-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tt7H8i160DISjQomqmnkNLPutYhyC4AUl5mfZY5UZGwGYtsdAgaZKvkC2krOpQSY AInZlUyzDtwZdlZLJDwXpg== 0001047469-98-017328.txt : 19980504 0001047469-98-017328.hdr.sgml : 19980504 ACCESSION NUMBER: 0001047469-98-017328 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOLOGISTICS CORP CENTRAL INDEX KEY: 0001015527 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 223438013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607 FILM NUMBER: 98606054 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM STREET 2: STE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM STREET 2: STE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL LOGISTICS LTD DATE OF NAME CHANGE: 19971126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR FREIGHT CONSOLIDATORS INTERNATIONAL INC CENTRAL INDEX KEY: 0001051652 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 112826590 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-01 FILM NUMBER: 98606055 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEP FAIRS INC CENTRAL INDEX KEY: 0001051653 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 581666904 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-02 FILM NUMBER: 98606056 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEP PROFIT INTERNATIONAL CENTRAL INDEX KEY: 0001051655 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 952920613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-03 FILM NUMBER: 98606057 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX INTERNATIONAL LOGISTICS INC CENTRAL INDEX KEY: 0001051656 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541378078 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-04 FILM NUMBER: 98606058 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY AREA MATRIX INC CENTRAL INDEX KEY: 0001051658 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541378078 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-05 FILM NUMBER: 98606059 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LA MATRIX INC CENTRAL INDEX KEY: 0001051659 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 521744031 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-06 FILM NUMBER: 98606060 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST MATRIX INC CENTRAL INDEX KEY: 0001051661 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541840752 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-07 FILM NUMBER: 98606061 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX CT INC CENTRAL INDEX KEY: 0001051664 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541513202 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-08 FILM NUMBER: 98606062 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7709808184 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEKINS VAN LINES CO CENTRAL INDEX KEY: 0001051687 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 362193916 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-09 FILM NUMBER: 98606063 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLCAN INC CENTRAL INDEX KEY: 0001051688 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223471988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-10 FILM NUMBER: 98606064 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM RD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLSCOT INC CENTRAL INDEX KEY: 0001051689 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223471990 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-11 FILM NUMBER: 98606065 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM RD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIW HOLDINGS CORP CENTRAL INDEX KEY: 0001051690 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-12 FILM NUMBER: 98606066 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEKINS CO /NEW/ CENTRAL INDEX KEY: 0001051691 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954106021 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-42607-13 FILM NUMBER: 98606067 BUSINESS ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 BUSINESS PHONE: 7085472000 MAIL ADDRESS: STREET 1: 330 S MANNHEIM ROAD STREET 2: SUITE 200 CITY: HILLSIDE STATE: IL ZIP: 60162 424B3 1 424B3 PROSPECTUS $110,000,000 OFFER TO EXCHANGE 9 3/4% SENIOR NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 9 3/4% SENIOR NOTES DUE 2007 OF GEOLOGISTICS CORPORATION (FORMERLY KNOWN AS INTERNATIONAL LOGISTICS LIMITED) GUARANTEED BY THE FOLLOWING WHOLLY-OWNED SUBSIDIARIES OF GEOLOGISTICS CORPORATION: AIR FREIGHT CONSOLIDATORS INTERNATIONAL, INC., LEP FAIRS, INC., LEP PROFIT INTERNATIONAL, INC., MATRIX INTERNATIONAL LOGISTICS, INC., BAY AREA MATRIX, INC., L.A. MATRIX, INC., SOUTHWEST MATRIX, INC., MATRIX, CT., INC., BEKINS VAN LINES CO., ILLCAN, INC., ILLSCOT, INC., LIW HOLDINGS CORP. AND THE BEKINS COMPANY THE EXCHANGE OFFER (AS DEFINED HEREIN) WILL EXPIRE ON MAY 30, 1998. THE EXCHANGE OFFER WILL REMAIN IN EFFECT FOR A MAXIMUM OF 49 DAYS FROM THE DATE THE REGISTRATION STATEMENT BECOMES EFFECTIVE. INTEREST PAYABLE APRIL 15 AND OCTOBER 15 DUE OCTOBER 15, 2007 ------------------------ GeoLogistics Corporation (the "Company") hereby offers (the "Exchange Offer"), pursuant to a registration statement (the "Registration Statement"), of which this Prospectus constitutes a part, and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange its issued 9 3/4% Senior Notes Due 2007 (the "Old Notes") of which an aggregate of $110,000,000 principal amount is outstanding as of the date hereof, for an equal amount of newly issued 9 3/4% Senior Notes Due 2007 (the "New Notes" and together with the Old Notes the "Notes"). (CONTINUED ON NEXT PAGE) FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE OLD NOTES (THE "NOTEHOLDERS" OR "HOLDERS") PRIOR TO TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER OR BY A PROSPECTIVE INVESTOR BEFORE PURCHASING THE NEW NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 12. EACH BROKER-DEALER THAT RECEIVES NEW NOTES FOR ITS OWN ACCOUNT PURSUANT TO THE EXCHANGE OFFER MUST ACKNOWLEDGE THAT IT WILL DELIVER A PROSPECTUS IN CONNECTION WITH ANY RESALE OF SUCH NEW NOTES. THE LETTER OF TRANSMITTAL STATES THAT BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, A BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT. THIS PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A BROKER-DEALER IN CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES WHERE SUCH OLD NOTES WERE ACQUIRED BY SUCH BROKER-DEALER AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES. THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER THE EXPIRATION DATE (AS DEFINED HEREIN), IT WILL MAKE THIS PROSPECTUS AVAILABLE TO ANY BROKER-DEALER FOR USE IN CONNECTION WITH ANY SUCH RESALE. SEE "PLAN FOR DISTRIBUTION." THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS APRIL 28, 1998 (CONTINUED FROM PREVIOUS PAGE) The New Notes will mature on October 15, 2007 and are fully and unconditionally guaranteed (the "Subsidiary Guaranties"), jointly and severally, on an unsecured senior basis by the Subsidiary Guarantors (as defined). The New Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after October 15, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time prior to October 15, 2000, the Company may redeem, at its option, up to an aggregate of 35% of the original principal amount of the New Notes with the proceeds received by the Company from one or more Public Equity Offerings (as defined) at 109.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 65% of the original principal amount of the New Notes remains outstanding after each such redemption. Upon a Change of Control (as defined), each holder of the New Notes will have the right to require the Company to repurchase such holder's New Notes in whole or in part at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. See "Description of the New Notes." The New Notes and the Subsidiary Guaranties will be unsecured senior obligations of the Company and of the Restricted Subsidiaries (as defined) that execute Subsidiary Guaranties (each a "Subsidiary Guarantor" and collectively the "Subsidiary Guarantors"), respectively, and will rank PARI PASSU with all existing and future unsecured senior indebtedness of the Company and the Subsidiary Guarantors, respectively, and will be effectively subordinated to all existing and future Secured Indebtedness (as defined) of the Company and the Subsidiary Guarantors, respectively, to the extent of the value of the assets securing such indebtedness. The New Notes and the Subsidiary Guaranties will be effectively subordinated to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries other than those of the Subsidiary Guarantors. The New Notes and the Subsidiary Guaranties will rank senior in right of payment to any Subordinated Obligations (as defined) of the Company and the Subsidiary Guarantors, respectively. As of December 31, 1997, the Company had $0.8 million of outstanding Secured Indebtedness and the Subsidiary Guarantors had approximately $0.4 million of outstanding Secured Indebtedness to which the New Notes and the Subsidiary Guaranties are effectively subordinated to the extent of the value of the assets securing such indebtedness, and the Company's non-guarantor subsidiaries had approximately $99.6 million of indebtedness and other liabilities (including trade payables) outstanding to which the New Notes and the Subsidiary Guaranties would be effectively subordinated. See "New Credit Facility" and "Description of the New Notes." The New Notes are being offered hereby in order to satisfy certain obligations of the Company under a registration rights agreement, dated October 29, 1997 (the "Registration Rights Agreement"), between the Company and Credit Suisse First Boston Corporation, BT Alex. Brown Incorporated, Smith Barney Inc. and ING Baring (U.S.) Securities, Inc. (collectively, the "Initial Purchasers"). The form and terms of the New Notes will be substantially identical to those of the Old Notes except that the New Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and hence are not subject to certain transfer restrictions, registration rights and related liquidated damages provisions applicable to the Old Notes. The Old Notes were issued and sold to the Initial Purchasers pursuant to Section 4(2) of the Securities Act. The Initial Purchasers were advised by the Company that, until such time as the Old Notes have been exchanged for New Notes or the sale of Old Notes has been registered under the Securities Act, subsequent resales of the Old Notes must be made in accordance with Rule 144A under the Securities Act or another applicable exemption from the registration and prospectus delivery requirements of the Securities Act. The New Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the indenture (the "Indenture"), dated as of October 29, 1997, by and between the Company and U.S. Bank Trust, a national association (formerly First Trust National Association), as trustee (the "Trustee"). The Indenture provides for the issuance of both the Old Notes and the New Notes. Holders of Old Notes not tendered, or tendered and not accepted, in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences, and subject to the limitations, applicable thereto under the Indenture. Following consummation of the Exchange Offer, Noteholders of Old Notes not tendered, or tendered and not accepted, in the Exchange Offer will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Noteholders to provide for the registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "Risk Factors--Restrictions Upon Transfer of and Limited Trading Market for Old Notes." ii The Company will not receive any proceeds from the Exchange Offer. The Company will pay all expenses incident to the Exchange Offer (which shall not include the expenses of any holder in connection with resales of the New Notes). The Company will accept for exchange any and all validly tendered Old Notes on or prior to 5:00 p.m. New York City time, on May 30, 1998 (such date and time, if and as extended, the "Expiration Date"). Tender of the Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. Old Notes may be tendered only in integral multiples of $1,000. This Prospectus, together with the Letter of Transmittal, is first being sent on or about April 30, 1998 to all holders of the Old Notes known to the Company. Based on interpretations contained in no-action letters of the Securities and Exchange Commission (the "Commission"), the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold, and otherwise transferred by a holder thereof (other than (i) a broker-dealer who purchased the Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person who is an affiliate of the Company (within the meaning of Rule 405 under the Securities Act)), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Noteholders wishing to accept the Exchange Offer must represent to the Company that such conditions have been met. Each broker-dealer that receives the New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. This Prospectus has been prepared for use in connection with the Exchange Offer and may be used by the Initial Purchasers in connection with offers and sales related to market- making transactions in the Old Notes. The Initial Purchasers may act as a principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. The Letter of Transmittal states that by so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of the New Notes received in exchange for the Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that it will use its best efforts to make this Prospectus available to any broker-dealer for use in connection with any such resale for such period of time as such persons may be required to comply with the prospectus delivery requirements of the Securities Act (which period shall not exceed one year from the date the Registration Statement becomes effective). See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF NEW NOTES. Prior to this Exchange Offer, there has been no public market for the New Notes. However, the Initial Purchasers are not obligated to make a market in the New Notes, and may discontinue such market-making activities at any time without notice. In addition, there can be no assurance that an active market for the New Notes will develop. To the extent that a market for the New Notes does develop, the market value of the New Notes will depend on many factors, including, among other things, prevailing interest rates, market conditions, general economic conditions, the Company's results of operations and financial condition, the market for similar securities, and other conditions. Such conditions might cause the New Notes, to the extent that they are actively traded, to trade at a significant discount from face value. See "Risk Factors--Absence of Public Trading Market." iii PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES HEREIN TO THE "COMPANY" REFER TO GEOLOGISTICS CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SEE "RISK FACTORS" FOR CERTAIN FACTORS THAT A PROSPECTIVE INVESTOR SHOULD CONSIDER IN EVALUATING THE COMPANY BEFORE PURCHASING THE NOTES. THE COMPANY IS A DELAWARE CORPORATION. ITS PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 13952 DENVER WEST PARKWAY, GOLDEN, COLORADO 80401 AND ITS TELEPHONE NUMBER IS (303) 704-4400. THE COMPANY The Company is one of the largest non-asset-based providers of worldwide logistics and transportation services headquartered in the United States, based on revenues for 1997 and after giving pro forma effect to the LIW Acquisition (as defined). The Company's primary business operations involve obtaining shipment or material orders from customers, creating and delivering a wide range of logistics solutions to meet customers' specific requirements for transportation and related services, and arranging and monitoring all aspects of material flow activity utilizing advanced information technology systems. These logistics solutions include domestic and international freight forwarding and door-to-door delivery services using a wide range of transportation modes, including air, ocean, truck and rail. The Company also provides value-added services such as warehousing, inventory management, assembly, customs brokerage, distribution and installation for manufacturers and retailers of commercial and consumer products such as copiers, computers, pharmaceutical supplies, medical equipment, consumer durables and aviation products. The Company also specializes in arranging for the worldwide transportation of goods for major infrastructure projects, such as power plants, oil refineries, oil fields and mines, to lesser developed countries and remote geographic locations. In addition, the Company provides international and domestic relocation services through the household goods ("HHG") divisions of Matrix International Logistics, Inc. ("Matrix") and The Bekins Company ("Bekins"), two of its subsidiaries. On a pro forma basis after giving effect to the LIW Acquisition, the Company generated approximately $1.5 billion of revenues and $21.3 million of EBITDA (as defined) for the year ended December 31, 1997. As a non-asset-based logistics services provider, the Company arranges for and subcontracts services on a non-committed basis to airlines, truck lines, van lines, express companies, steamship lines, rail lines and warehousing and distribution operators. By concentrating on network-based solutions, the Company avoids competition with logistics services providers that offer dedicated outsourcing solutions for single elements of the supply chain. Such dedicated logistics companies typically provide expensive, customized infrastructure and systems for a customer's specific application and, as a result, dedicated solutions that are generally asset-intensive, inflexible and invariably localized to address only one or two steps in the supply chain. Conversely, network-based services leverage common infrastructure and technology systems so that solutions are scaleable, replicable and require a minimum amount of customization (typically only at the interface with the customer). This non-asset ownership approach maximizes the Company's flexibility in creating and delivering a wide range of end-to-end logistics solutions on a global basis while simultaneously allowing the Company to exercise significant control over the quality and cost of the transportation services provided. As of December 31, 1997 the Company serviced over 75,000 active customers through a global network of 75 countries consisting of operations located in 33 countries and strategic alliance partners located in 42 countries. Some of the Company's major customers include Lucent Technologies Inc., Cisco Systems, Inc., Williams-Sonoma, Inc. and Danka Business Systems plc (formerly the office imaging technology division of Eastman Kodak Company). Formed in 1996 by investment entities managed by William E. Simon & Sons, LLC ("WESS") and Oaktree Capital Management, LLC ("Oaktree"), and Roger E. Payton, the Company's President and 1 Chief Executive Officer, the Company has created a global network that provides a broad range of transportation and logistics services through points of service in both industrialized and developing nations and a strong local presence in North America, Europe and Asia. The Company built its network through a series of acquisitions of transportation and logistics providers (the "Subsidiary Acquisitions") beginning with Bekins in May 1996, Matrix in November 1996 and, in a series of transactions beginning in October 1996, the Company acquired all of the equity securities of LEP International Worldwide Limited (U.K.) ("LIW") and all of the equity interests of LIW's North American subsidiaries (the "LEP Sale"), LEP Profit International, Inc. ("LEP-USA") and LEP International Co. ("LEP-Canada" and, together with LEP-USA, "LEP"). See "Risk Factors--Uncertainties Relating to Operations and Acquisition of LIW" and "Recent Acquisitions." The U.S. logistics services industry generated approximately $25.0 billion in revenues in 1996, having experienced an average annual growth rate of approximately 20.0% from 1992 to 1996. The Company believes that the global logistics services industry is three to four times the size of the U.S. logistics services industry. Within the logistics services and freight forwarding industries, the Company targets specific markets in which the Company believes it has a competitive advantage. For example, in the freight forwarding market, the Company arranges transportation for shipments of heavy cargo that are generally larger than shipments handled by integrated carriers, such as United Parcel Service of America and Federal Express Corporation. In the logistics market, the Company provides specialized combinations of services that traditional freight forwarders cannot cost-effectively provide, including time-definite delivery requirements, direct-to-store distribution and merge-in-transit movement of products from various vendors in a single coordinated delivery and/or installation to the end-user. The Company has developed a business strategy to increase revenue and expand profit margins by: (i) continuing to develop and implement higher margin and greater value-added logistics services to fulfill customers' end-to-end supply chain requirements, (ii) maintaining and enhancing the Company's existing technological position to ensure on-time delivery, real-time inventory management and efficient overall transportation services, (iii) strengthening and expanding the Company's global network through the opening of new offices and making strategic acquisitions and (iv) growing the Company's overall business by further penetrating and expanding its existing customer base as well as increasing its share of specialized niche transportation and logistics services. BUSINESS STRENGTHS The Company believes that its primary business strengths include the following: ESTABLISHED GLOBAL NETWORK WITH STRONG LOCAL PRESENCE. The Company has an established global network of freight handling operations in 75 countries throughout the world which serviced over 75,000 active customers as of December 31, 1997. The Company offers its customers a wide range of logistics and transportation solutions through over 693 Company- and agent-owned locations in 33 countries staffed with approximately 6,388 employees worldwide as of December 31, 1997 (excluding employees of agents). The Company's strategic alliances with partners in South Africa, South America, the Middle East, Latin America and the Indian subcontinent provide the Company with service capability in 42 additional countries with approximately 382 locations. The Company is particularly well-positioned in three major economic regions of the world with operations in approximately 465 locations in North America, 161 locations in 17 European countries and 67 locations in 14 Asian countries, as of December 31, 1997. The Company's HHG relocation business maintains a strong domestic presence with 284 Bekins service centers throughout the United States as of December 31, 1997 and, through Matrix, provides international relocation services to and from North America and between other countries. ADVANCED INFORMATION SYSTEMS. The Company believes the proprietary FAST 400 and the MATRAK information systems are the most technologically advanced information systems in the global logistics industry. FAST 400 is a real-time, multi-modal, multi-currency, multi-lingual system that provides global transportation and logistics information and detailed job costing analysis. MATRAK is an advanced system 2 for global project logistics. The Company's existing information technology system currently supports logistics management applications such as warehouse management systems, inventory management systems and transportation management and is scaleable to support additional business and product lines. The Company believes that planned system upgrades and expenditures, a significant part of which relates to enhancement of the Company's financial reporting, communications and inventory tracking systems, will complement the technological advantages of FAST 400. The Company expects to spend approximately $30.0 million over the next three years to conclude the global implementation and integration of FAST 400 and its related BUSINESS 400 systems, purchase additional information systems equipment and software upgrades and integrate the system capabilities of the Company's subsidiaries. The Company anticipates that, upon the completion of the planned expenditures, all of the Companies' subsidiaries will be operating on a single, FAST 400-based system. FLEXIBLE NON-ASSET-BASED OPERATIONS. As a non-asset-based provider of transportation and logistics services, the Company has access to a network of freight handling providers but does not own a fleet of aircraft or steamships and owns only 208 road vehicles. As a result of the Company's ability to subcontract transportation and distribution services on a non-committed basis to airlines, truck lines, van lines, express companies, steamship lines and rail lines as well as warehousing and distribution operators, the Company is able to create and deliver a wide range of logistics solutions while retaining significant control over the quality of service provided. In addition, the Company is able to control the costs of transportation services provided as the large volume of cargo shipped by the Company permits the Company to negotiate reduced shipping rates with a variety of transportation providers. Moreover, unlike the asset-intensive nature of integrated transportation providers such as Burlington Air Express, Inc. and Emery Air Freight Corp., the Company's network requires a relatively low level of capital expenditures for transportation equipment. WELL POSITIONED TO BENEFIT FROM INDUSTRY AND WORLD TRADE TRENDS. Because of its global position, broad service offerings and technologically-advanced information systems, the Company believes it is well-positioned to participate in the growing trend for large corporations to outsource logistics, transportation and distribution services. From 1992 to 1996, the United States logistics services industry grew approximately 20.0% per year to $25.0 billion and it is expected to continue to grow at comparable levels through the end of the year 2000. Businesses are increasingly striving to minimize the cost of carrying inventory by decreasing the cycle-time in delivery of products, minimizing costs of manufacturing by performing manufacturing and assembly operations in different locations and reducing the overall costs associated with the distribution and movement of goods. As a result, companies are increasingly seeking third-party service providers to assist in increasing profitability by reducing costs of carrying inventory and distribution. In conformity with industry trends, many of the Company's existing customers are seeking end-to-end logistics services from capable service providers such as the Company. In addition, the Company believes that continuing reductions in tariffs, increases in open trade policies and globalization of the world's economies will cause manufacturers and distributors of products around the world, and in particular U.S. multi-national companies, to become increasingly more dependent on the type of shipping, customs and inventory management services that the Company currently offers to its customers. EXPERIENCED MANAGEMENT. The Company's management team is led by Roger E. Payton, President and Chief Executive Officer. Mr. Payton has over 20 years of experience in transportation and logistics operations and services. The Company's senior operating executives also have an average of approximately 20 years of experience in transportation and logistics operations and services. As of April 6, 1998, the Company's employees owned approximately 10.7% of the currently outstanding shares of common stock of the Company, par value $.001 per share ("Common Stock"), and, assuming such employees exercise all of their warrants to purchase Common Stock, such employees would own approximately 25.8% of the shares of Common Stock on a fully diluted basis, including, in each case, shares of Common Stock held by the Company's Deferred Plan (as defined) for the account of certain employees. 3 THE EXCHANGE OFFER The form and terms of the New Notes will be substantially identical to those of the Old Notes except that the New Notes will have been registered under the Securities Act, and hence will not be subject to certain transfer restrictions, registration rights and related liquidated damages provisions applicable to the Old Notes. The Exchange Offer................ The Company is offering to exchange an aggregate of $110.0 million principal amount of the New Notes for a like principal amount of the Old Notes. The Old Notes may be exchanged only in multiples of $1,000 principal amount. The Company will issue the New Notes on or promptly after the Expiration Date. See "The Exchange Offer." Issuance of the Old Notes; Registration Rights............. The Old Notes were issued and sold on October 29, 1997 to the Initial Purchasers. In connection therewith, the Company executed and delivered for the benefit of the Noteholders the Registration Rights Agreement, pursuant to which the Company agreed (i) to commence an exchange offer under which the New Notes, registered under the Securities Act with terms substantially identical to those of the Old Notes, will be exchanged for the Old Notes pursuant to an effective registration statement (the "Exchange Offer Registration Statement") or (ii) cause the Old Notes to be registered under the Securities Act pursuant to a resale shelf registration statement (the "Shelf Registration Statement"). If the Company does not comply with its obligations under the Registration Rights Agreement, it will be required to pay certain liquidated damages that will accrue and be payable semiannually. See "The Exchange Offer--Purpose of the Exchange Offer; Registration Rights." Expiration Date................... The Exchange Offer will expire at 5:00 pm., New York City time, on May 30, 1998, unless extended in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. June 16, 1998 is the latest date through which the Exchange Offer may be extended. Conditions to the Exchange Offer........................... The Exchange Offer is subject to certain conditions, which may be waived by the Company in whole or in part and from time to time in its sole discretion. See "The Exchange Offer--Certain Conditions to the Exchange Offer." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange. Procedures for Tendering Old Notes....................... Each Noteholder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act satisfactory to the Company in its sole discretion, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at
4 the address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any beneficial owner of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender the Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such beneficial owner's behalf. See "The Exchange Offer-- Procedures for Tendering the Old Notes." Guaranteed Delivery Procedures.... Noteholders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer--Guaranteed Delivery Procedures." The Letter of Transmittal provides that each Noteholder (other than participating broker-dealers) will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, that neither such Noteholder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the holder nor any such person is an "affiliate" of the Company, as defined in Rule 405 under the Securities Act. Any tendered Old Notes not accepted for exchange for any reason will be returned promptly after the expiration or termination of the Exchange Offer. See "The Exchange Offer." Withdrawal Rights................. Tenders of the Old Notes may be withdrawn at any time prior to the Expiration Date. See "The Exchange Offer--Withdrawal Rights." Acceptance of the Old Notes and Delivery of the New Notes....... The Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Resales under the Shelf Registration Statement.......... If a Holder notifies the Company within 30 days after the commencement of the Exchange Offer that such Holder may not resell New Notes acquired by it to the public without delivery of a prospectus and that the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder, then in lieu conducting the Exchange Offer, the Company has agreed to file a Shelf Registration Statement covering resales of the Old Notes or the New Notes, as the case may be. See "The Exchange Offer-- Purpose of the Exchange Offer--Registration Rights."
5 Resales of the New Notes.......... Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by any Noteholder thereof (other than any such Noteholder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Noteholder's business and that such Noteholder has no arrangement or understanding with any person to participate in the distribution of such New Notes, and provided, further, that each broker- dealer that receives the New Notes for its own account in exchange for the Old Notes must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." If a Noteholder does not exchange such Old Notes for New Notes pursuant to the Exchange Offer, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exception from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "The Exchange Offer--Consequences of Failure to Exchange." Consequences of Failure to Exchange..................... Noteholders who do not exchange their Old Notes for the New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon. In general, the Old Notes may not be offered or sold, except pursuant to a registration statement under the Securities Act or any exemption from registration thereunder and in compliance with applicable state securities laws. In the event the Company completes the Exchange Offer, the Noteholders will have no further rights to registration or liquidated damages pursuant to the Registration Rights Agreement. Certain Tax Considerations........ There will be no Federal income tax consequences to Noteholders exchanging the Old Notes for the New Notes pursuant to the Exchange Offer and a Noteholder will have the same adjusted basis and holding period in the New Notes as in the Old Notes immediately before the exchange. Registration Rights Agreement..... The Exchange Offer is intended to satisfy the registration rights of Noteholders under the Registration Rights Agreement, which rights terminate upon consummation of the Exchange Offer. Exchange Agent.................... U.S. Bank Trust (formerly First Trust National Association) is the Exchange Agent. The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer-- Exchange Agent."
6 DESCRIPTION OF THE NEW NOTES New Notes......................... $110,000,000 principal amount of 9 3/4% Senior Notes Due 2007 (the "New Notes"). Maturity Date..................... October 15, 2007. Interest Payment Dates............ April 15 and October 15, commencing April 15, 1998. Optional Redemption............... The New Notes may be redeemed at the option of the Company, in whole or in part, at any time after October 15, 2002 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time prior to October 15, 2000, the Company may redeem up to an aggregate of 35% of the original principal amount of the Notes, with the net cash proceeds of one or more Public Equity Offerings (as defined) at 109.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; provided, however, that at least $71.5 million aggregate principal amount of Notes remain outstanding immediately after each such redemption. See "Description of the New Notes--Optional Redemption." Change of Control................. Upon a Change of Control (as defined), each holder of the New Notes may require the Company to repurchase such holder's New Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. There can be no assurance that the Company will have sufficient funds to purchase all of the New Notes in the event of a Change in Control. See "Risk Factors--Change of Control" and "Description of the New Notes--Change of Control." Ranking........................... The New Notes and the Subsidiary Guaranties (as defined) will be unsecured senior obligations of the Company and the Subsidiary Guarantors (as defined), respectively, and will rank PARI PASSU in right of payment with all existing and future senior unsecured indebtedness of the Company and the Subsidiary Guarantors, respectively. The New Notes and the Subsidiary Guaranties will be effectively subordinated to all existing and future Secured Indebtedness (as defined) of the Company and the Subsidiary Guarantors, respectively, to the extent of the value of the assets securing such indebtedness. The New Notes and the Subsidiary Guaranties will be effectively subordinated to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries other than the Subsidiary Guarantors. The New Notes and the Subsidiary Guaranties will rank senior in right of payment to any Subordinated Obligations (as defined) of the Company and the Subsidiary Guarantors, respectively. As of December 31, 1997, the Company had $0.8 million of outstanding Secured Indebtedness and the Subsidiary Guarantors had approximately $0.4 million of outstanding Secured Indebtedness to which the New Notes and the Subsidiary Guaranties are effectively subordinated to the
7 extent of the value of the assets securing such indebtedness, and the Company's non-guarantor subsidiaries had approximately $99.6 million of indebtedness and other liabilities (including trade payables) outstanding to which the New Notes and the Subsidiary Guaranties are effectively subordinated. See "Description of the New Notes--Ranking." Subsidiary Guaranties............. The New Notes will be guaranteed (the "Subsidiary Guaranties") on a senior unsecured basis by the Company's domestic Restricted Subsidiaries (as defined) that are or become obligors or guarantors with respect to the New Credit Facility (the "Subsidiary Guarantors"). See "Description of the New Notes--Subsidiary Guaranties." Certain Covenants................. The indenture under which the New Notes will be issued (the "Indenture") will contain certain covenants that, among other things, will limit the ability of the Company and its Restricted Subsidiaries to (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, (iv) make investments, (v) enter into transactions with affiliates, (vi) make certain asset dispositions and (vii) merge or consolidate with, or transfer substantially all of its assets to, another person. The Indenture will also limit the ability of the Company's Restricted Subsidiaries to create restrictions on the ability of such Restricted Subsidiaries to pay dividends or make any other distributions. In addition, the Company will be obligated, under certain circumstances, to offer to repurchase New Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase, with the net cash proceeds of certain sales or other dispositions of assets. However, all of these limitations and prohibitions are subject to a number of important qualifications. See "Description of the New Notes--Certain Covenants." Exchange Rights................... Holders of New Notes are not entitled to any exchange rights with respect to the New Notes. Holders of Old Notes are entitled to certain exchange rights pursuant to the Registration Rights Agreement. Under the Registration Rights Agreement, the Company is required to offer to exchange the Old Notes for new notes having substantially identical terms which have been registered under the Securities Act. This Exchange Offer is intended to satisfy such obligation. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Old Notes not tendered by the Holders for exchange, except pursuant to a shelf registration statement to be filed under certain limited circumstances specified in "The Exchange Offer--Purposes of the Exchange Offer." See "Risk Factors--Consequences to Non-Tendering Holders of Old Notes."
8 Absence of a Public Market for the The New Notes will be a new issue of securities with no New Notes....................... established market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. Use of Proceeds................... The Company will not receive any proceeds in connection with the Exchange Offer. In consideration for issuing the New Notes in exchange for the Old Notes as described in this Prospectus, the Company will receive the Old Notes that will be retired and canceled.
EXCHANGE RATES Certain financial data of LIW has been translated from British Pounds Sterling to U.S. Dollars using the average exchange rate in effect for results of operations and cash flow data and the period end rate for balance sheet data for the respective periods presented. The following table reflects the exchange rates used as well as other information for the benefit of the reader. The Company does not represent that the British Pound Sterling amounts shown in this Prospectus would have been converted into U.S. Dollars at the quoted exchange rates.
PERIOD PERIOD END AVERAGE ------ ------- ($ PER L1.00) Year Ended December 31, 1997 1.6508 1.6411 Nine Months Ended September 30, 1997.... 1.6185 1.6305 January 24, 1996 to December 31, 1996... 1.7123 1.5607 January 24, 1996 to September 30, 1996.................................. 1.5650 1.5373 January 1, 1996 to January 23, 1996..... 1.5135 1.5377 Year Ended December 31, 1995............ 1.5530 1.5785 Year Ended December 31, 1994............ 1.5603 1.5319 Year Ended December 31, 1993............ 1.4794 1.5016 Year Ended December 31, 1992............ 1.5145 1.7642
RISK FACTORS Holders of the Old Notes and prospective purchasers of New Notes should consider carefully all of the information set forth in this Prospectus, and in particular the information set forth under "Risk Factors" before tendering their Old Notes in the Exchange Offer or making an investment in the New Notes. These risks include, without limitation, restrictions upon transfer of and limited trading market for Old Notes, the limited operating history and net losses of the Company, leverage and debt service obligations of the Company, the holding company structure of the Company and certain restrictions imposed on the Company by the terms of the outstanding indebtedness of the Company. See "Risk Factors." 9 SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA The following table presents summary unaudited pro forma condensed financial data derived from the Unaudited Pro Forma Condensed Combined Statement of Operations included elsewhere in this Prospectus. The summary pro forma data gives effect to the Old Notes Offering and the execution of the Company's new $100.0 million revolving credit facility (the "New Credit Facility"), as well as the acquisition of LIW as if such events had occurred on January 1, 1997. The Unaudited Pro Forma Condensed Combined Statement of Operations does not purport to present the actual results of operations of the Company had the transactions and events assumed therein in fact occurred on January 1, 1997, nor are they necessarily indicative of the results of operations that may be achieved in the future. The Unaudited Pro Forma Condensed Combined Statement of Operations is based on certain assumptions and adjustments described in the notes to the Unaudited Pro Forma Condensed Combined Statement of Operations and should be read in conjunction therewith and with "Recent Acquisitions" and the Consolidated Financial Statements of the Company and LIW and the related notes thereto included elsewhere in this Prospectus. Financial data of LIW has been translated from British Pounds Sterling to U.S. Dollars using the average exchange rate in effect for results of operations and cash flow data and the December 31, 1997 rate for balance sheet data.
PRO FORMA YEAR ENDED DECEMBER 31, 1997(1)(2) ----------- (UNAUDITED) Revenues.................................................... $1,525,162 Transportation and other direct costs....................... 1,146,889 ----------- Net revenues................................................ 378,273 Other operating expenses.................................... 355,276 Depreciation and amortization............................... 32,153 ----------- Operating loss.............................................. (9,156) Interest expense, net and amortization of debt issuance costs..................................................... 12,987 Share of loss in equity investments......................... 1,078 Other expense, net.......................................... 13 ----------- Loss before income taxes and minority interests............. (23,234) Income tax benefit.......................................... (7,050) ----------- Loss before minority interests.............................. (16,184) Minority interests.......................................... (1,433) ----------- Net loss.................................................... $ (17,617) ----------- ----------- BASIC LOSS PER COMMON SHARE: Net loss.................................................. $ (8.60) DILUTED LOSS PER COMMON SHARE: Net loss.................................................. $ (8.60) Weighted average number of common shares outstanding........ 2,049,800 OTHER FINANCIAL DATA: EBITDA(3)................................................. $ 21,283 Cash (advances to) affiliates, net........................ $ (1,701) Cash interest expense(4).................................. $ 9,653 Capital expenditures...................................... $ 13,312 Net cash from operating activities........................ $ 13,815 Net cash from investing activities........................ $ (14,707) Net cash from financing activities........................ $ 1,215 Ratio of earnings to fixed charges(5)(6).................. $ --
10
DECEMBER 31, 1997 ----------------- BALANCE SHEET DATA: Current assets............................................................................... $ 319,732 Property and equipment, net.................................................................. 51,807 Total assets................................................................................. 485,766 Current liabilities.......................................................................... 301,809 Long-term debt (including current portion)................................................... 115,370 Other noncurrent liabilities................................................................. 46,647 Minority interest............................................................................ 1,601 Stockholders' equity......................................................................... 22,919
- ------------------------ (1) For a description of LIW purchase accounting and pro forma adjustments, see the notes to the Unaudited Pro Forma Condensed Combined Statement of Operations included elsewhere herein. (2) Certain amounts of LIW and its predecessor have been adjusted to conform to U.S. GAAP. (3) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization, and other non-cash items such as share of loss in equity investments and minority interests. EBITDA also includes other income and expenses and cash advances to and cash dividends received from companies accounted for under the equity method or consolidated subsidiaries in which LIW has a controlling interest. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statements of Cash Flows of the Company and of LIW and the related notes thereto included in this Prospectus. EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring the ability to service debt, EBITDA as used herein is consistent with the definition used in the Indenture and is calculated as follows: Operating loss..................................... $ (9,156) Add: depreciation and amortization................. 32,153 Subtract: Other expense, net............................... (13) Cash advances to affiliates...................... (1,701) --------- EBITDA............................................. $ 21,283 --------- ---------
(4) "Cash interest expense" represents interest expense recorded in the statement of operations less amortization of deferred financing costs. Total debt and cash interest expense give effect to the Old Notes Offering and other interest bearing debt after application of proceeds from the Old Notes Offering. See "Use of Proceeds" and "Consolidated Capitalization." (5) For purposes of this computation, fixed charges consist of interest expense and amortization of deferred financing costs and the estimated portion of rental expense attributable to interest. Earnings consist of loss before income taxes excluding losses from equity investments plus fixed charges. (6) Pro forma earnings were inadequate to cover pro forma fixed charges by $22,143 for the year ended December 31, 1997. 11 RISK FACTORS THE NOTEHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. RESTRICTIONS UPON TRANSFER OF AND LIMITED TRADING MARKET FOR OLD NOTES The New Notes will be issued in exchange for the Old Notes only after timely receipt by the Exchange Agent of tenders of such Old Notes. Therefore, Noteholders desiring to tender such Old Notes in exchange for the New Notes should allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor the Company is under any duty to give notification of defects or irregularities with respect to tenders of the Old Notes for exchange. The Old Notes that are not tendered or are tendered but not accepted will, following consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. In addition, any holder of the Old Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer who receives New Notes for its own account in exchange for the Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or any other trading activities, must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." To the extent that the Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer." LIMITED OPERATING HISTORY; NET LOSSES The Company was incorporated on February 14, 1996 and acquired (i) Bekins in May 1996, (ii) LEP and a 33.3% minority interest in LIW in October 1996, (iii) Matrix in November 1996, (iv) an additional 41.9% interest in the common equity of LIW in September 1997 and (v) the remainder of LIW in December 1997. Accordingly, the Company has only a limited combined operating history upon which an evaluation of the Company and its prospects can be based. After giving effect to certain purchase accounting adjustments made in connection with the acquisitions of Bekins, LEP and Matrix, which resulted in approximately $104.0 million in intangible assets, the Company incurred net losses of $9.2 million for its first year of operations and net losses of $19.7 million for the year ended December 31, 1997. On the same basis, for the year ended December 31, 1997, pro forma earnings were inadequate to cover fixed charges by $22.1 million. Net losses for the period ended December 31, 1996 and the year ended December 31, 1997 included amortization expenses of $14.8 million and $25.8 million, respectively, relating to intangible assets. There can be no assurances that the Company will achieve profitability, will improve EBITDA or will be able to meet fixed charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LEVERAGE AND DEBT SERVICE OBLIGATIONS The Company has substantial fixed debt service in addition to operating expenses. The Company used the net proceeds from the Old Notes Offering to repay all amounts outstanding under the Company's old credit facility (the "Old Credit Facility") and, concurrently with the closing of the Old Notes Offering, entered into the New Credit Facility. See "New Credit Facility." As of December 31, 1997, the Company's total consolidated indebtedness was $115.4 million, consisting of the Old Notes and $5.4 million of other indebtedness, and the Company's ratio of pro forma EBITDA to cash interest expense for the year ended December 31, 1997 was 2.20 to 1.0. The Company's ability to make scheduled payments of principal of, or interest on, or to refinance its indebtedness will depend on the availability of funding under its New Credit Facility and on future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels and financial, competitive, business and other factors beyond the Company's control. The degree to which the Company is leveraged could have important consequences to the holders of the 12 New Notes, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be impaired, (ii) the Company's flexibility in planning for or reacting to changes in market conditions may be limited, (iii) the Company's vulnerability in the event of a downturn in its business and (iv) the Company's ability to finance contingencies related to tax and regulatory matters and payments due under incentive and stock repurchase arrangements. See "Business--Litigation" and "Management--Incentive Compensation Plans-- Employee Stock Ownership." The refinancing effected by the application of the proceeds of the Old Notes Offering reduced the Company's obligation to make principal repayments pursuant to the terms of the Company's indebtedness outstanding prior to the issuance of the Old Notes and the application of the net proceeds thereof; however, under the terms of the Indenture and the New Credit Facility, the Company may continue to incur additional indebtedness, including indebtedness that may be incurred to fund future distributions to stockholders of the Company. The Company believes that, based on anticipated levels of operations, it should be able to meet its debt service obligations, including interest payments on the Notes, when due. If, however, the Company cannot generate sufficient cash flow from operations to meet its obligations, the Company might be required to refinance its indebtedness or dispose of assets to obtain funds for such purpose. There is no assurance that any such refinancing or asset dispositions could be effected on satisfactory terms, if at all, or would be permitted by the terms of the New Credit Facility or the Indenture pursuant to which the Old Notes were issued and the New Notes will be issued. In the event that the Company is unable to refinance the New Credit Facility or raise funds through asset sales, sales of equity or otherwise, its ability to pay principal of and interest on the New Notes would be materially adversely affected. HOLDING COMPANY STRUCTURE; SUBSIDIARY OPERATIONS The Company conducts its operations through subsidiaries. Substantially all of the assets of the Company are owned by its subsidiaries and the Company has no significant assets of its own other than cash, cash equivalents and equity interests in subsidiaries of the Company. As a holding company, the Company is dependent on distributions or other intercompany transfers of funds from its subsidiaries to meet its debt service and other obligations, including the payment of principal of and interest on the New Notes. The Company does not own all of the equity interests of certain of its subsidiaries, and consequently must share profits with certain minority shareholders. See "Business--Ownership of LIW Subsidiaries." Distributions and intercompany transfers from the Company's subsidiaries to the Company may be restricted by covenants contained in debt agreements and other agreements to which such subsidiaries may be subject and may be restricted by other agreements entered into in the future and by applicable law. There can be no assurance that the operating results of the Company's subsidiaries at any given time will be sufficient to make distributions to the Company. The Company's right and the rights of its creditors, including holders of New Notes, to participate in the distribution of assets of any subsidiary of the Company upon such subsidiary's liquidation or recapitalization will be subject to the prior claims of such subsidiary's creditors. The Subsidiary Guarantors will guarantee the Company's obligations under the New Notes. Initially the Subsidiary Guarantors will consist of the following wholly-owned subsidiaries of the Company: Bekins, LEP-USA, Matrix, three special-purpose direct domestic subsidiaries the sole assets of which are LEP- Canada, and LIW and the active first-tier domestic subsidiaries of each of the foregoing. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS The New Credit Facility and the Indenture contain certain restrictive covenants including, among other things, limitations on the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness, create liens and other encumbrances, make certain payments and investments, enter into transactions with affiliates, sell or otherwise dispose of assets and merge or consolidate with another entity. There can be no assurance that such covenants will not adversely affect the Company's ability to finance future operations or capital needs or engage in other activities which may be in the interest of the 13 Company. The Company is required under the New Credit Facility to maintain certain financial ratios. The Company's ability to comply with such provisions will be dependent upon its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, no assurance can be given that the Company will maintain a level of operating cash flow that will permit it to service its obligations and to satisfy the financial covenants in the New Credit Facility. A breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under the New Credit Facility, which would entitle the lenders thereunder to accelerate the maturity of the New Credit Facility, and could result in cross-defaults permitting the acceleration of other indebtedness of the Company, including the New Notes. Such an event would materially adversely affect the Company's ability to make payments on the New Notes. See "New Credit Facility" and "Description of the New Notes." ENFORCEABILITY OF THE SUBSIDIARY GUARANTIES; FRAUDULENT CONVEYANCE CONSIDERATIONS The Subsidiary Guarantors will guarantee the Company's obligations under the New Notes. Initially, the Subsidiary Guarantors will consist of the following wholly-owned subsidiaries of the Company: Bekins, LEP-USA, Matrix, three special-purpose direct domestic subsidiaries, the sole assets of which are LEP- Canada and LIW and the active first-tier domestic subsidiaries of each of the foregoing. See "Description of the New Notes--Subsidiary Guaranties." Under applicable provisions of the federal bankruptcy law or comparable provisions of state law, if any Subsidiary Guarantor is insolvent at the time it incurs its Subsidiary Guaranty, such Subsidiary Guaranty could be voided, or claims in respect of such Subsidiary Guaranty could be subordinated to all other debts of such Subsidiary Guarantor. The measures of insolvency will vary depending upon the law applied in any such proceeding. Generally, however, the Subsidiary Guarantors may be considered insolvent if the sum of their debts, including contingent liabilities, is greater than the fair market value of all of their assets at a fair valuation or if the present fair market value of their assets is less than the amount that would be required to pay their probable liability on their existing debts, including contingent liabilities, as they become absolute and mature. See "Description of the New Notes--Ranking." The incurrence by the Company or the Subsidiary Guarantors of indebtedness such as the New Notes or the Subsidiary Guaranties, respectively, may be subject to review under relevant U.S. federal and state fraudulent conveyance laws if a bankruptcy case or a lawsuit (including in circumstances where bankruptcy is not involved) is commenced by or on behalf of unpaid creditors of the Company or the Subsidiary Guarantors. Under these laws, if a court were to find that, at the time the New Notes were issued, either (a) any of the Company or the Subsidiary Guarantors incurred debt represented by the New Notes or Subsidiary Guaranties, respectively, with the intent of hindering, delaying or defrauding creditors or (b) any of the Company or the Subsidiary Guarantors received less than reasonably equivalent value or consideration for incurring the indebtedness represented by the New Notes or such Subsidiary Guaranties, respectively, and (i) was insolvent or was rendered insolvent by reason of such transaction, (ii) was engaged in a business or transaction for which the assets remaining with such entity constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court may subordinate the New Notes or such Subsidiary Guaranty to presently existing and future indebtedness of such entity, void the issuance of the New Notes or any Subsidiary Guaranty or direct the repayment of any amounts paid thereunder to such entity or to a fund for the benefit of such entity's creditors or take other action detrimental to the holders of the New Notes. Because substantially all of the Company's obligations (including trade payables) are at the subsidiary level, any such voiding of the New Notes or the Subsidiary Guaranties would effectively subordinate the New Notes and such Subsidiary Guaranties, respectively, to such obligations. The Company believes that it and each Subsidiary Guarantor will receive equivalent value at the time the indebtedness represented by the New Notes and the Subsidiary Guaranties, respectively, is incurred. In addition, the Company does not believe that it, as a result of the issuance of the New Notes, or any Subsidiary Guarantor as a result of the issuance of the Subsidiary Guaranties, (i) will be insolvent or 14 rendered insolvent under the foregoing standards, (ii) will be engaged in a business or transaction for which its remaining assets constitute unreasonably small capital or (iii) intends to incur, or believes that it will incur, debts beyond its ability to pay such debts as they mature. These beliefs are based on the Company's and each Subsidiary Guarantor's operating history and net worth and management's analysis of internal cash flow projections and estimated values of assets and liabilities of each such entity at the time of the Old Notes Offering. There can be no assurance, however, that a court passing on these issues would make the same determination. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds." UNCERTAINTIES RELATING TO OPERATIONS AND ACQUISITION OF LIW In January 1996, certain members of the senior management of LEP Group plc formed LIW and acquired the freight forwarding business of LEP Group plc. LEP Group plc and its operating subsidiaries, including the freight forwarding business, had experienced substantial financial difficulties, and, immediately following the management buy-out of the freight forwarding business, LEP Group plc was placed into an administrative receivership. Notwithstanding the separation of LIW from LEP Group plc, LIW's reputation, business and operations have been adversely affected by LEP Group plc's historical financial difficulties. In addition, certain of LIW's operating subsidiaries have incurred historical operating losses that have threatened such subsidiaries' solvency and certain of the LIW operating subsidiaries' credit facility providers have withdrawn financing to such subsidiaries or have indicated that outstanding indebtedness must be refinanced or restructured. LIW incurred a net loss of L3.0 million ($4.6 million) for the period from January 24, 1996 (the date on which the management buy-out was consummated) to December 31, 1996 and a net loss of L2.8 million ($4.4 million) for the nine months ended September 30, 1997. Furthermore, LIW has faced and is encountering numerous other challenges relating to the worldwide integration of its financial and operating systems, increased competition resulting from deregulation, and various customs and tax matters in dispute involving approximately L11.9 million ($19.5 million). See "Business--Litigation." Moreover, the purchase obligation for the minority equity interests not owned by LIW in its Italian affiliate will require payments totaling approximately L.6 million (approximately $1.0 million) prior to July 1999, and minority shareholders in certain of LIW's foreign subsidiaries hold significant interests in the profits of such subsidiaries and have a significant say in management and control issues related to such subsidiaries. Successful integration of such entities may depend on maintaining satisfactory relationships with such minority shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business-- Ownership of LIW Subsidiaries." While the Company believes that it will be able to integrate LIW successfully and improve its results of operations, there can be no assurances that future operations of LIW will be profitable or that the operations of LIW will not have a material adverse effect on the Company as a whole. INTEGRATION OF ACQUISITIONS The Company has experienced significant growth in the past through the Subsidiary Acquisitions. The Company's future operations and earnings will be largely dependent upon the Company's ability to continue to integrate the operations of the companies acquired in the Subsidiary Acquisitions, particularly LIW, into the current operations of the Company. Although the Company believes that the Subsidiary Acquisitions, and in particular the recently consummated LIW Acquisition, offer opportunities for long-term efficiencies in operations and that the combined operations of Bekins, Matrix, LEP and LIW should positively affect future results of the operations of the Company, such acquisitions may materially adversely affect the Company's financial performance in 1998 and beyond until such time as the Company is able to realize the positive effect of expected long-term efficiencies of such acquisitions. As a result of the Subsidiary Acquisitions, the combined companies are more complex and diverse than the stand-alone operations of the Company prior to the Subsidiary Acquisitions. The combination and continued operation 15 of the businesses of the Company's subsidiaries may present significant challenges for the Company's management due to the increased time and resources required to properly integrate management, employees, information systems, accounting controls, personnel and administrative functions of such businesses. There can be no assurance that the Company will be able to successfully integrate and streamline overlapping functions with respect to any or all of such entities, or, if successfully accomplished, that such integration will not be more costly to accomplish than presently contemplated by the Company. The difficulties of such integration may be increased by the necessity of coordinating geographically separate organizations. The continued integration of certain operations of the Company's subsidiaries will require the dedication of management resources which may distract attention from the day-to-day business of the combined companies in the short- and long-term. Failure to effectively and completely accomplish the integration of operations of the Company's subsidiaries could have a material adverse effect on the Company's results of operations and financial condition. COMPETITION The transportation and logistics services industry is highly competitive. The Company competes against other integrated logistics companies and third party carriers offering logistics services. The Company also competes with truck lines for the services of fleet contractors and drivers. Competition is based primarily on freight rates, quality of service, reliability, transit times and scope of operations. Several other logistics companies, third party brokers and numerous carriers have substantially greater financial and other resources and are more established than the Company. Additionally, the Company competes against carriers' internal sales forces and shippers' transportation departments. As the Company expands its international operations, it expects to encounter increased competition from those service providers that have a predominantly international focus, including Air Express International Corporation, Expeditors International of Washington, Inc., Fritz Companies Inc., Circle International Group, Inc., Kuehne & Nagel, Panalpina and NFC plc, as well as from its competitors for domestic freight forwarding such as Burlington Air Express, Inc., Eagle USA Air Freight Inc. and Emery Air Freight Corp. Many of these competitors have substantially greater financial resources than the Company. The Company also encounters competition from regional and local air freight forwarders and HHG relocaters such as North American Van Lines, Allied Van Lines Inc., Atlas Van Lines Inc. and UniGroup, Inc. (United Van Lines, Inc. and Mayflower Transit, Inc.), cargo sales agents and brokers, surface freight forwarders and carriers, and associations of shippers organized for the purpose of consolidating their members' shipments to obtain lower freight rates from carriers. Deregulation has also increased competitive pressures on pricing. The intense competition to which the Company is subject could materially adversely affect the Company's operating margins. See "Business--Competition and Business Conditions." RANKING The Indenture permits the Company and its Restricted Subsidiaries to incur additional senior indebtedness provided certain financial or other conditions are met. The New Notes and the Subsidiary Guaranties will be senior unsecured obligations and will rank PARI PASSU in right of payment with all existing and future senior unsecured indebtedness of the Company and the Subsidiary Guarantors, respectively. In addition, the New Notes and the Subsidiary Guaranties will be effectively subordinated to all existing and future Secured Indebtedness of the Company and the Subsidiary Guarantors, respectively, to the extent of the value of the assets securing such indebtedness and all existing and future indebtedness and other liabilities (including trade payables) of the Company's non-guarantor subsidiaries. As of December 31, 1997, (i) the Company had $0.8 million of outstanding Secured Indebtedness and the Subsidiary Guarantors had approximately $0.4 million of outstanding Secured Indebtedness to which the New Notes and the Subsidiary Guaranties are effectively subordinated to the extent of the value of the assets securing such indebtedness, (ii) all indebtedness and other liabilities (including trade payables) of the Company's non-guarantor subsidiaries was approximately $99.6 million, to which the New Notes and 16 the Subsidiary Guaranties are effectively subordinated and (iii) the Company and the Subsidiary Guarantors had $30.0 million of outstanding indebtedness ranking PARI PASSU with the New Notes and the Subsidiary Guaranties (consisting of trade accounts payable of the Company and the Subsidiary Guarantors). The New Credit Facility is secured by certain assets of the Company and its Restricted Subsidiaries and therefore, the New Notes and the Subsidiary Guaranties are effectively subordinated to the New Credit Facility to the extent of the value of the assets securing such indebtedness. Holders of existing or future Secured Indebtedness of the Company and its Restricted Subsidiaries permitted under the Indenture, including the New Credit Facility, and holders of existing or future indebtedness of the Company's non-guarantor subsidiaries will have claims with respect to certain assets of the Company and such subsidiaries that are prior to the claims of holders of the New Notes. See "Description of the New Notes-- Ranking." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS After giving pro forma effect to the Subsidiary Acquisitions, the Company derived approximately 63.4% and 58.0% of its total revenue from sales outside the United States in the fiscal year ended December 31, 1996 and the year ended December 31, 1997, respectively. As of December 31, 1997, the Company had operations in 33 countries, utilizing the services of approximately 1,673 employees in the United States and approximately 4,715 employees in other countries and maintained strategic alliance partnerships with 57 partners in 42 additional countries. International operations are subject to a number of risks, including longer accounts receivable collection periods and greater difficulty in accounts receivable collections in certain geographic regions, unexpected changes in regulatory requirements, import and export restrictions, delays and tariffs, difficulties and costs of staffing and managing international operations, potentially adverse tax consequences, political instability, share ownership restrictions on foreign operations, currency fluctuations, the burdens of complying with multiple, potentially conflicting laws and the impact of business cycles and economic instability. There can be no assurance that the geographic, time zone, language and cultural differences between the Company's international personnel and operations will not result in problems that materially adversely affect the Company's business, operating results and financial condition. After giving pro forma effect to the Subsidiary Acquisitions, the Company derived approximately 23.8% and 23.7% of its total revenue from sales in Asia in the fiscal years ended December 31, 1996 and 1997, respectively. The Company is exposed to risks associated with the current economic and currency crisis in Asia. The Company has not experienced any permanent impairment to its Asian operations to date and has taken steps to establish a foreign exchange risk management program to minimize the volatility of certain currencies against results of operations. See "Management's Discussion and Analysis of financial Condition--Company Historical--Foreign Currency Risk Management." However, a sustained economic slowdown and/or currency crisis in Asia could have a material adverse effect on the Company's business, operating results and financial condition. The Company expects to commit additional time and resources to expanding its worldwide sales and marketing activities, globalizing its products in selected markets and developing local sales and support channels. There can be no assurance that such efforts will be successful. Failure to sustain international revenue could have a material adverse effect on the Company's business, operating results and financial condition. The Company may also experience an operating loss in one or more regions of the world for one or more periods. The Company's ability to manage such operational fluctuations and to maintain adequate long-term strategies in the face of such developments will be critical to the Company's continued growth and profitability. See "Management's Discussion and Analysis of Financial Condition and the Results of Operations" and "Business--Marketing." EXPOSURE TO CURRENCY FLUCTUATIONS Prior to the LIW Acquisition, the Company's revenue from international operations has primarily been denominated in U.S. Dollars. After giving pro forma effect to the LIW Acquisition, the proportion of 17 revenues and expenses denominated in currencies other than U.S. Dollars will increase dramatically. As of December 31, 1997, 41.9%, 11.6%, 10.8% and 5.1% of the Company's accounts receivable were denominated in U.S. Dollars, British Pounds Sterling, German Deutschemarks and Canadian Dollars, respectively. The remainder of the Company's accounts receivable were denominated in various other European and Asian currencies of the countries in which LIW operates. In addition, a portion of the borrowings under the New Credit Facility may be denominated in British Pounds Sterling, Canadian Dollars and other foreign currencies to the extent permitted by the New Credit Facility. As a result, fluctuations in the values of the respective currencies relative to the other currencies in which the Company generates revenue could materially adversely affect its business, operating results and financial condition. Adoption of the new European currency may affect the fluctuations. Fluctuations in currencies relative to the U.S. Dollar will affect period-to-period comparisons of the Company's reported results of operations. Due to the constantly changing currency exposures and the volatility of currency exchange rates, there can be no assurance that the Company will not experience currency losses in the future, nor can the Company predict the effect of exchange rate fluctuations upon future operating results. The Company has not in the past undertaken hedging transactions due to the previously limited exposure and impact of currency fluctuations on financial results. The Company may choose to hedge a portion of its currency exposure in the future as it deems appropriate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPLEMENTATION AND INTEGRATION OF MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 SOLUTIONS The Company utilizes FAST 400, a proprietary system for the real-time management of shipments on a multi-modal, multi-currency and multi-lingual basis, in certain of its operations. The Company believes that FAST 400 is the most advanced information system of its type currently in use in the global freight forwarding industry. The Company expects to spend approximately $30.0 million over the next three years to conclude the implementation and integration of FAST 400 and its related BUSINESS 400 systems globally, purchase additional information systems equipment and software upgrades and integrate the system capabilities of its Company's subsidiaries. The Company plans to fund these expenditures through a combination of cash provided from operations and from borrowings under the New Credit Facility. The failure of the Company's management information systems to adapt to the Company's business needs or the failure of the Company to successfully implement these systems could have a material adverse effect on the Company. The planned expenditures for information systems include significant costs during the next two to three years to address the inability of certain information systems, primarily computer software programs, to properly recognize and process date sensitive information after December 31, 1999 (the "Year 2000 Problem"). The Company has completed an assessment of its information systems and has developed a specific workplan to address the Year 2000 Problem through the introduction of new financial software for all of its subsidiaries. Of the $30.0 million required to implement and integrate the FAST 400 and related BUSINESS 400 systems globally, approximately $6.0 million will be spent to complete the upgrade and integration of the Company's North American subsidiaries' accounting systems and simultaneously address the Year 2000 Problem. Such costs may have a material adverse effect on the Company's results of operation in the near future. The Company believes it will be able to modify or replace its affected systems to minimize any detrimental effect that the Year 2000 Problem may have on the Company's long-term results of operations, liquidity or consolidated financial position. However, no assurance can be given that the Year 2000 Problem will be resolved without any future disruption or that the Company will not incur significant expense in resolving the issue. See "Business--Information Systems." 18 As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 problem. The Company is currently engaged in a comprehensive project to upgrade its information technology, including hardware and software systems that will consistently and properly recognize the Year 2000. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company expects to complete the project in late 1999 but before any operational impact. The estimated cost for this project could range as high as $1.1 million, excluding the cost of new systems which will be capitalized. This cost is being funded through a combination of cash provided from operations and borrowings under the New Credit Facility. Failure by the Company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. PRINCIPAL AND CONTROLLING STOCKHOLDERS As of April 6, 1998, TCW Special Credits Fund V--The Principal Fund (the "Principal Fund") and OCM Principal Opportunities Fund, L.P. (the "Opportunities Fund" and together with the Principal Fund, the "Oaktree Entities") owned 1,295,575 shares of Common Stock, representing approximately 60.9% of the outstanding shares of Common Stock (or 45.2% on a fully-diluted basis). As of April 6, 1998, Logistical Simon, L.L.C. ("Logistical Simon") owned 469,532 shares of Common Stock (and warrants to purchase 125,000 shares of Common Stock) representing approximately 22.1% of the outstanding shares of Common Stock (or 20.7% on a fully-diluted basis). The Oaktree Entities and Logistical Simon are parties to a Stockholders Agreement (the "Stockholders Agreement") pursuant to which the parties thereto have agreed to elect a board of directors consisting of (i) two individuals appointed by the Opportunities Fund, (ii) one individual appointed by the Principal Fund, (iii) three individuals appointed by WESS, (iv) the Chief Executive Officer of the Company and (v) William E. Myers, Jr. Currently the Stockholders Agreement provides that, except with respect to the daily affairs and operations of the Company arising in the ordinary course of business, no action may be taken, securities issued, monies borrowed, sum expended, decision made or obligation incurred by or on behalf of the Company with respect to any matter unless approved by at least six members of the Company's Board of Directors or by all of the members of the Executive Committee of the Board of Directors. As a result, because of concentration of ownership of Common Stock of the Company by the Oaktree Entities and Logistical Simon and the provisions of the Stockholders Agreement, the Oaktree Entities and Logistical Simon may be in a position to influence the Company at both the Board of Directors and stockholder levels. As of April 6, 1998, the Oaktree Entities and Logistical Simon owned 83.0% of the Common Stock of the Company and are therefore able to take certain actions without obtaining the approval of the remaining stockholders of the Company. There can be no assurance that the Oaktree Entities and Logistical Simon will exercise their power over the Common Stock in a manner that is consistent with, or that will not have a material adverse effect on, the interests of the holders of the New Notes. See "Principal Stockholders" and "Certain Relationships and Related Transactions." DEPENDENCE ON KEY PERSONNEL The Company believes that its future success will be highly dependent upon its ability to attract and retain skilled managers and other personnel, including Roger E. Payton, the Company's other executive officers and its regional managers. The loss of the services of such managers and personnel could have a material adverse effect on the Company. The Company maintains a $15 million key man life insurance policy on Mr. Payton. 19 RELIANCE ON INDEPENDENT AGENTS The Company relies in part upon the services of independent agents to market its transportation services, to act as intermediaries with customers and to provide services on behalf of the Company. Although the Company believes its relationship with its agents is satisfactory, there can be no assurance that the Company will continue to be successful in retaining its agents or that agents who terminate their contracts can be replaced by equally qualified companies. Because the agents occasionally have the primary relationship with customers, some customers could be expected to terminate their relationship with the Company if a particular agent were to terminate his or her relationship with the Company. See "Business--Operations." CHARACTERISTICS OF THE LOGISTICS INDUSTRY As a participant in the global logistics services industry, the Company's business is dependent upon a number of factors including the availability of transportation equipment and warehousing and distribution facilities at cost-effective rates and on reasonable terms and conditions. Such services and facilities are often provided by independent third parties. Shortages of cargo space are most likely to develop in and around the holiday season and in exceptionally heavy transportation lanes. Shortages in available space could also be triggered by economic conditions, transportation strikes, regulatory changes and other factors beyond the control of the Company. The future operating results of the Company could be materially adversely affected by significant shortages of suitable cargo space and associated increases in rates charged by passenger airlines and other providers of such cargo space. In addition, if the Company were unable to secure sufficient equipment or attract and retain sufficient personnel drivers and owner-operators to meet its customers' needs, its results of operations could be materially adversely affected. Finally, the Company's operating results would be materially adversely affected if the Company were unable to arrange suitable warehousing and distribution facilities to support its customers' logistics services needs because the Company's production would be limited to transportation-based services which are typically lower margin and subject to greater competitive pressures than logistics services. See "Business-- Competition and Business Conditions." From time to time, third parties, including the Internal Revenue Service ("IRS") and state authorities, have sought to assert, and at times have been successful in asserting, that independent owner-operators in the transportation industry, including those of the type utilized in connection with the Company's local pick-up and delivery operations, are "employees," rather than "independent contractors." Although the Company believes that the independent owner-operators utilized by it are not employees, there can be no assurance that the IRS and state authorities or others will not challenge this position, or that federal and state tax or other applicable laws, or interpretations thereof, will not change. If they do, the Company could incur additional employee benefit related expenses and could be liable for additional taxes, penalties and interest for prior periods and additional taxes for future periods. See "Business--Employees." VULNERABILITY TO ECONOMIC CONDITIONS The Company's future operating results may be dependent on the economic environments in which it operates. Demand for the Company's services could be materially adversely affected by economic conditions in the industries of the Company's customers. Interest rate fluctuations, economic recession, customers' business cycles, availability of qualified drivers, changes in fuel prices and supply, increases in fuel or energy taxes and the transportation costs of third party carriers are all economic factors over which the Company has little or no control. Increased operating expenses incurred by transportation carriers can be expected to result in higher transportation costs, and the Company's operating margins would be materially adversely affected if it were unable to pass through to its customers the full amount of increased transportation costs. Economic recession or a downturn in customers' business cycles, particularly in industries in which the Company has a large number of customers, could also have a material adverse effect on the Company's operating results due to reduced volume of loads shipped. The Company expects 20 that demand for the Company's services (and, consequently, its results of operations) will continue to be sensitive to domestic and, increasingly, global economic conditions and other factors beyond its control including a sustained economic slowdown and/or currency crisis in Asia. GOVERNMENT REGULATION The Company's operations are subject to various state, local, federal and foreign regulations that in many instances require permits and licenses. The Company was issued a license by the Interstate Commerce Commission (the "ICC") permitting the Company to act as a broker in arranging for the transportation, by motor vehicle, of general commodities between points in the United States and as a motor carrier and freight forwarder. In 1996, the ICC was dissolved and responsibility for oversight of motor carriers, brokers and freight forwarders was assumed by the Surface Transportation Board (the "STB") and the Federal Highway Administration (the "FHWA") both of which are part of the Department of Transportation (the "DOT"). The FHWA prescribes qualifications for acting in this capacity, including certain surety bonding requirements. In its ocean freight forwarding business, the Company is licensed as an ocean freight forwarder and as a non-vessel operating common carriers ("NVOCC") by the Federal Maritime Commission. The Company's domestic customs brokerage agents are licensed by the United States Department of the Treasury and are regulated by the United States Customs Service. The Company's air freight forwarding business is subject to regulation, as an indirect air cargo carrier, under the Federal Aviation Act by the DOT. The Company's motor carrier operations are subject to safety regulations of the FHWA related to such matters as hours of service by drivers, equipment inspection and equipment maintenance. The Company is also subject to similar regulations by the regulatory authorities of foreign jurisdictions in which the Company operates. The Company is also a common carrier and a contract motor carrier regulated by the STB and various state agencies. The Company is subject to various foreign and U.S. environmental laws. Numerous jurisdictions in Asia prohibit or restrict United States ownership of local logistics operations, and although the Company believes its ownership structure in Asia conforms to such laws, the matter is often subject to considerable regulatory discretion and there can be no assurance local authorities would agree with the Company. Any violation of the laws and regulations discussed above could increase claims and/or liability, including claims for uninsured punitive damages. Violations also could subject the Company to fines or, in the event of a serious violation, suspension, revocation of operating authority or criminal penalties. All of these regulatory authorities have broad powers generally governing activities such as authority to engage in motor carrier operations, rates and charges, and certain mergers, consolidations and acquisitions. Although compliance with these regulations has not had a material adverse effect on the Company's operations or financial condition in the past, there can be no assurance that such regulations or changes thereto will not materially adversely impact the Company's operations in the future. See "Business-- Regulation." Certain federal officials have announced that they are considering implementing increased security measures with respect to air cargo. There can be no assurance as to what, if any, regulations will be adopted or what, if adopted, their ultimate effect on the Company will be. Failure of the Company to maintain required permits or licenses, or to comply with applicable regulations, could result in substantial fines or revocation of the Company's operating authorities. See "Business--Regulation." PICK-UP AND DELIVERY CLAIMS EXPOSURE The Company utilizes the services of a significant number of drivers in connection with its local pick-up and delivery operations and from time to time such drivers are involved in accidents. Although most of these drivers are independent contractors, there can be no assurance that the Company will not be held liable for the actions of such drivers. The Company currently carries, or requires its independent owner-operators to carry, liability insurance in varying amounts, depending on the country in which operations are being conducted, for each such accident. However, there can be no assurance that claims against the 21 Company will not exceed the amount of coverage. If the Company were to experience a material increase in the frequency or severity of accidents, liability claims or workers' compensation claims, or unfavorable resolutions of claims, the Company's operating results and financial condition could be materially adversely affected. In addition, significant increases in insurance costs could reduce the Company's profitability. CHANGE OF CONTROL In the event of a Change of Control of the Company, the Company will be required, subject to certain conditions, to offer to purchase all outstanding New Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. Certain events involving a Change of Control may be an event of default under other indebtedness of the Company. Moreover, the exercise by the holders of the New Notes of their right to require the Company to purchase the New Notes may cause a default under such other indebtedness, even if the Change of Control does not. Finally, there can be no assurance that the Company will have the financial resources necessary to repurchase the New Notes upon a Change of Control. See "Description of the New Notes--Change of Control." ABSENCE OF PUBLIC TRADING MARKET Prior to this Exchange Offer, there has been no public market for the Old Notes which were sold pursuant to an exemption from registration under applicable securities laws. Like the Old Notes, the New Notes constitute a new issue of securities, have no established trading market and may not be widely distributed. The Initial Purchasers have informed the Company that they currently intend to make a market in the New Notes following the effectiveness of the Registration Statement; however, the Initial Purchasers are not obligated to do so and may discontinue such market-making activities at any time without notice. If the New Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities and other factors, including general economic conditions and the financial condition of, performance of and prospects for the Company. There can be no assurance as to the development of any market or liquidity of any market that may develop for the New Notes. If a market does develop, the price of the New Notes may fluctuate and liquidity may be limited. If a market for the New Notes does not develop, purchasers of the New Notes may be unable to resell such securities for an extended period of time, if at all. USE OF PROCEEDS This Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement. The Company will not receive any cash proceeds from the issuance of the New Notes offered in the Exchange Offer. In consideration for issuing the New Notes as contemplated in this Prospectus, the Company will receive in exchange Old Notes in like principal amount, the form and terms of which are the same in all material respects as the form and terms of the New Notes except that the New Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to special interest payments applicable to the Old Notes. The Old Notes surrendered in exchange for New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase in the indebtedness of the Company. The net proceeds to the Company from the sale of the Old Notes were approximately $103.4 million (after deducting discounts to the Initial Purchasers and other expenses). Of the net proceeds of the Old Notes Offering (i) approximately $75.8 million was used to repay all indebtedness outstanding under the Company's Old Credit Facility, (ii) approximately $8.0 million was used by the Company to repay certain outstanding indebtedness of LIW's subsidiaries, (iii) approximately $10.0 million was used to finance the 22 purchase price paid by the Company for the acquisition of certain shares of LIW capital stock and preference shares, (iv) approximately $4.5 million was used to pay expenses relating to the LIW Acquisition, (v) approximately $2.2 million was used to pay commitment fees and other fees and expenses associated with the execution of the Company's New Credit Facility, and (vi) approximately $2.9 million is expected to be used for general working capital purposes. See "Recent Acquisitions--Acquisition of LIW," "New Credit Facility," "Unaudited Pro Forma Condensed Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 23 CONSOLIDATED CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at December 31, 1997. See "Use of Proceeds" and "Selected Consolidated Financial Data of the Company." This table should be read in conjunction with the more detailed information and financial statements appearing elsewhere in this Prospectus.
DECEMBER 31, 1997 -------------- Cash and cash equivalents................................................... $ 37,909 -------------- -------------- Long-term debt (including current portion): Other indebtedness (including capital leases)............................. $ 5,370 New Credit Facility....................................................... -- 9 3/4% Senior Notes Due 2007.............................................. 110,000 -------------- Total debt.............................................................. 115,370 -------------- Stockholders' equity: Common stock.............................................................. 2 Additional paid-in capital................................................ 52,291 Accumulated deficit....................................................... (28,902) Notes receivable from stockholders........................................ (357) Cumulative translation adjustment......................................... (115) -------------- Total stockholders' equity.................................................. 22,919 -------------- Total capitalization.................................................... $ 138,289 -------------- --------------
24 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS The following Unaudited Pro Forma Condensed Combined Statement of Operations gives effect to the LIW Acquisition, the issuance of the Old Notes and the New Credit Facility (the "Pro Forma Adjustments") as if they had occurred January 1, 1997. The Unaudited Pro Forma Condensed Combined Statement of Operations does not purport to present the actual results of operations of the Company had the transactions and events assumed therein in fact occurred on the date specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The Unaudited Pro Forma Condensed Combined Statement of Operations is based on certain assumptions and adjustments described in the notes to the Unaudited Pro Forma Condensed Combined Statement of Operations and should be read in conjunction therewith and with "Recent Acquisitions" and the Consolidated Financial Statements of the Company and LIW and the related notes thereto included elsewhere in this Prospectus. 25 GEOLOGISTICS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
LIW(1) NINE MONTHS ENDED SEPTEMBER 30, PRO FORMA PRO FORMA COMPANY 1997 ADJUSTMENTS COMBINED --------- ------------------ ---------------- ----------- Revenues................................ $ 978,249 $ 828,798 $ (281,885)(2) $ 1,525,162 Transportation and other direct costs... 759,049 670,284 (282,444 (3) 1,146,889 --------- -------- ---------------- ----------- Net revenues............................ 219,200 158,514 559 378,273 Other operating expenses................ 204,733 156,813 (6,270 (3) 355,276 Depreciation and amortization........... 30,398 615 1,140(3) 32,153 --------- -------- ---------------- ----------- Operating income (loss)................. (15,931) 1,086 5,689 (9,156) Interest expense, net................... 8,576 830 3,581(4) 12,987 Share of loss in equity investments..... 151 927 1,078 Other (income) expense.................. 60 404 (451 (5) 13 --------- -------- ---------------- ----------- Income (loss) before income taxes, minority interest and extraordinary loss.................................. (24,718) (1,075 ) 2,559 (23,234) Income tax provision (benefit).......... (8,420) 2,251 (881 (6) (7,050) Income (loss) before minority interests and extraordinary loss................ (16,298) (3,326 ) 3,440 (16,184) Minority interests...................... (1,067) (366 ) -- (1,433) Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,528(11)................. (2,293) -- 2,293 -- --------- -------- ---------------- ----------- Net income (loss)....................... $ (19,658) $ (3,692 ) $ 5,733 $ (17,617) --------- -------- ---------------- ----------- --------- -------- ---------------- ----------- BASIC LOSS PER COMMON SHARE: Net loss.............................. $ (8.60) DILUTED LOSS PER COMMON SHARE: Net loss.............................. $ (8.60) Weighted average number of common shares outstanding........................... 2,049,800 Other Financial Data: EBITDA(7)............................. $ 14,337 $ (334 ) $ 7,280 $ 21,283 Cash (advances to) dividends from affiliates, net..................... $ (70) $ (1,631 ) $ -- $ (1,701) Cash interest expense(8).............. $ 7,715 $ 830 $ 1,108 $ 9,653 Capital expenditures.................. $ 11,744 $ 1,568 $ -- $ 13,312 Net cash from operating activities.... $ 13,815 Net cash from investing activities.... $ (14,707) Net cash from financing activities.... $ 1,215 Ratio of earnings to fixed charges(9)(10)...................... --
See accompanying Notes to Unaudited Pro Forma Condensed Combined Statements of Operations. 26 GEOLOGISTICS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) (1) Amounts for LIW have been translated from British Pounds Sterling into U.S. Dollars using the average exchange rate for 1997 and adjusted to conform to U.S. GAAP. Amounts include only the first nine months of the year as the last three months after the LIW Acquisition have been included in the Company's numbers. See Notes 24 and 25 to the Combined and Consolidated Financial Statements of LIW, Note 8 to the Unaudited Interim Consolidated Financial Statements of LIW and "Prospectus Summary--Exchange Rates" included elsewhere herein. (2) Reflects primarily the elimination of (a) intercompany transactions between the Company and LIW, and (b) duties and value-added tax paid on behalf of customers which are subsequently invoiced to customers. Duties and value-added tax paid on behalf of customers are recorded by the Company net of invoiced amounts while LIW records the revenue and cost components separately. Therefore, such amounts have been removed to conform LIW's historical financial information to the Company's accounting procedures. The following represents the effect of such eliminations on both revenues and transportation and other direct costs:
NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------- Duty, value-added tax and other................................................ $ (200,060) Intercompany................................................................... (81,825) ------------- Total...................................................................... $ (281,885) ------------- -------------
(3) Reflects adjustments as if the LIW Acquisition was completed January 1, 1997 as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ Administrative costs and expenses (eliminated) created as a result of the acquisitions: Transportation and other direct costs......................................... $ (559) ------------ ------------ Corporate office expenses..................................................... $ (880) Insurance..................................................................... (624) Adjustment to reverse LIW reserve captured in purchase accounting............... (4,762) Other......................................................................... (4) ------------ Total other operating expense adjustment.................................... $ (6,270) ------------ ------------ Additional depreciation as a result of the LIW Acquisition...................... $ 1,140 ------------ ------------
Additional depreciation relates to the excess of purchase cost over book value of net assets acquired of $22.8 million which is allocated to property and equipment and depreciated on a straight-line basis using an average useful life of approximately 20 years. The LIW reserve captured in purchase accounting represents the reversal of expenses included in LIW's results of operations (required under UK GAAP) for the nine months ended September 30, 1997 relating to terminations and shut down costs of the corporate headquarters of LIW following the LIW 27 GEOLOGISTICS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS) Acquisition. These costs have been reversed and recorded as part of the purchase accounting adjustments consistent with U.S. GAAP at September 30, 1997. (4) Reflects adjustments to interest expense for the Old Notes Offering as if such offering was completed January 1, 1997 as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ Interest on the Old Notes at 9.75%.............................................. $ 10,725 Amortization of deferred financing costs related to the Old Notes and the New Credit Facility............................................................... 1,100 ------------ Pro forma interest expense for the Old Notes Offering........................... 11,825 ------------ Pro forma interest expense on other debt........................................ 1,162 ------------ Total pro forma interest expense.............................................. 12,987 Less interest expense on retired debt........................................... (5,727) Less amortization of deferred financing costs of retired debt................... (547) Less interest expense and amortization of deferred financing costs of new debt already included in interest expense.......................................... (1,970) Less interest expense on other debt............................................. (1,162) ------------ Interest expense for year ended December 31, 1997............................... (9,406) ------------ Net adjustment.................................................................. $ 3,581 ------------ ------------
Amortization of deferred financing costs includes costs related to the Old Notes Offering and New Credit Facility of approximately $6,600 and $2,200 amortized over a period of 10 and 5 years, respectively. (5) Reflects adjustment to gain on the October 31, 1996 sale of LEP-USA and LEP-Canada to the Company recorded by LIW. (6) Reflects the tax effect of Pro Forma Adjustments. (7) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization, and other non-cash items such as share of loss in equity investments, extraordinary loss and minority interests. EBITDA also includes other income and expenses and cash advances to and cash dividends received from companies accounted for under the equity method or consolidated subsidiaries in which LIW has a controlling interest. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statement of Cash Flows of the Company and LIW and the related notes thereto included in this Prospectus. EBITDA is included herein because management believes that certain 28 GEOLOGISTICS CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS) investors find it to be a useful tool for measuring the ability to service debt. EBITDA as used herein is consistent with the definition used in the Indenture. EBITDA is calculated as follows:
Operating loss..................................................................... $ (9,156) Add: depreciation and amortization................................................. 32,153 Subtract: Other expense, net............................................................... (13) Cash advances to affiliates...................................................... (1,701) --------- EBITDA............................................................................. $ 21,283 --------- ---------
(8) "Cash interest expense" represents interest expense recorded in the statement of operations less amortization of deferred financing costs. Total debt and cash interest expense give effect to the Old Notes Offering and other interest bearing debt after application of proceeds from the Old Notes Offering as if such transactions had occurred at January 1, 1997. See "Use of Proceeds" and "Consolidated Capitalization." (9) Pro forma earnings were inadequate to cover pro forma fixed charges by $22,143 for the year ended December 31, 1997. (10) For purposes of this computation, fixed charges consist of interest expense and amortization of deferred financing costs and the estimated portion of rental expense attributable to interest. Earnings consist of income (loss) before income taxes excluding equity investment losses plus fixed charges. (11) On October 29, 1997, the Company applied a portion of the proceeds from the sale of the Old Notes to retire the Indebtedness outstanding under the Old Credit Facility. In connection with such transaction, the Company recorded an extraordinary loss of $3,821 ($2,293 net of taxes) related to the write-off of unamortized deferred financing costs. 29 SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The following table summarizes certain selected consolidated financial data, which should be read in conjunction with the Company's consolidated financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected consolidated financial data have been derived from the audited consolidated financial statements of the Company and Bekins (the "Company Predecessor").
COMPANY PREDECESSOR(1) COMPANY --------------------------------------------------- ---------------------------- PERIOD FROM PERIOD FROM YEAR ENDED MARCH 31,(2) APRIL 1, MAY 2, 1996 YEAR ENDED -------------------------------------- 1996 TO MAY TO DECEMBER DECEMBER 31, 1993 1994 1995 1996 1, 1996(2) 31, 1996(3) 1997(3) -------- -------- -------- -------- ----------- ------------ ------------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues............... $244,353 $238,812 $242,966 $231,752 $17,458 $225,793 $978,249 Transportation and other direct costs... 192,530 186,570 191,278 179,611 13,634 181,208 759,049 -------- -------- -------- -------- ----------- ------------ ------------- Net revenues......... 51,823 52,242 51,688 52,141 3,824 44,585 219,200 Other operating expenses............. 40,853 40,799 43,008 42,810 3,309 37,554 204,733 Depreciation and amortization......... 6,085 6,054 5,675 4,194 337 16,310 30,398 -------- -------- -------- -------- ----------- ------------ ------------- Operating income (loss)............. 4,885 5,389 3,005 5,137 178 (9,279) (15,931) Interest expense, net.................. 3,552 1,758 2,252 2,397 230 2,981 8,576 Share of loss in equity investments.......... -- -- -- -- -- -- 151 Other (income) expense.............. 32 (26) (259) 34 (73) -- 60 -------- -------- -------- -------- ----------- ------------ ------------- Income (loss) before income taxes, minority interest and extraordinary loss............... 1,301 3,657 1,012 2,706 21 (12,260) (24,718) Income tax provision (benefit)............ 628 1,880 816 1,508 48 (4,013) (8,420) -------- -------- -------- -------- ----------- ------------ ------------- Income (loss) before minority interest and extraordinary loss............... 673 1,777 196 1,198 (27) (8,247) (16,298) Minority interest...... -- -- -- -- -- -- (1,067) Extraordinary loss on early extinguishment of debt, net of tax benefit of $664 and $1,528(4)............ -- -- -- -- -- (997) (2,293) -------- -------- -------- -------- ----------- ------------ ------------- Net income (loss).... $ 673 $ 1,777 $ 196 $ 1,198 $ (27) $ (9,244) $(19,658) -------- -------- -------- -------- ----------- ------------ ------------- -------- -------- -------- -------- ----------- ------------ ------------- Basic loss per share before extraordinary loss................... -- -- -- -- -- $ (6.58) $ (8.47) Extraordinary loss..... -- -- -- -- -- $ (.79) $ (1.12) Net loss............... -- -- -- -- -- $ (7.37) $ (9.59) Diluted loss per share before extraordinary loss................... -- -- -- -- -- $ (6.58) $ (8.47) Extraordinary loss..... -- -- -- -- -- $ (.79) $ (1.12) Net loss............... -- -- -- -- -- $ (7.37) $ (9.59) Weighted average number of common shares outstanding............ 1,254,200 2,049,800 OTHER FINANCIAL DATA: EBITDA(5).............. $ 10,938 $ 11,469 $ 8,939 $ 9,297 $ 588 $ 7,031 $ 14,337 Capital expenditures... $ 3,055 $ 3,210 $ 3,251 $ 3,175 $ 130 $ 1,369 $ 11,744 Cash from operating activities........... $ (9,559) $ 6,377 $ 671 $ 9,266 $(2,667) $ 2,427 $ (7,749) Cash from investing activities........... $ (3,073) $ (2,963) $ (4,542) $ (469) $ (146) $(106,949) $(18,669) Cash from financing activities........... $ 11,717 $ (2,073) $ 3,826 $ (9,343) $ 2,485 $103,476 $ 38,320 Ratio of earnings to fixed charges(6)(7)........ 1.3x 2.5x 1.3x 1.9x 1.1x -- -- BALANCE SHEET DATA: Current assets......... $ 39,115 $ 38,437 $ 35,389 $ 33,313 $32,834 $135,036 $319,732 Property and equipment, net.................. $ 14,285 $ 12,011 $ 10,080 $ 8,266 $ 8,143 $ 11,781 $ 51,807 Total assets........... $ 81,264 $ 74,604 $ 71,276 $ 64,476 $63,845 $236,684 $485,766 Current liabilities.... $ 44,099 $ 57,223 $ 36,799 $ 48,188 $48,798 $123,144 $301,809 Long-term debt (including current portion)............. $ 22,911 $ 18,861 $ 21,049 $ 11,915 $15,634 $ 66,314 $115,370 Other noncurrent liabilities.......... $ 11,431 $ 10,219 $ 7,423 $ 7,768 $ 6,567 $ 11,117 $ 46,647 Minority interest...... $ 1,601 Stockholders' equity... $ 4,487 $ 6,264 $ 6,879 $ 8,137 $ 8,112 $ 40,619 $ 22,919
See accompanying Notes to Selected Consolidated Financial Data of the Company. 30 GEOLOGISTICS CORPORATION NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY (DOLLARS IN THOUSANDS) (1) On May 2, 1996, the Company acquired all of the outstanding shares of the Company Predecessor. See "Recent Acquisitions" and Note 3 to the Company's Consolidated Financial Statements. (2) Includes the operating results of Bekins Moving and Storage division ("BMS"). Upon acquisition of Bekins by the Company on May 2, 1996, BMS was treated as discontinued with the net assets of BMS recorded as a current asset--see Note 3 to the Company's Consolidated Financial Statements. The following is selected financial information of BMS:
YEAR ENDED MARCH 31, ------------------------------------------ 1993 1994 1995 1996 --------- --------- --------- --------- INCOME STATEMENT DATA: Revenues........................................ $ 54,491 $ 52,880 $ 53,948 $ 47,264 Net revenues.................................... 18,327 18,803 19,564 17,855 Depreciation and amortization................... 1,447 1,413 1,453 1,237 Operating income................................ 7 440 470 243 OTHER FINANCIAL DATA: EBITDA.......................................... $ 1,454 $ 1,853 $ 1,923 $ 1,480 Capital expenditures............................ 561 1,817 1,216 608
(3) Includes the accounts of LEP-USA and LEP-Canada since November 1, 1996 when acquired from LIW, the accounts of Matrix since its acquisition on November 7, 1996 and the accounts of LIW since September 30, 1997. See "Recent Acquisitions" and Note 3 to the Company's Consolidated Financial Statements. (4) On October 31, 1996, the Company applied proceeds from the Old Credit Facility to repay certain indebtedness incurred to finance the acquisition of Bekins. In connection with such transaction, the Company recorded an extraordinary loss of $1,661 ($997 net of tax) related to the write-off of unamortized deferred financing costs. On October 29, 1997, the Company applied proceeds from the sale of the Old Notes to repay the indebtedness outstanding under the Old Credit Facility. In connection with such transaction, the Company recorded an extraordinary loss of $3,821 ($2,293 net of taxes) related to the write-off of unamortized deferred financing costs. (5) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization, and other non-cash terms such as share of loss in equity investments, extraordinary loss and minority interests. EBITDA also includes other income and expenses and cash advances to and cash dividends received from companies accounted for under the equity method or consolidated subsidiaries in which LIW has a controlling interest. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statement of Cash Flows of the Company and the related Notes thereto included in this Prospectus. EBITDA is included herein because management believes that certain investors find it to 31 be a useful tool for measuring the ability to service debt. EBITDA as used herein is consistent with the definition used in the Indenture. EBITDA has been calculated as follows:
PERIOD FROM YEAR ENDED MARCH 31, PERIOD FROM MAY 2, 1996 YEAR ENDED ------------------------------------------ APRIL 1, 1996 TO DECEMBER DECEMBER 31, 1993 1994 1995 1996 TO MAY 1, 1996 31, 1996 1997 --------- --------- --------- --------- --------------- ------------- ------------- EBITDA Reconciliation.............. Operating income (loss).......... $ 4,885 $ 5,389 $ 3,005 $ 5,137 $ 178 $ (9,279) $ (15,931) Depreciation and amortization.... 6,085 6,054 5,675 4,194 337 16,310 30,398 Other (income) expense........... 32 (26) (259) 34 (73) -- 60 Cash (advances to) dividends from affiliates, net................ -- -- -- -- -- -- (70) --------- --------- --------- --------- ----- ------------- ------------- EBITDA............................. $ 10,938 $ 11,469 $ 8,939 $ 9,297 $ 588 $ 7,031 $ 14,337 --------- --------- --------- --------- ----- ------------- ------------- --------- --------- --------- --------- ----- ------------- -------------
(6) For purposes of this computation, fixed charges consist of interest expense and amortization of deferred financing costs and the estimated portion of rental expense attributable to interest. Earnings consists of income (loss) before income taxes plus fixed charges. (7) Earnings were inadequate to cover fixed charges by $12,260 and $24,507 for the period from May 2, 1996 to December 31, 1996 and for the year ended December 31, 1997, respectively. 32 SELECTED CONSOLIDATED FINANCIAL DATA OF LIW The following table summarizes certain selected financial data, which should be read in conjunction with LIW's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected consolidated financial data as of December 31, 1992, 1993, 1994 and 1995 and for the periods from January 1, 1996 to January 23, 1996 and January 24, 1996 to December 31, 1996, set forth in U.K. GAAP in British Pounds Sterling, has been derived from the audited combined and consolidated financial statements of LIW and the LIW Predecessor. The data for the nine months ended September 30, 1997, has been derived from LIW's accounting records and the unaudited interim consolidated financial statements of LIW. In the opinion of LIW management, the unaudited interim consolidated financial statements for the nine months ended September 30, 1997 have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations as of such dates and for such periods. With respect to the nine months ended September 30, 1996, the financial statements of LIW have been derived from management reports. Management has made such adjustments to these reports as they believe are necessary for a fair presentation of the statement of operations with respect to the nine months ended September 30, 1996. However, there can be no assurances that such financial statements are as reliable or accurate as financial statements that were prepared using normal interim period or year-end financial reporting procedures. The combined and consolidated financial statements of LIW and its predecessor have been prepared in accordance with U.K. GAAP, which differs in certain significant respects from U.S. GAAP. See Notes 24 and 25 to the Combined and Consolidated Financial Statements of LIW and Note 8 to the Unaudited Interim Consolidated Financial Statements of LIW included elsewhere herein. The selected financial data for the period from January 1, 1996 to January 23, 1996, for the period from January 24, 1996 to December 31, 1996 and (unaudited) for the periods from January 24, 1996 to September 30, 1996 and the nine months ended September 30, 1997, set forth in U.S. GAAP in U.S. Dollars, has been derived from the audited and unaudited consolidated financial statements of LIW and its predecessor and adjusted for differences between U.K. GAAP and U.S. GAAP. 33 SELECTED CONSOLIDATED FINANCIAL DATA OF LIW (CONTINUED)
U.K. GAAP IN U.K. POUNDS (POUNDS IN THOUSANDS) --------------------------------------------------------------------------------------------------------- LIW LIW PREDECESSOR(1)(2) ------------------------------------------- ----------------------------------------------------------- PERIOD FROM PERIOD FROM PERIOD FROM JANUARY 24, JANUARY 1, JANUARY 24, 1996 TO NINE MONTHS YEAR ENDED DECEMBER 31, 1996 TO 1996 TO SEPTEMBER ENDED ---------------------------------------------- JANUARY 23, DECEMBER 31, 30, SEPTEMBER 30, 1992 1993 1994 1995 1996 1996(2) 1996(2) 1997 ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) INCOME STATEMENT DATA: Revenues.......... L1,073,681 L1,032,689 L1,096,377 L1,106,223 L 68,362 L958,864 L748,900 L505,026 Transportation and other direct costs........... 876,873 831,319 900,700 906,743 55,618 778,897 613,406 408,436 ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- Net revenues.... 196,808 201,370 195,677 199,480 12,744 179,967 135,494 96,590 Other operating expenses........ 199,437 192,661 188,176 204,840 11,948 180,039 136,281 95,000 Depreciation and amortization.... 6,632 5,654 4,670 4,234 244 3,424 2,690 1,554 ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- Operating income (loss)........ (9,261) 3,055 2,831 (9,594) 552 (3,496) (3,477) 36 Interest expense, net............. 2,843 2,478 1,985 2,741 98 1,227 1,046 506 Share of (income) loss in equity investments..... 145 (135) (14) 1,021 86 1,283 612 565 Other (income) expense......... -- 1,769(3) -- -- -- (5,800)(3) -- 275 ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- Income (loss) before income taxes and minority interests....... (12,249) (1,057) 860 (13,356) 368 (206) (5,135) (1,310) Income tax provision (benefit)....... (32) 2,809 1,780 5,987 168 2,420 1,431 1,246 ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- Income (loss) before minority interests....... (12,217) (3,866) (920) (19,343) 200 (2,626) (6,566) (2,556) Minority interests....... (324) (221) (353) (397) (26) (386) (461) (223) ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- Net income (loss)........ L (12,541) L (4,087) L (1,273) L (19,740) L 174 L (3,012) L (7,027) L (2,779) ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- ---------- ---------- ---------- ---------- ----------- ------------ ------------ ------------- OTHER FINANCIAL DATA: EBITDA(4)......... L (2,859) L 7,061 L 7,284 L (4,925) L 796 L 5,035 L (817) L 321 Cash (advances to) dividends received from equity investments..... 3 269 17 670 -- (410) 58 (954) Cash (advances to) dividends received from minority interests....... (233) (148) (234) (235) -- (283) (88) (40) Capital expenditures.... 3,255 1,202 1,935 2,981 -- 1,758 1,249 955 Ratio of earnings to fixed charges(5)(6)... -- 1.1x 1.2x -- 3.3x -- -- 0.6x BALANCE SHEET DATA: Current assets.... L 172,674 L 169,816 L 171,024 L 181,889 L181,320 L127,531 L171,508 L122,739 Property and equipment, net............. 45,559 34,603 33,904 33,580 31,621 22,306 28,996 20,488 Total assets...... 231,174 215,214 215,973 224,860 216,842 152,206 203,804 146,963 Current liabilities..... 174,307 155,587 165,734 186,304 178,240 122,376 170,751 121,839 Long-term debt (including current portion)........ 33,223 23,394 24,726 39,383 39,768 11,239 28,056 9,690 Other noncurrent liabilities..... 12,510 14,238 14,704 18,256 18,209 15,414 20,628 15,210 Minority interest........ 1,668 1,651 1,479 1,455 1,481 1,447 1,815 1,485 Stockholders' equity.......... 30,974 32,296 29,306 15,035 15,081 11,122 8,447 7,240
See accompanying Notes to Selected Consolidated Financial Data of LIW. 34 SELECTED CONSOLIDATED FINANCIAL DATA OF LIW (CONTINUED)
U.S. GAAP IN U.S. DOLLARS (DOLLARS IN THOUSANDS)(8) ------------------------------------------ LIW ------------------------------------------ PERIOD FROM PERIOD FROM JANUARY 1, JANUARY 24, NINE MONTHS 1996 TO 1996 TO ENDED JANUARY 23, DECEMBER 31, SEPTEMBER 30, 1996 1996(2) 1997 ----------- ------------ ------------- (UNAUDITED) INCOME STATEMENT DATA: Revenues.......... $105,120 $1,496,499 $823,445 Transportation and other direct costs........... 85,524 1,215,625 665,955 ----------- ------------ ------------- Net revenues.... 19,596 280,874 157,490 Other operating expenses........ 18,288 280,178 154,221 Depreciation and amortization.... 341 3,616 611 ----------- ------------ ------------- Operating income (loss)........ 967 (2,920) 2,658 Interest expense, net............. 151 1,915 825 Share of (income) loss in equity investments..... 132 2,002 921 Other (income) expense......... -- (14,337)(3) 401 ----------- ------------ ------------- Income (loss) before income taxes and minority interests....... 684 7,500 511 Income tax provision (benefit)....... 286 5,573 2,932 ----------- ------------ ------------- Income (loss) before minority interests....... 398 1,927 (2,421) Minority interests....... (40) (602) (364) ----------- ------------ ------------- Net income (loss)........ $ 358 $ 1,325 $ (2,785) ----------- ------------ ------------- ----------- ------------ ------------- OTHER FINANCIAL DATA: EBITDA(4)......... $ 1,308 $ 13,951 $ 1,248 Cash (advances to) dividends received from equity investments..... -- (640) (1,555) Cash (advances to) dividends received from minority interests....... -- (442) (65) Capital expenditures.... -- 2,744 1,557 Ratio of earnings to fixed charges(5)(7)... 3.5x -- 1.7x BALANCE SHEET DATA: Current assets.... $274,428 $ 218,371 $198,653 Property and equipment, net............. 26,373 27,505 13,773 Total assets...... 307,127 251,119 228,917 Current liabilities..... 269,766 209,544 197,196 Long-term debt (including current portion)........ 60,189 19,245 15,683 Other noncurrent liabilities..... 28,290 27,505 24,399 Minority interests....... 2,241 2,478 2,403 Stockholders' equity.......... 1,031 8,430 2,557
See accompanying Notes to Selected Consolidated Financial Data of LIW. 35 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA OF LIW (DOLLARS AND POUNDS IN THOUSANDS) (1) On January 24, 1996, the LIW Predecessor was purchased by LIW together with LEP International A/S, LIW's Danish affiliate. (2) Includes the accounts of LEP-USA and LEP-Canada until October 31, 1996 when sold to the Company. See "Recent Acquisitions" and Note 1 to the LIW consolidated financial statements. (3) For the year ended December 31, 1993, amount represents loss on sale of property in Cologne, Germany. For the period January 24, 1996 to December 31, 1996 amount represents gain on sale of LEP-USA and LEP-Canada to the Company. See Note 2 above and Note 21(a) to the Consolidated Financial Statements of LIW. (4) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization, and other non cash items such as share of loss in equity investments, extraordinary loss and minority interest. EBITDA is further adjusted to include other income and expenses and cash advances to and cash dividends received from companies accounted for under the equity method or consolidated subsidiaries in which LIW has a controlling interest. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statement of Cash Flows of LIW and the related Notes thereto included in this Prospectus. EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring the ability to service debt. EBITDA as used herein is consistent with the definition used in the Indenture. EBITDA is calculated as follows:
U.S. GAAP IN U.S. DOLLARS ------------------------------------------ LIW ------------------------------------------ PERIOD FROM PERIOD FROM JANUARY 1, JANUARY 24, NINE MONTHS 1996 TO 1996 TO ENDED JANUARY 23, DECEMBER 31, SEPTEMBER 30, 1996 1996 1997 ------------- ------------ ------------- EBITDA Reconciliation Operating income (loss)........................ $ 967 $ (2,920) $ 2,658 Depreciation and amortization.................. 341 3,616 611 Other (income) expense......................... -- (14,337) 401 Cash (advances to) dividends from affiliates, net.......................................... -- (1,082) (1,620) ------ ------------ ------------- EBITDA........................................... $ 1,308 $ 13,951 $ 1,248 ------ ------------ ------------- ------ ------------ -------------
(5) For purposes of this computation, fixed charges consist of interest expense and amortization of deferred financing costs and the estimated portion of rental expense attributable to interest. Earnings consists of income (loss) before income taxes excluding equity investment losses and excludes items referred to in note (3) above plus fixed charges. (6) Earnings were inadequate to cover fixed charges by L12,104, L12,335 and L4,723 for the years ended December 31, 1992 and 1995, and for the period from January 24, 1996 to December 31, 1996, respectively. (7) Earnings were inadequate to cover fixed charges by $5,554 for the period from January 24, 1996 to December 31, 1996. (8) Amounts shown as of and for the year ended December 31, 1995 and all subsequent periods have been converted into U.S. GAAP based on the information disclosed in Notes 24 and 25 to the LIW Consolidated Financial Statements and Note 8 to the Unaudited Interim Consolidated Financial Statements of LIW included elsewhere herein with amounts for all periods shown translated into U.S. Dollars at average rates for the respective period. See also "Prospectus Summary--Exchange Rates". 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY," "SELECTED CONSOLIDATED FINANCIAL DATA OF LIW," THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF LIW INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND OTHER UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE THOSE DISCUSSED BELOW, AS WELL AS GENERAL ECONOMIC AND BUSINESS CONDITIONS, COMPETITION AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS. GENERAL The Company commenced operation on May 2, 1996 in connection with its acquisition of Bekins. On October 31, 1996, the Company acquired LEP and securities representing 33.3%, in the aggregate, of the common equity of LIW. On November 7, 1996, the Company acquired Matrix. On September 30, 1997, the Company acquired an additional 41.9% of the common equity of LIW and on December 15, 1997, the Company completed the acquisition of all of the remaining equity securities of LIW. All of such acquisitions were accounted for by the purchase method of accounting, and accordingly, the book values of the assets and liabilities of the acquired companies were adjusted to reflect their estimated values at the dates of acquisition. The Company is one of the largest non-asset-based providers of worldwide logistics and transportation services headquartered in the United States based on revenues for 1997 and after giving pro forma effect to the LIW Acquisition. The Company's primary business operations involve obtaining shipment or material orders from customers, creating and delivering a wide range of logistics solutions to meet customers' specific requirements for transportation and related services, and arranging and monitoring all aspects of material flow activity utilizing advanced information technology systems. The logistics solutions include domestic and international freight forwarding and door-to-door delivery services using a wide range of transportation modes, including air, ocean, truck and rail. The Company also provides value-added services such as warehousing, inventory management, assembly, customs brokerage, distribution and installation for manufacturers and retailers of commercial and consumer products such as copiers, computers, pharmaceutical supplies, medical equipment, consumer durables and aviation products. The Company also specializes in arranging for the worldwide transportation of goods for major infrastructure projects, such as power plants, oil refineries, oil fields and mines, to lesser developed countries and remote geographic locations. In addition, the Company provides international and domestic relocation services through the HHG divisions of Bekins and Matrix. The portion of the Company's business that is focused on traditional transportation and logistics services normally experiences a higher percentage of its revenues and operating income in the fourth calendar quarter as volumes increase for the holiday season. Conversely, the Company's domestic household goods relocation business experiences approximately half of its revenue between June and September. In addition, Matrix has a significant project logistics business which is cyclical due to its dependence upon the timing of shipment volumes for large, one-time projects. Through the Subsidiary Acquisitions, the Company has created a global network that provides a broad range of transportation and logistics services through points of service in both industrialized and developing nations with a strong local presence in North America, Europe and Asia. Because of its global position, broad service offerings and technologically-advanced information systems, the Company believes it is well-positioned to participate in the growing trend for large corporations to outsource logistics and transportation distribution services. The United States logistics services industry generated approximately $25.0 billion in revenues in 1996, having experienced an average annual growth rate of approximately 20.0% from 37 1992 to 1996. The Company believes that the global logistics service industry is three to four times the size of the U.S. logistics services industry. The Company's future operating results will be dependent on the economic environments in which it operates. Demand for the Company's services will also be affected by economic conditions in the industries of the Company's customers. The Company's principal businesses are directly impacted by the volume of domestic and international trade between the United States and foreign nations and among foreign nations. 38 COMPANY HISTORICAL The following discussion and analysis relates to the results of operations for the Company as reported for the period May 2, 1996 to December 31, 1996 and the year ended December 31, 1997, and should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this Prospectus.
PERIOD FROM MAY 2, 1996 TO YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 ----------------- ----------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: LIW/LEP.................................................................. $ 82,752 $ 712,398 Bekins:HVP/Logistics..................................................... 56,487 91,694 HHG............................................................... 78,933 108,513 Matrix................................................................... 7,621 65,644 ----------------- -------- Consolidated........................................................... $ 225,793 $ 978,249 ----------------- -------- ----------------- -------- Net Revenues: LIW/LEP.................................................................. $ 16,899 $ 162,852 Bekins:HVP/Logistics..................................................... 11,542 21,152 HHG............................................................... 13,746 18,908 Matrix................................................................... 2,398 16,288 ----------------- -------- Consolidated........................................................... 44,585 219,200 ----------------- -------- Other Operating Expenses: LIW/LEP.................................................................. 15,957 157,541 Bekins:HVP/Logistics..................................................... 7,250 13,432 HHG............................................................... 10,765 14,323 Matrix................................................................... 2,726 13,649 Corporate................................................................ 856 5,788 ----------------- -------- Consolidated........................................................... 37,554 204,733 Depreciation and Amortization.............................................. 16,310 30,398 ----------------- -------- Operating Loss............................................................. (9,279) (15,931) Interest Expense, Net...................................................... 2,981 8,576 Other Expense.............................................................. -- 211 Income Tax Benefit......................................................... (4,013) (8,420) Minority Interests......................................................... -- (1,067) ----------------- -------- Loss before Extraordinary Item............................................. (8,247) (17,365) Extraordinary Loss on Early Extinguishment of Debt-- Net of Tax Benefit ($664 and $1,528, respectively)....................... (997) (2,293) ----------------- -------- Net Loss................................................................... $ (9,244) $ (19,658) ----------------- -------- ----------------- --------
39
PERIOD FROM MAY 2, 1996 TO YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 ----------------- ----------------- (DOLLARS IN THOUSANDS) OTHER DATA: EBITDA: LIW/LEP.................................................................. $ 942 $ 5,266 Bekins:HVP/Logistics..................................................... 4,292 7,716 HHG............................................................... 2,981 4,507 Matrix................................................................... (328) 2,639 Corporate................................................................ (856) (5,791) ----------------- -------- Consolidated........................................................... $ 7,031 $ 14,337 ----------------- -------- ----------------- -------- EBITDA/Net Revenues: LIW/LEP.................................................................. 5.6% 3.2% Bekins: HVP/Logistics.................................................... 37.2% 36.5% HHG............................................................... 21.7% 23.8% Matrix................................................................... 13.7% 16.2% Consolidated............................................................. 15.8% 6.5% Net cash from operating activities......................................... $ 2,427 $ (7,749) Net cash from investing activities......................................... $ (106,949) $ (18,669) Net cash from financing activities......................................... $ 103,476 $ 38,320
YEAR ENDED DECEMBER 31, 1997 VERSUS PERIOD FROM MAY 2, 1996 TO DECEMBER 31, 1996 REVENUES. The Company's revenues increased by approximately $752.4 million, to $978.2 million for the year ended December 31, 1997 from $225.8 million for the period ended December 31, 1996. Approximately $250.0 million of the increase related to the LIW Acquisition and the full year operations of 1996 acquisitions accounted for $502.4 million of the increase. The majority of the remaining increase was volume related with only minimal gains relating to price increases in 1997. NET REVENUES. Net revenues increased by approximately $174.6 million, to $219.2 million for the year ended December 31, 1997 from $44.6 million for the period ended December 31, 1996. Net revenues as a percentage of revenues increased to 22.4% from 19.7% for the same period in 1996 primarily due to a shift in product offerings to higher margin value-added services in LIW. Net revenues increases are primarily the result of the LIW Acquisition ($62.0 million) and full year operating results for the 1996 acquisitions of $112.6 million. OTHER OPERATING EXPENSES. Other operating expenses increased by approximately $167.1 million, to $204.7 million for the year ended December 31, 1997 from $37.6 million for the period ended December 31, 1996. Other operating expenses as a percentage of net revenues 1997 increased to 93.4% from 84.2% for the same period in 1996 due to the higher expenses of LIW compared to net revenues (96.7%). Operating expenses relating to the LIW Acquisition amounted to $58.1 million of the change for 1996. The remaining $109.0 million increase was due to a full year of expenses for 1996 acquisitions. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 86.4% to $30.4 million for the year ended December 31, 1997 compared to $16.3 million for the period ended December 31, 1996 as a result of higher amortization relating to intangible assets acquired in the 1996 acquisitions now included for a full year in the results of operations. In connection with the Subsidiary Acquisitions, the Company incurred a significant amount of goodwill and other intangible assets of which approximately $14.2 million and $23.9 million was amortized in the Company's financial statements for the periods ended December 31, 1996 and 1997, respectively. The Company believes that amortization expense should decrease to $3.1 million in fiscal 1998 because the portion of the intangible assets from the 40 Subsidiary Acquisitions with twelve to twenty-four month amortization periods will have been substantially expensed. OPERATING LOSS. The Company recorded a $15.9 million loss for the year ended December 31, 1997 as compared to $9.3 million for the period ended December 31, 1996 due to an increase in charges for depreciation and amortization expense relating primarily to the 1996 acquisitions and an increase in other operating expenses. Operating income was also negatively affected by certain non-recurring items which amounted to $.5 million and $3.7 million in the 1996 and 1997 periods, respectively. Substantially all of such charges related to redundancy costs and severance expenses. INTEREST EXPENSE, NET. Interest expense, net, increased by approximately $5.6 million, to $8.6 million for 1997 from $3.0 million for the period ended December 31, 1996. The increase was associated with higher levels of working capital-related borrowings, a full year of expense relating to borrowings in 1996 to finance acquisitions and the Old Notes Offering which was completed in October 1997. SHARE OF INCOME (LOSS) IN EQUITY INVESTMENT. The share of loss in equity investment represents the Company's portion of losses incurred by LIW's Italian affiliate. LIW's portion of such losses was approximately $0.2 million for the three months ended December 31, 1997, the period of LIW ownership by the Company. INCOME TAX PROVISION. Income tax benefit changed by approximately $4.4 million, to a tax benefit of $8.4 million for 1997, from $4.0 million for the period ended December 31, 1996. The tax benefit for 1997 produced an effective benefit rate of 32.7% which was comparable to the period ended December 31, 1996. MINORITY INTERESTS. Interests held by minority shareholders in certain subsidiaries of LIW increased by $1.1 million, for the three months ended December 31, 1997, the period of LIW ownership by the Company. NET LOSS. Net loss increased by $10.5 million to $19.7 million for 1997 compared to $9.2 million for the period ended December 31, 1996. This increase is due primarily to higher other operating expenses, depreciation and amortization, and interest expense partially offset by an increase in the tax benefit. LIQUIDITY AND CAPITAL RESOURCES The increases in working capital of $6.0 million and the net increase in indebtedness of $49.1 million are primarily the result of the LIW Acquisition. The principal impact upon the Company's capital structure over the period resulted from the issuance of the Old Notes, the repayment of amounts outstanding under the Old Credit Facility and the execution of the New Credit Facility. Stockholders' equity was primarily affected by the net loss of $19.7 million, which was partially offset by $2.3 million of additional paid-in capital from the sales of stock to employees. Within North America, the Company has utilized cash flows from operations and borrowings under its credit facilities to meet working capital requirements and to fund capital expenditures principally related to the improvement of existing information systems. Since May 2, 1996, the Company has received an aggregate of $9.0 million in net cash proceeds from the disposition of certain assets of BMS. At December 31, 1997, the Company had a working capital borrowing base under the New Credit Facility of $95.8 million with no outstanding working capital related borrowings and outstanding letter of credit commitments of $27.5 million. In addition to the Old Notes as of December 31, 1997, the Company had $5.4 million of capital lease commitments and other indebtedness outstanding. In connection with the LIW Acquisition and the Old Notes Offering, the Company applied certain of the proceeds of the Old Notes Offering to repay all amounts outstanding under the Old Credit Facility and enter into the New Credit Facility. See "New Credit Facility" and "Use of Proceeds." 41 Total borrowings of LIW at December 31, 1997 were approximately $3.6 million, representing a combination of short and long-term borrowings and capital leases in local currencies in countries where LIW operates. Funding requirements have historically been satisfied by revenues from operations and borrowings under various bank credit facilities. In connection with the LIW Acquisition and the New Credit Facility, a certain amount of borrowing capacity is provided to LIW based upon the level of accounts receivable in the United Kingdom. The Company believes that this borrowing ability and revenues from operations will be sufficient to meet the liquidity needs of LIW in the future. Approximately $75.8 million of the proceeds from the Old Notes Offering was used to repay the debt of the Company under the Old Credit Facility. In addition, $10.0 million of the proceeds was used to complete the acquisition of all outstanding LIW equity securities. See "Recent Acquisitions--LIW Acquisition." The balance of the proceeds of the Old Notes Offering was used to pay transaction costs, as well as for general corporate purposes and to repay $8.0 million of debt of certain LIW subsidiaries. See "Use of Proceeds." The Company expects that its future liquidity needs will be primarily for debt service obligations, working capital and capital expenditures. The Company's primary sources of liquidity are cash flows from operations and borrowings under the New Credit Facility. In October 1997, the Company entered into the New Credit Facility which provides for up to $100.0 million of borrowing capacity, based upon the level of the Company's accounts receivable. Up to $30.0 million of the total commitment under the New Credit Facility may be derived from eligible accounts receivable of LEP International Ltd., a subsidiary of LIW ("LEP UK"). In addition to the increase in borrowing capacity provided by the New Credit Facility and the Notes, the Company intends to improve the efficiency of existing cash management consistent with systems currently used by other multinational corporations in order to reduce the need for external borrowing and to improve liquidity. The Company's capital expenditures for 1997 were $11.7 million and are estimated to be $25.4 million for 1998. Of these amounts, $8.7 million and $15.4 million, respectively, relate to information technology projects. The Company also will be required to pay $1.0 million prior to July 1999 to purchase the remainder of its Italian affiliate and may have to fund undetermined amounts in connection with the ultimate resolution of tax, customs and similar matters and in connection with stock repurchase and other incentive compensation. See "Management--Incentive Compensation Plans-- Employee Stock Ownership." See "Business--Litigation." The Company believes that funds provided from operations, cash available from proceeds of the Old Notes Offering, improved cash management and borrowings under the New Credit Facility will be sufficient to meet planned financial commitments and anticipated future needs. As of December 31, 1997, the Company had $110.0 million of debt relating to the Notes, $5.4 million of other funded indebtedness outstanding and no borrowings under the New Credit Facility. The Company had approximately $27.5 million in letters of credit outstanding under the New Credit Facility, leaving approximately $68.3 million of unused credit commitment under such facility. FOREIGN CURRENCY RISK MANAGEMENT. The Company's objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign exchange rate changes and allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to protect certain of its existing foreign assets, liabilities, commitments and anticipated foreign earnings. The Company may use a combination of financial instruments to manage these risks, including forward contracts or option related instruments. The principal currencies hedged are the British pound, German mark, Canadian dollar and some Asian currencies such as the Hong Kong dollar, and Singapore dollar. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for the next year. The gains and losses on these contracts are offset by changes in the value of the related exposures. 42 It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for speculative purposes. YEAR 2000. As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 problem. The Company is currently engaged in a comprehensive project to upgrade its information technology including hardware and software that will consistently and properly recognize the Year 2000. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company expects to complete the project in late 1999 but before any operational impact. The estimated cost for this project could range as high as $1 million, excluding the cost of new systems which will be capitalized. This cost is being funded through a combination of cash provided from operations and borrowings under the New Credit Facility. Failure by the company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. 43 COMPANY PREDECESSOR GENERAL Following the acquisition of Bekins on May 2, 1996, Bekins changed its fiscal year-end from March 31 to December 31. The results of Bekins are presented in three principal operating units: HVP/Logistics, HHG and BMS. The Company has pursued a strategy of converting the Company-owned BMS service centers into centers owned by independent moving and storage agents, which have or will become part of the Bekins HHG agent network. Since the acquisition of Bekins, BMS has been treated as a discontinued operation, with its net assets recorded on the balance sheet; however, the results are included in the Company Predecessor financial statements. See "Notes to Consolidated Financial Statements of the Company--Note 3." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the relative contribution to income and expense of the HVP/Logistics division, HHG division and BMS division.
FISCAL YEAR ENDED MARCH 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: HVP/Logistics.............................................................. $ 70,711 $ 76,736 $ 80,970 HHG........................................................................ 115,221 112,282 103,518 BMS........................................................................ 52,880 53,948 47,264 ---------- ---------- ---------- Consolidated............................................................. $ 238,812 $ 242,966 $ 231,752 ---------- ---------- ---------- ---------- ---------- ---------- Net Revenues: HVP/Logistics.............................................................. $ 13,440 $ 14,279 $ 15,521 HHG........................................................................ 19,999 17,845 18,765 BMS........................................................................ 18,803 19,564 17,855 ---------- ---------- ---------- Consolidated............................................................. 52,242 51,688 52,141 Other Operating Expenses: HVP/Logistics.............................................................. 9,269 10,402 11,820 HHG........................................................................ 14,580 14,965 14,615 BMS........................................................................ 16,950 17,641 16,375 ---------- ---------- ---------- Consolidated............................................................. 40,799 43,008 42,810 Depreciation and Amortization................................................ 6,054 5,675 4,194 ---------- ---------- ---------- Operating Income............................................................. 5,389 3,005 5,137 Interest Expense, Net........................................................ 1,758 2,252 2,397 Other (Income) Expense....................................................... (26) (259) 34 Income Tax Provision......................................................... 1,880 816 1,508 ---------- ---------- ---------- Net Income................................................................... $ 1,777 $ 196 $ 1,198 ---------- ---------- ---------- ---------- ---------- ----------
44
FISCAL YEAR ENDED MARCH 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- (IN THOUSANDS) EBITDA: HVP/Logistics.............................................................. $ 4,171 $ 3,877 $ 3,701 HHG........................................................................ 5,445 3,139 4,116 BMS........................................................................ 1,853 1,923 1,480 ---------- ---------- ---------- Consolidated............................................................. $ 11,469 $ 8,939 $ 9,297 ---------- ---------- ---------- ---------- ---------- ---------- EBITDA/Net Revenues: HVP/Logistics.............................................................. 31.0% 27.1% 23.8% HHG........................................................................ 27.2% 17.6% 21.9% BMS........................................................................ 9.9% 9.8% 8.3% Consolidated............................................................. 21.9% 17.3% 17.8% Net cash from operating activities......................................... $ 6,377 $ 671 $ 9,266 Net cash from investing activities......................................... $ (2,963) $ (4,542) $ (469) Net cash from financing activities......................................... $ (2,073) $ 3,826 $ (9,343)
FISCAL YEAR ENDED MARCH 31, 1996 VERSUS FISCAL YEAR ENDED MARCH 31, 1995 REVENUES. Revenues decreased by approximately $11.2 million, or 4.6%, to $231.8 million for the year ended March 31, 1996 from $243.0 million for the year ended March 31, 1995. Revenues of the HVP/ Logistics division increased by approximately $4.3 million, or 5.5%, to $81.0 million for the year ended March 31, 1996 from $76.7 million for the year ended March 31, 1995. Such increase was attributable primarily to growth in the value-added logistics services business which was partially offset by an intentional reduction of low-margin truckload business. Revenues of the HHG division decreased by approximately $8.8 million, or 7.8%, to $103.5 million for the year ended March 31, 1996 from $112.3 million for the year ended March 31, 1995. This decrease was primarily attributable to a program initiated by Bekins' HHG management to strengthen the profitability of the HHG division. Specific HHG strategies were developed to eliminate lower margin national account business and create a geographic balance of tonnage, thereby also providing operational efficiencies. Such balance was achieved through the creation of a zoned pricing matrix which allowed the management of spot pricing by region for non-contract customers. Revenues of the BMS division decreased by approximately $6.6 million, or 12.4%, to $47.3 million for the year ended March 31, 1996 from $53.9 million for the year ended March 31, 1995. The BMS division revenue was also substantially impacted by the new HHG strategy, particularly as it related to the national balance of tonnage, with the majority of BMS revenue derived from the Southwest region of the United States. NET REVENUES. Net revenues increased by approximately $0.4 million, or 0.9%, to $52.1 million for the year ended March 31, 1996 from $51.7 million for the year ended March 31, 1995. In the HVP/ Logistics division, net revenues as a percentage of revenue increased to 19.2% for the year ended March 31, 1996 from 18.6% for the year ended March 31, 1995 due to an increased focus on generating higher prices per shipment and providing more value-added services such as inventory management and home delivery. In the HHG division, net revenues as a percentage of revenues increased to 18.1% for the year ended March 31, 1996 from 15.9% for the year ended March 31, 1995. The increase in net revenues for the HHG division was primarily attributable to more efficient operations resulting from the improved geographic balance of tonnage. 45 In the BMS division, the $1.7 million net revenue decrease was attributable to a decrease in revenue, partially offset by a favorable change in the product mix. Net revenues as a percentage of revenue increased to 37.8% for the year ended March 31, 1996 from 36.3% for the year ended March 31, 1995. OTHER OPERATING EXPENSES. Other operating expenses remained virtually unchanged, decreasing by approximately $0.2 million, or 0.5%, to $42.8 million for the year ended March 31, 1996 from $43.0 million for the year ended March 31, 1995. The other operating expenses of the HVP/Logistics division increased along with the growth in revenue, because incremental resources were employed to manage the future revenue growth and introduce more value-added services, while other operating expenses of the HHG and BMS divisions decreased as a result of the lower revenues. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased by approximately $1.5 million, or 26.1%, to $4.2 million for the year ended March 31, 1996 from $5.7 million for the year ended March 31, 1995. This decline was attributable primarily to a shift from ownership and depreciation of trailers to leasing of trailers. OPERATING INCOME. Operating income increased by approximately $2.1 million, or 70.9%, to $5.1 million for the fiscal year ended March 31, 1996 from $3.0 million for the fiscal year ended March 31, 1995. This increase was primarily due to the reduction in depreciation and amortization noted above together with improvements in net revenues and improved management of other operating expenses primarily in the HHG and BMS divisions. EBITDA. EBITDA increased by approximately $0.4 million, or 4.0%, to $9.3 million for the year ended March 31, 1996 from $8.9 million for the year ended March 31, 1995. EBITDA as a percentage of net revenues increased to 17.8% from 17.3%. The increase was primarily attributable to improvements in operating leverage and cost controls implemented in the HHG and BMS divisions. EBITDA for the HVP/ Logistics division fell slightly as the pace of infrastructure investment exceeded revenue growth to enable the division to harness future growth opportunities. INTEREST EXPENSE, NET. Interest expense, net increased by approximately $0.1 million, or 6.4%, to $2.4 million for the fiscal year ended March 31, 1996 from $2.3 million for the fiscal year ended March 31, 1995. This increase was primarily due to an increase in the weighted average interest rate during the period to 8.6% from 7.3%. This increase in rate was partially offset by a reduction in borrowings, primarily in the fourth fiscal quarter of the fiscal year ended March 31, 1996, to $10.9 million from $19.5 million at March 31, 1995, due to improved working capital management and the disposition of certain BMS assets. INCOME TAX PROVISION. Income taxes increased by approximately $0.7 million to $1.5 million for the fiscal year ended March 31, 1996 from $0.8 million for the fiscal year ended March 31, 1995. The effective tax rate was 56.0% for the fiscal year ended March 31, 1996 compared to 81.0% for the fiscal year ended March 31, 1995. This decrease in effective tax rate was related to the overall increase in earnings resulting in less of an impact of non-deductible intangible asset amortization. NET INCOME. Net income increased by approximately $1.0 million to $1.2 million for the fiscal year ended March 31, 1996 from $0.2 million for the fiscal year ended March 31, 1995. This improvement was attributable to increased net revenues achieved through operating improvements and reduced depreciation and amortization expense. FISCAL YEAR ENDED MARCH 31, 1995 VERSUS FISCAL YEAR ENDED MARCH 31, 1994 REVENUES. Revenues increased by approximately $4.2 million, or 1.7%, to $243.0 million for the fiscal year ended March 31, 1995 from $238.8 million for the fiscal year ended March 31, 1994. Revenues of the HVP/Logistics division increased by approximately $6.0 million, or 8.5%, to $76.7 million for the year ended March 31, 1995 from $70.7 million for the year ended March 31, 1994. This increase was primarily attributable to growth in the HVP/Logistics division and its entry into the home delivery market. 46 Revenues of the HHG division decreased by approximately $2.9 million, or 2.6%, to $112.3 million for the year ended March 31, 1995 from $115.2 million for the year ended March 31, 1994. The HHG division revenues declined as a result of insufficient hauling capacity related to a nationwide imbalance of tonnage during the peak summer months. Significant revenue was rejected by the HHG division due to its inability to service the tonnage during the summer of 1994. Revenues of the BMS division increased by approximately $1.0 million, or 2.0%, to $53.9 million for the year ended March 31, 1995 from $52.9 million for the year ended March 31, 1994. This increase was primarily a result of increased volume in BMS's California locations due to the January 1994 earthquake which caused significant storage activity in the spring and summer of 1994. NET REVENUES. Net revenues decreased by approximately $0.6 million, or 1.1%, to $51.7 million for the fiscal year ended March 31, 1995 from $52.2 million for the fiscal year ended March 31, 1994. Net revenue of the HVP/Logistics division increased by approximately $0.8 million, or 6.2%, to $14.3 million for the year ended March 31, 1995 from $13.4 million for the year ended March 31, 1994. Such increase was attributable to the increase in revenue, partially offset by higher costs and lower margins related to the new home delivery business segment. Net revenue as a percentage of revenue decreased to 18.6% for the year ended March 31, 1995 from 19.0% for the year ended March 31, 1994. Net revenues of the HHG division decreased $2.2 million, or 10.8%, to $17.8 million for the fiscal year ended March 31, 1995 from $20.0 million for the fiscal year ended March 31, 1994. Net revenues of the HHG division as a percentage of revenue decreased to 15.9% for the year ended March 31, 1995 from 17.4% for the year ended March 31, 1994. This decrease was primarily attributable to increased operational costs in the HHG division related to the geographic imbalance of tonnage. Net revenue of the BMS division as a percentage of revenue increased to 36.3% for the year ended March 31, 1995 from 35.6% for the year ended March 31, 1994. The increase in net revenue in the BMS division was attributable to an increase in revenue, and a favorable change in product offerings to a higher percentage of storage revenue. OTHER OPERATING EXPENSES. Other operating expenses increased by approximately $2.2 million, or 5.4%, to $43.0 million for the fiscal year ended March 31, 1995 from $40.8 million for the fiscal year ended March 31, 1994. This increase was principally due to customer service and operational control costs associated with the growth and development in the HVP/Logistics business. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased by $0.4 million, or 6.3%, to $5.7 million for the year ended March 31, 1995 from $6.1 million for the year ended March 31, 1994. This decrease was primarily attributable to a shift from ownership and depreciation of trailers to leasing of trailers. OPERATING INCOME. Operating income decreased by approximately $2.4 million, or 44.2%, to $3.0 million for the fiscal year ended March 31, 1995 from $5.4 million for the fiscal year ended March 31, 1994. This decrease was primarily due to decreases in the HHG division revenues combined with higher other operating expenses. EBITDA. EBITDA decreased by approximately $2.6 million, or 22.1%, to $8.9 million for the fiscal year ended March 31, 1995 from $11.5 million for the fiscal year ended March 31, 1994. This decrease was principally due to the HHG division imbalance of tonnage and the resultant operational inefficiencies and the increase in other operating expenses of the HVP/Logistics division. As a percentage of net revenues, EBITDA decreased to 17.3% for the fiscal year ended March 31, 1995 from 21.9% for the fiscal year ended March 31, 1994. INTEREST EXPENSE, NET. Interest expense, net increased by approximately $0.4 million, or 28.1%, to $2.2 million for the fiscal year ended March 31, 1995, from $1.8 million for the fiscal year ended March 31, 1994. This increase in interest expense was due to a slightly higher level of borrowings during the year ended March 31, 1995 and an increase in the weighted average interest rate to 7.3% from 5.4%. 47 INCOME TAX PROVISION. Income taxes decreased by approximately $1.1 million to $0.8 million for the fiscal year ended March 31, 1995 from $1.9 million for the fiscal year ended March 31, 1994. The effective tax rate was 81% for the fiscal year ended March 31, 1995 compared to 51% for the fiscal year ended March 31, 1994. The increase in effective rate was related to the overall decrease in earnings and the resulting larger impact that the non-deductible intangible asset amortization had on the effective tax rate. NET INCOME. Net income decreased by approximately $1.6 million to $0.2 million for the fiscal year ended March 31, 1995 from $1.8 million for the fiscal year ended March 31, 1994. This decrease was attributable to lower net revenues, increases in other operating expenses and higher interest expense. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at April 30, 1996 totaled $1.1 million compared to $1.4 million at March 31, 1996. All available cash was used to reduce the debt balances under the $35 million revolving credit facility. The debt balance at April 30, 1996 totaled $13.4 million, which was an approximately $1.5 million increase from the $11.9 million debt balance at March 31, 1996. This debt increase was primarily a result of a sharp reduction in accrued liabilities. The working capital deficit at April 30, 1996 was $16.0 million as a result of the classification of the Company's revolving credit facility of $13.9 million as a current liability because of the expiration date of July 31, 1996. At March 31, 1996, the working capital deficit was $14.9 million. On May 2, 1996, Bekins was acquired by the Company, and all outstanding debt was paid in full. Cash and cash equivalents at March 31, 1996 totaled $1.4 million compared to $1.9 million at March 31, 1995. All available cash was used to reduce the debt balances under the $35.0 million revolving credit facility. The debt balance at March 31, 1996 totaled $11.9 million, which was an approximately $9.1 million reduction from the $21.0 million debt balance at March 31, 1995. This debt reduction was primarily a result of cash flow from operations of approximately $5.9 million and improvements in management of working capital of approximately $3.1 million. The working capital deficit at March 31, 1996 was $14.9 million as a result of the classification of the Company's revolving credit facility of $10.9 million as a current liability due to the July 31, 1996 expiration date. At March 31, 1995, the working capital deficit was $1.4 million. Cash and cash equivalents at March 31, 1995 totaled $1.9 million compared to $2.0 million at March 31, 1994. The debt balance at March 31, 1995 totaled $21.0 million, which was an increase of approximately $2.1 million from the $18.9 million debt balance at March 31, 1994. The increase was primarily a result of growth in the Company. At March 31, 1995, the working capital deficit was $1.4 million compared to $19.2 million at March 31, 1994. This was primarily as a result of the Company's revolving credit facility of $16.6 million being re-classified as a long-term liability in January 1995, due to an extension of the maturity date. 48 LIW GENERAL LIW was founded in 1849 and is one of the leading European-based international freight forwarding companies. In October 1996, the Company acquired LEP from LIW, acquired a 33.3% interest in LIW and entered into long-term agreements with LIW to continue to operate LEP and the remaining LIW operations as an integrated network. The net proceeds to LIW resulting from the LEP Sale were used to restructure certain operations that had been generating operating losses in LIW's European operations. In September 1997, the Company exercised options and warrants with respect to equity of LIW which increased the Company's ownership position in LIW from 33.3% to 75.2% of LIW's outstanding ordinary shares. The remainder of common and preference shares were acquired in the fourth quarter. With respect to the nine months ended September 30, 1996, the financial statements of LIW have been derived from management reports. Management has made such adjustments to these reports as they believe are necessary for a fair presentation of the Statement of Operations with respect to the nine months ended September 30, 1996. However, there can be no assurances that such financial statements are as reliable or accurate as financial statements that were prepared using normal interim period or year-end financial reporting procedures. In addition, such financial statements have not been subject to independent review of the independent accountants of LIW or the Company. 49 RESULTS OF LIW EUROPE, LIW ASIA/PACIFIC AND LEP OPERATIONS The following table sets forth, for the periods indicated, the relative contribution to income and expense of LIW Europe, LIW Asia/Pacific and LEP. The Company acquired LEP on October 31, 1996 and the results of operations for LIW following such date do not include results of operations of LEP.
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ---------------------- (POUNDS IN THOUSANDS) 1995 1996 1996 1997 - ---------------------------------------- ------------ ------------ ---------- --------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues(a): LIW Europe............................ L 556,188 L 543,409 L402,722 L370,710 LIW Asia/Pacific...................... 180,754 180,690 139,587 134,316 LEP................................... 369,281 303,127 274,953 -- ------------ ------------ ---------- --------- Consolidated........................ L1,106,223 L1,027,226 L817,262 L505,026 ------------ ------------ ---------- --------- ------------ ------------ ---------- --------- Net Revenues: LIW Europe............................ L 103,181 L 100,385 L 71,813 L 65,065 LIW Asia/Pacific...................... 37,156 41,967 30,924 31,525 LEP................................... 59,143 50,359 45,501 -- ------------ ------------ ---------- --------- Consolidated........................ 199,480 192,711 148,238 96,590 ------------ ------------ ---------- --------- Other Operating Expenses: LIW Europe............................ 110,847 101,751 72,880 63,998 LIW Asia/Pacific...................... 33,202 37,297 27,838 27,361 LEP................................... 57,942 50,278 45,343 -- Corporate............................. 2,849 2,661 2,167 3,641 ------------ ------------ ---------- --------- Consolidated........................ 204,840 191,987 148,228 95,000 Depreciation and Amortization........... 4,234 3,668 2,935 1,554 ------------ ------------ ---------- --------- Operating Income (Loss)................. (9,594) (2,944) (2,925) 36 Interest Expense, Net................... 2,741 1,325 1,144 506 Share of Loss in Equity Investments..... 1,021 1,369 698 565 Other (Income) Expense.................. -- (5,800) -- 275 ------------ ------------ ---------- --------- Income (Loss) Before Income Taxes and Minority Interests.................... (13,356) 162 (4,767) (1,310) Income Tax Provision.................... 5,987 2,588 1,599 1,246 ------------ ------------ ---------- --------- Loss Before Minority Interests.......... (19,343) (2,426) (6,366) (2,556) Minority Interests...................... (397) (412) (487) (223) ------------ ------------ ---------- --------- Net Loss................................ L (19,740) L (2,838) L (6,853) L (2,779) ------------ ------------ ---------- --------- ------------ ------------ ---------- --------- OTHER DATA: EBITDA: LIW Europe............................ L (6,996) L (1,833) L (1,067) L 113 LIW Asia/Pacific...................... 3,719 4,444 3,056 4,124 LEP................................... 1,201 81 158 -- Corporate............................. (2,849) 3,139 (2,168) (3,916) ------------ ------------ ---------- --------- Consolidated........................ L (4,925) L 5,831 L (21) L 321 ------------ ------------ ---------- --------- ------------ ------------ ---------- --------- EBITDA/Net Revenues: LIW Europe............................ (6.8)% (1.8)% (1.5)% 0.2% LIW Asia/Pacific...................... 10.0% 10.5% 9.9% 13.1% LEP................................... 2.0% 0.2% 0.3% --% Consolidated........................ (2.5)% 3.0% --% 0.3% Net cash from operating activities.... L (15,281) L (3,101) L (5,020) L 2,526 Net cash from investing activities.... L (539) L 12,335 L 6,220 L (2,123) Net cash from financing activities.... L 19,423 L (12,493) L (8,682) L (1,330)
- -------------------------- (a) Revenues include intercompany balances between LIW and LEP as well as duties and value-added tax paid on behalf of customers and subsequently invoiced to customers. 50 NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES. Revenues decreased by approximately L312.3 million to L505.0 million for the nine months ended September 30, 1997 from L817.3 million for the nine months ended September 30, 1996. This decrease was primarily attributable to the sale of LEP to the Company on October 31, 1996, (the "LEP Sale") which reduced overall revenues by L275.0 million between the two periods. In addition, currency fluctuations accounted for L67.5 million of the decrease over the period. Exclusive of currency fluctuations, the combined revenues of LIW Europe and LIW Asia/Pacific (the "Retained Businesses") increased by L30.2 million, or 5.6%, with LIW Europe accounting for L21.0 million of the increase and LIW Asia/Pacific for L9.2 million. These increases were due in part to increased air and ocean volumes of the export-oriented manufacturers served by LIW in the growth economies of the Asia/Pacific region. NET REVENUES. Net revenues decreased by approximately L51.6 million to L96.6 million for the nine months ended September 30, 1997 from L148.2 million for the nine months ended September 30, 1996. This decrease was primarily attributable to the LEP Sale, which reduced net revenues by L45.5 million. In addition, currency fluctuations accounted for L12.5 million of the decrease. Exclusive of currency fluctuations, the net revenues of the Retained Businesses increased by L6.3 million, or 5.6%. LIW Europe increased by L2.3 million and LIW Asia/Pacific increased by L2.0 million. Net revenues as a percentage of revenues increased to 19.1% for the nine months ended September 30, 1997, from 18.1% for the nine months ended September 30, 1996. OTHER OPERATING EXPENSES. Other operating expenses decreased by approximately L53.2 million to L95.0 million for the nine months ended September 30, 1997 from L148.2 million for the nine months ended September 30, 1996. This decrease was primarily attributable to the LEP Sale which resulted in a decrease of L45.3 million in other operating expenses. Currency fluctuations accounted for L12.2 million of the reduction in these expenses. Exclusive of the impact of currency fluctuations, other operating expenses of the Retained Businesses increased slightly by L4.3 million. Other operating expenses as a percentage of net revenues improved to 98.3% to September 30, 1997 from 99.6% in the first nine months of 1996. Redundancy/restructuring charges were included in other operating expenses for each of the 1997 and 1996 periods were L1,563 and L1,560, respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased by approximately L1.4 million to L1.5 million for the nine months ended September 30, 1997 from L2.9 million for the nine months ended September 30, 1996. This decrease was primarily attributable to the reduction in depreciable assets associated with the LEP Sale. OPERATING INCOME (LOSS). Operating income increased by approximately L3.0 million to a profit of L0.1 million for the nine months ended September 30, 1997 from a loss of L2.9 million for the nine months ended September 30, 1996. This increase was partially attributable to (i) the LEP Sale which removed losses of L0.9 million, (ii) an increase of L2.3 million in the profits of LIW Europe and (iii) an increase of L1.1 million in the profits of LIW Asia/Pacific. None of the foregoing factors were impacted by currency fluctuations. EBITDA. EBITDA increased by approximately L0.3 million to L0.3 million in the nine months ended September 30, 1997 from a breakeven for the nine months ended September 30, 1996. This increase was primarily attributable to an increase in the net revenues of the Retained Businesses and the LEP Sale which removed the losses associated with LEP. As a result of these factors, EBITDA expressed as a percentage of net revenues, improved to 0.3% for the nine months ended September 30, 1997 from zero for the nine months ended September 30, 1996. INTEREST EXPENSE, NET. Interest expense, net decreased by approximately L0.6 million to L0.5 million for the nine months ended September 30, 1997 from L1.1 million for the nine months ended September 30, 51 1996. This decrease was primarily due to lower average outstanding debt balances following the L17.3 million reduction in borrowings which were repaid in 1996 from the proceeds of the LEP Sale. SHARE OF INCOME (LOSS) IN EQUITY INVESTMENT. The Company's share of losses in equity investments decreased by approximately L0.1 million for the nine months ended September 30, 1997 to L0.6 million from L0.7 million for the nine months ended September 30, 1996. This decrease is due to reduced losses from LIW's 50% equity interest in its Italian affiliate. INCOME TAX PROVISION. The provision for income tax decreased by approximately L0.4 million to L1.2 million for the nine months ended September 30, 1997 from L1.6 million for the nine months ended September 30, 1996. The decrease is primarily attributable to the LEP Sale. In both periods, LIW was a net payer of taxes on a worldwide basis as a result of a corporate structure wherein losses in one country cannot be offset against profits in another country. MINORITY INTERESTS. Interests of minority shareholders in certain subsidiaries of LIW decreased by approximately L0.3 million to L0.2 million for the nine months ended September 30, 1997 from L0.5 million for the nine months ended September 30, 1996. The decrease is primarily due to the impact of foreign currency fluctuations in those Asian subsidiaries which have minority interests. NET INCOME (LOSS). Net loss decreased by approximately L4.1 million to a loss of L2.8 million for the nine months ended September 30, 1997 from a net loss of L6.9 million for the nine months ended September 30, 1996. The improvement is primarily attributable to the factors affecting the aforementioned increase in operating income in combination with reductions in depreciation expense and interest expense occasioned by the LEP Sale. FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues decreased by approximately L79.0 million, or 7.1%, to L1,027.2 million for the fiscal year ended December 31, 1996 from L1,106.2 million for the fiscal year ended December 31, 1995. This decrease was primarily attributable to the LEP Sale on October 31, 1996, which reduced revenues by L68.7 million. Currency fluctuations accounted for an additional L6.0 million of the reduction. Exclusive of currency fluctuations, revenues of the Retained Businesses decreased by L4.3 million reflecting increased pricing pressure within continental Europe and decreases in the revenues of the Australian business. NET REVENUES. Net revenues decreased by approximately L6.8 million, or 3.4%, to L192.7 million for the fiscal year ended December 31, 1996 from L199.5 million for the fiscal year ended December 31, 1995. Currency fluctuations accounted for L1.1 million of the decrease in net revenues while the LEP Sale contributed L9.2 million to the decrease. Exclusive of currency fluctuations, net revenues of the Retained Businesses increased by L3.5 million. The L1.4 million decrease in net revenues of Europe was more than offset by increases of L4.9 million in LIW Asia/Pacific. Net revenue as a percentage of revenue for the period increased to 18.8% in 1996 from 18.0% in 1995. OTHER OPERATING EXPENSES. Other operating expenses decreased by approximately L12.8 million, or 6.3%, to L192.0 million for the fiscal year ended December 31, 1996 from L204.8 million for the fiscal year ended December 31, 1995. This decrease was primarily attributable to the LEP Sale, which reduced other operating expenses by L8.0 million. Currency fluctuations accounted for L1.3 million of the decrease. Exclusive of currency fluctuations, other operating expenses of the Retained Businesses decreased by L3.5 million over the period, as LIW Europe decreased by L7.6 million and LIW Asia/Pacific increased by L4.1 million. Redundancy/restructuring charges were reflected in other operating expenses for the fiscal years ended December 31, 1995 and 1996. The decline in expense levels in LIW Europe reflects the benefits of certain restructuring efforts and administrative personnel reductions undertaken in 1995 and 1996, while increases in other operating expenses of LIW Asia/Pacific were consistent with the growth of 52 business in that region. Other operating expenses as a percentage of net revenues for the period improved to 99.6% in 1996 from 102.7% in 1995. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased by approximately L0.5 million, or 13.4%, to L3.7 million for the fiscal year ended December 31, 1996, from L4.2 million for the fiscal year ended December 31, 1995. This decrease was primarily attributable to the decrease in depreciable assets associated with the LEP Sale. OPERATING INCOME (LOSS). Operating loss improved by approximately L6.7 million to a loss of L2.9 million for the year ended December 31, 1996 from a loss of L9.6 million for the year ended December 31, 1995. This improvement was attributable to reduced losses, net of currency fluctuations, in LIW Europe of L6.7 million as a result of a decrease in other operating expenses while LIW Asia/Pacific also improved by L0.7 million. This was offset by a decrease in income due to the divestiture of LEP of L0.9 million. In addition, depreciation and amortization decreased by L0.5 million, while currency fluctuations had no significant impact on the operating loss results. EBITDA. EBITDA increased by approximately L10.7 million to L5.8 million for the year ended December 31, 1996 from a loss of L4.9 million for the year ended December 31, 1995. This increase was primarily attributable to reductions in other operating expenses partially offset by a decrease in consolidated net revenues. While this EBITDA improvement includes the gain on the LEP Sale of L5.8 million, LIW Europe reported a L5.2 million improvement in EBITDA. INTEREST EXPENSE, NET. Interest expense, net decreased by approximately L1.4 million, or 52%, to L1.3 million for the fiscal year ended December 31, 1996 from L2.7 million for the fiscal year ended December 31, 1995. This decrease was due to the reduction of borrowings from the proceeds from the sales of a minority interest in a Swiss freight forwarding business in the beginning of 1996, and the reduction of L17.3 million of borrowings which were repaid in 1996 from the proceeds of the LEP Sale. SHARE OF INCOME (LOSS) IN EQUITY INVESTMENT. LIW's share of losses in equity investments increased by approximately L0.4 million to L1.4 million for the year ended December 31, 1996 from L1.0 million for the year ended December 31, 1995. LIW's principal investment is a 50% share in its Italian affiliate, where LIW's share of such entity's loss was unchanged at a loss of L1.4 million. In 1995, LIW reported a profit of L0.4 million from its 33% interest in a Swiss freight forwarding business which was sold at the start of 1996. INCOME TAX PROVISION. The provision for income tax decreased by L3.4 million to L2.6 million for the year ended December 31, 1996 from L6.0 million for the year ended December 31, 1995. The 1995 provision includes a general provision of L2.5 million recorded to provide for contingent tax liabilities in a number of countries. The improvement in profit before taxation has little impact on the tax charge as a result of losses being reduced, and also as the profit on the LEP Sale was not subject to significant taxes. MINORITY INTEREST. There was no change in the minority share of profit of L0.4 million. NET INCOME (LOSS). Net loss decreased by approximately L16.9 million to a net loss of L2.8 million for the year ended December 31, 1996 from a net loss of L19.7 million for the year ended December 31, 1995. This reduction was attributable to the factors affecting the aforementioned increase in operating income in conjunction with reductions in depreciation expense and interest expense occasioned by the LEP Sale. In addition, a gain on the sale of LEP of L5.8 million was recorded in other income in the 1996 period. LIQUIDITY AND CAPITAL RESOURCES In connection with the LEP Sale, LIW's net working capital was reduced by L10.7 million and the cash position of LIW was improved as a result of the removal of L14.4 million of loans and borrowings. The cash proceeds of L6.0 million received by LIW from the LEP Sale were applied by LIW to repay L2.9 million of 53 borrowings in Europe and Australia and L2.3 million for restructuring costs primarily in Germany. At September 30, 1997, LIW had borrowings of L9.7 million and cash balances of L13.7 million. For the fiscal year ended December 31, 1996, the principal sources of cash for LIW were L6.0 million from the LEP Sale, L5.4 million from the sale of shares in a freight forwarding business in Switzerland, and L2.7 million from the sale of fixed assets, including L1.9 million from the sale of certain real estate and assets in the United Kingdom. Operating losses of L2.9 million were offset by L3.7 million of depreciation. Interest costs amounted to L1.8 million, which includes interest costs of L1.2 million in respect of the borrowings of the North American business prior to the LEP Sale. Tax charges of L2.4 million were paid as operating losses in certain countries were not able to shelter taxable income in profitable countries. Capital expenditures totalled L1.8 million in the period. During the fiscal year ended December 31, 1995, cash inflows consisted of L5.2 million of capital contributed to LIW by its sole shareholder, L6.3 million in commercial loans and L6.7 million in overdraft facilities. Cash outflows consisted of losses of L5.4 million, net of depreciation, additional working capital investment of L4.0 million, interest costs of L2.7 million, tax charges of L3.0 million and capital expenditures of L3.0 million including L0.9 million on FAST 400 software development. In the nine months ending September 30, 1997 cash of L1.3 million was generated from operations and L2.4 million was generated by reduced working capital of which L0.8 million was used to fund income tax charges. At September 30, 1997, LIW had loan facilities with a number of banks in the countries in which it operates. Such facilities aggregate to L34.0 million of which L23.0 million relate to customs and other guarantees integral to LIW's freight forwarding operations. The remaining L11.0 million is available in overdraft/revolver facilities, on which the utilization varies. Additional facilities include mortgage loans of L1.4 million secured by property in Germany and Portugal. The remainder of the facilities are normally fully utilized over the course of an average month, however, the degree and timing of utilization varies by region. For LIW Europe, peak utilization is normally in the middle of the month as customs duties and excise taxes are paid. In LIW Asia/Pacific peak utilization varies among countries depending on local terms of trade. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) The combined and consolidated financial statements have been prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. A description of the relevant accounting principles which differ materially is given below: GOODWILL AND OTHER ACQUISITION ACCOUNTING ADJUSTMENTS Under UK GAAP the Group has written off purchased goodwill (as well as negative goodwill arising on purchases of businesses) against reserves. US GAAP requires that any remaining goodwill after the allocation of purchase price to separately identifiable intangible assets and the fair value of net tangible assets acquired and liabilities assumed be capitalised as an intangible asset and amortised over a period not in excess of 40 years. Furthermore, US GAAP requires that any negative goodwill arising from a purchase transaction be allocated to the assigned fair values of identifiable tangible and intangible assets until these are reduced to a carrying amount of zero with the remainder recorded as a deferred credit and amortised to income over a period not in excess of 40 years. PENSION COSTS UK GAAP and US GAAP are conceptually similar in respect of accounting for pension costs. However, US GAAP is more specific in its requirements as to the selection of discount rates which must reflect current market conditions at each balance sheet date. In addition, the amortisation of unrecognised 54 gains and losses arising from changes in assumptions and actuarial experience, under US GAAP is affected through a corridor approach. TAXES ON INCOME Under UK GAAP, deferred taxes are accounted for to the extent that it is considered probable that a liability or asset will crystalise in the foreseeable future. Under US GAAP, deferred taxes are accounted for on all timing differences and a valuation allowance is established in respect of those deferred tax assets where it is more likely than not that some portion will remain unrealised. Deferred tax also arises in relation to the tax effect of the other US GAAP adjustments. REVALUATION OF PROPERTY AND PROPERTY DEPRECIATION Under UK GAAP property is carried either at original cost or at subsequent valuation less related depreciation, calculated on the revalued amount where applicable. Revaluation surpluses are taken directly to shareholders' funds, while deficits below cost, less any related depreciation, are included in attributable profit. Under US GAAP revaluations of properties are not permitted in the accounts. As a result, when a property is disposed of, a greater profit or lower loss is generally recorded under US GAAP than under UK GAAP. Depreciation is based on the historical cost. DIVIDENDS Under UK GAAP, dividends are provided for in the year in respect of which they are declared or proposed. Under US GAAP, dividends and the related advance corporation tax are given effect only in the period in which dividends are formally declared. The effects of these differing accounting principles are shown below:
TWELVE MONTHS ENDED NINE MONTH ENDED DECEMBER 31, SEPTEMBER 30, --------------------- -------------------- 1995 1996 1996 1997 ---------- --------- --------- --------- ADJUSTMENT TO NET INCOME (Loss)/profit attributable to shareholders in accordance with UK GAAP............................................................. L(19,740) L(2,838) L(6,853) L(2,779) US GAAP adjustments: Fixed asset revaluations excess depreciation.......................... 351 22 -- -- Depreciation adjustments.............................................. -- 1,129 1,081 1,179 Profit on sale of fixed assets........................................ -- 482 209 29 Disposal of North American operations................................. -- 2,904 -- -- Pension scheme charges................................................ 351 573 380 415 Taxation effect on the above items.................................... (116) (1,147) (599) (536) Deferred taxation..................................................... -- (22) (16) (16) ---------- --------- --------- --------- Approximate net income in accordance with US GAAP..................... L(19,154) L1,103 L(5,798) L(1,708) ---------- --------- --------- --------- ---------- --------- --------- ---------
55 BUSINESS HISTORY The Company was formed in 1996 by Oaktree, WESS and Roger E. Payton, the Company's President and Chief Executive Officer who has over 20 years experience in the logistics industry, with the objective of developing a leading provider of global logistics services for major multinational companies. The Company believes that it can accomplish its objective by offering comprehensive logistics and freight forwarding services that fulfill the individual requirements of multinational customers that outsource their logistics needs. In furtherance of the Company's strategy, the Company has assembled, through a series of strategic acquisitions, a core platform of leading domestic and international logistics companies that serve the niche markets that the Company has targeted for future growth. On May 2, 1996, the Company acquired Bekins. Founded in 1891, Bekins has historically been a provider of HHG hauling and storage services. In recent years, Bekins has expanded its service offerings to include inventory management, distribution, specialized truck transportation and TimeLok, a network-based transportation and warehouse logistics operation which services manufacturers and distributors of high value products ("HVP"). As of December 31, 1997 Bekins operated through a United States network of 92 HVP Logistics service centers and 284 HHG service centers, all of which were owned by independent agents. On October 31, 1996, the Company acquired LEP-USA and LEP-Canada from LIW in the first step of the overall acquisition of LIW. Founded in 1973, LEP-USA is a non-asset-based freight forwarder serving niche transport segments of both the United States and international freight forwarding and logistics markets. As of December 31, 1997, LEP-USA operated 56 full service offices throughout the United States and Puerto Rico, 26 of which were owned by the Company, with the remainder owned and operated by agents. Founded in 1930, LEP-Canada operates 12 offices located throughout Canada and provides international freight forwarding and logistics services, focusing on inbound transportation, customs clearance activities and trade fairs and exhibitions. On November 7, 1996, the Company acquired Matrix. Founded in 1986, Matrix offers specialized international relocation services for executives of multinational companies and government agencies and project cargo logistics services for major infrastructure development projects. Matrix provides its services through five offices in the United States, one minority partnership in Holland, one exclusive agent in Canada and eight joint venture offices in the Commonwealth of Independent States (the former Soviet Union). In September 1997, the Company expanded its international operations by acquiring a controlling interest in the common equity of LIW and in December 1997 the Company increased its ownership to all of LIW's outstanding equity and LIW became a wholly-owned subsidiary of the Company. See "Recent Acquisitions--Acquisition of LIW." Founded in 1849, LIW provided complete freight forwarding and logistics services through 196 branches in 26 countries, as of December 31, 1997. In Europe, LIW operates a pan-European transportation network and has offices in 12 countries including one of the largest freight forwarding businesses in the United Kingdom. In the Asia Pacific region, LIW maintains locations in 14 countries and is particularly well-established in the Hong Kong, Singapore and Philippines markets. Additionally, through strategic alliances in South Africa, the Indian sub-continent, Latin America and the Middle East, LIW provided freight forwarding and logistics services in an additional 42 countries as of December 31, 1997. The Company believes that the acquisition of LIW completed its efforts to create a global network with a strong local presence in North America, Europe and Asia, capable of providing logistics and transportation solutions to multinational companies. Moreover, the LIW Acquisition afforded the Company ownership of FAST 400, LIW's proprietary system for the real-time management of transportation shipments on a multi-modal, multi-currency and multi-lingual basis. The Company believes that FAST 400 56 is the most advanced information system of its type currently in use in the global freight forwarding and logistics industries. See "Business--Information Systems". For a more detailed discussion of the Subsidiary Acquisitions, see "Recent Acquisitions." OVERVIEW The Company is one of the largest non-asset-based providers of worldwide logistics and transportation services headquartered in the United States, based on revenues for 1997 and after giving pro forma effect to the LIW Acquisition. The Company's primary business operations involve obtaining shipment or material orders from customers, creating and delivering a wide range of logistics solutions to meet customers' specific requirements for transportation and related services, and arranging and monitoring all aspects of material flow activity utilizing advanced information technology systems. These logistics solutions include domestic and international freight forwarding and door-to-door delivery services using a wide range of transportation modes, including air, ocean, truck and rail. The Company also provides value-added services such as warehousing, inventory management, assembly, customs brokerage, distribution and installation for manufacturers and retailers of commercial and consumer products such as copiers, computers, pharmaceutical supplies, medical equipment, consumer durables and aviation products. The Company also specializes in arranging for the worldwide transportation of goods for major infrastructure projects, such as power plants, oil refineries, oil fields and mines, to lesser developed countries and remote geographic locations. In addition, the Company provides international and domestic relocation services through the HHG divisions of Bekins and Matrix. On a pro forma basis after giving effect to the Subsidiary Acquisitions, the Company generated approximately $1.5 billion of revenues and $21.3 million of EBITDA for the year ended December 31, 1997. As a non-asset-based logistics services provider, the Company arranges for and subcontracts services on a non-committed basis to airlines, truck lines, van lines, express companies, steamship lines, rail lines and warehousing and distribution operators. By concentrating on network-based solutions, the Company avoids competition with logistics services providers that offer dedicated outsourcing solutions for single elements of the supply chain. Such dedicated logistics companies typically provide expensive, customized infrastructure and systems for a customer's specific application and, as a result, dedicated solutions that are generally asset-intensive, inflexible and invariably localized to address only one or two steps in the supply chain. Conversely, network-based services leverage common infrastructure and technology systems so that solutions are scaleable, replicable and require a minimum amount of customization (typically only at the interface with the customer). This non-asset ownership approach maximizes the Company's flexibility in creating and delivering a wide range of end-to-end logistics solutions on a global basis while simultaneously allowing the Company to exercise significant control over the quality and cost of the transportation services provided. Through the Subsidiary Acquisitions the Company has created a global network that provides a broad range of transportation and logistics services through points of service in both industrialized and developing nations with a strong local presence in North America, Europe and Asia. As of December 31, 1997, the Company serviced over 75,000 active customers through a global network of 75 countries consisting of operations located in 33 countries and strategic alliance partners located in 42 countries. Some of the Company's major customers include Lucent Technologies Inc., Cisco Systems, Inc., Williams-Sonoma, Inc. and Danka Business Systems plc (formerly the office imaging technology division of Eastman Kodak Company). See "Recent Acquisitions." 57 The U.S. logistics services industry generated approximately $25.0 billion in revenues in 1996, having experienced an average annual growth rate of approximately 20.0% from 1992 to 1996. The Company believes that the global logistics services industry is three to four times the size of the U.S. logistics services industry. Within the logistics services and freight forwarding industries, the Company targets specific markets in which the Company believes it has a competitive edge. For example, in the freight forwarding market, the Company arranges transportation for shipments of heavy cargo that are generally larger than shipments handled by integrated carriers, such as United Parcel Service of America and Federal Express Corporation. In the logistics market, the Company provides specialized combinations of services that traditional freight forwarders cannot cost-effectively provide, including time-definite delivery requirements, direct-to-store distribution and merge-in-transit movement of products from various vendors in a single coordinated delivery and/or installation to the end-user. BUSINESS STRATEGY The Company has developed a business strategy designed to increase revenues and expand profit margins which includes the following principal elements: EMPHASIZE END-TO-END LOGISTICS SERVICES. The Company intends to continue to develop and market higher-margin, value-added logistics services. The Company believes that it differentiates itself from its competitors by providing its customers with superior service and added value through a global end-to-end logistics network. The Company is increasingly providing end-to-end logistics programs for a number of major customers in which the Company implements solutions addressing the customers' transportation, customs clearance, warehousing and distribution activities. For example, the Company manages purchase order requests from customers of a computer component manufacturer, selects optimal transportation modes to the United States, United Kingdom and Europe for such computer components, tests equipment to ensure that such equipment is in working order prior to delivery to the customer and delivers the product to the customer on a just-in-time basis. These logistics programs are specifically tailored to solve sourcing and distribution challenges of customers within targeted industries, including life sciences (health-care and pharmaceuticals), office technology, medical equipment and products, aviation and defense and retail. The implementation of these programs often includes the integration of the Company's information systems with those of its customers, and, in some cases, the stationing of Company personnel at the customers' offices. MAINTAIN AND ENHANCE TECHNOLOGICAL LEADERSHIP POSITION. The Company believes that the ability to provide accurate, up-to-date information on the status of shipments to ensure on-time delivery, real-time visibility of inventory on a global basis and efficient operations provides competitive advantages in the logistics services industry. The Company believes that it is a leader in information processing for transportation logistics and that maintaining and strengthening its leadership position will be critical to its continued success. The Company utilizes FAST 400, a proprietary system for the real-time management of shipments on a multi-modal, multi-currency and multi-lingual basis, in certain of its operations. The Company believes that FAST 400 is the most advanced information system of its type currently in use in the global freight forwarding industry. The Company believes that planned system upgrades and expenditures, a significant part of which relate to enhancement of the Company's financial reporting, communications and inventory tracking systems, will complement the technological advantages of FAST 400. The Company expects to spend approximately $30.0 million over the next three years to conclude the implementation and integration of FAST 400 and its related BUSINESS 400 systems globally, purchase additional information systems equipment and software upgrades and integrate the systems capabilities of its subsidiaries. The Company anticipates that, upon the completion of the planned expenditures, all the Company's subsidiaries will be operating on a single, FAST 400-based system. INCREASE PENETRATION OF EXISTING CUSTOMERS. The Company's broad range of services, dedication to excellent customer service and efforts to develop integrated transportation logistics programs have 58 fostered customer loyalty, enabling the Company to expand sales and services to existing customers. The use of specialized teams of marketing and operational personnel enables the Company to better analyze its customers' transportation logistics requirements and develop more complete end-to-end logistics solutions. For example, the Company services an apparel manufacturer through the development of a centralized European distribution center that receives delivery of products from 8 points of origin around the world and makes delivery of products to approximately 26 different ultimate points of destination in Europe on a demand basis. In addition, the Company's dedicated marketing staff for major accounts enables it to maintain close contact with its major customers on an ongoing basis. The Company believes that the combination of its knowledge of customer needs, proven level of service, quality and ability to develop customized logistics solutions continues to give the Company the opportunity to expand its business significantly within its existing customer base. EXPAND CUSTOMER BASE. The Company intends to increase the number of major corporations worldwide for which it provides transportation and logistics services. Through industry specialization teams, the Company believes that it can further penetrate certain targeted industries such as life sciences (health care and pharmaceuticals), office technology, medical equipment and products, aviation and defense and retail. For example, the Company recently developed a customized logistics solution for one of the world's leading pharmaceutical companies which required a complete logistics program to support sales sample distribution including temperature control facilities, inventory management, individual item tracking and management control for U.S. Food and Drug Administration compliance. The Company believes that the combination of its global network, high-quality service and ability to develop customized end-to-end logistics solutions will make its services attractive to potential new customers. In addition, the Company believes that its efforts to strengthen its international office network will enhance its ability to add major customers throughout the world. STRENGTHEN THE COMPANY'S GLOBAL NETWORK. The Company has a global network spanning 75 countries which includes offices in 33 countries and strategic partnerships in 42 countries. The Company intends to continue to strengthen its network of Company-owned offices by opening new offices and, to the extent the Company is able to identify appropriate acquisition opportunities, making selective acquisitions. Such expansion is expected to occur in major commercial centers in both the United States and abroad. As more countries with closed or highly-controlled economies have moved toward free market systems, the opportunity for international trade with emerging growth regions has improved significantly. Consequently, the Company continuously monitors and evaluates opportunities in developing nations and plans to expand its operations in Latin America, the Indian sub-continent and the Commonwealth of Independent States to meet the needs of customers that are serving the evolving consumer economies in such areas. The Company believes that such expansion will enhance its ability to offer uniform services on a worldwide basis, thereby enabling it to earn increased revenue from existing and new customers, particularly with respect to shipments originating in countries other than the United States. See "Risk Factors-- Risks Associated with International Operations." EXPAND PRESENCE IN NICHE MARKETS. The Company intends to expand its presence in selected niche markets which utilize the Company's existing transportation and logistics services and provide high marginal profits. In particular, the Company is focused on expanding its niche in project cargo logistics involving large-scale governmental and commercial projects. The Company's project logistics services include multiple-origin transportation planning and evaluation, vendor compliance, risk/opportunity assessment, performance measurement, procedure documentation, and forwarding of heavy material and equipment and its attendant logistics information from multiple points of origins to project locations. The Company believes that the addition of LIW's Asian and European operations to the Company's existing logistics capabilities will allow the Company to continue to expand its position in the market for complex, project cargo logistics solutions. 59 INDUSTRY OVERVIEW GENERAL. As business requirements for efficient and cost-effective distribution services have increased, so has the importance and complexity of effectively managing freight transportation. Businesses increasingly strive to minimize inventory levels, perform manufacturing and assembly operations in lowest cost locations and distribute their products to numerous global markets. As a result, companies frequently desire expedited or time-definite shipment services. To assist in accomplishing these tasks, many businesses turn to freight forwarders and logistics providers. A freight forwarder procures shipments from customers, makes arrangements for transportation of the cargo on a carrier and may arrange both for pick-up from the shipper to the carrier and for delivery of the shipment from the carrier to the recipient. A logistics provider moves and manages goods from suppliers to end customers with the goal of meeting specific customer requirements, working capital objectives and overall customer satisfaction. Historically, most transportation services have been provided by companies with capabilities in only one or a very limited number of modes. The Company believes it has differentiated itself by providing traditional transportation services in virtually every mode, as well as by combining these services with value-added logistics services, including pick-and-pack services, merge-in-transit, inventory management, warehousing, reverse logistics, dedicated trucking and regional and local distribution. The Company's logistics managers have the ability to utilize a portfolio of transportation products and design optimal transportation solutions for its customers. The Company believes that it has a competitive advantage resulting from the experience and knowledge of its logistics managers and in the market information it possesses from its diverse client base. Shippers increasingly use computer technology to control inventory carrying costs and improve customer service by decreasing shipping time through just-in-time delivery systems. The complex distribution systems that result require not only selection of the proper mode to transport freight, but also hands-on management to minimize overall logistics costs. At the same time, in an effort to reduce overhead costs and introduce the expertise necessary to manage their distribution systems, many shippers have sought to downsize their transportation departments by outsourcing all or a portion of the traffic function. FREIGHT FORWARDING. Freight forwarding services are provided through the following modes of transportation: - AIR FREIGHT. The air freight forwarding industry is highly fragmented. Many industry participants are capable of meeting only a portion of their customers' required transportation service needs. Some national domestic air freight forwarders rely on networks of terminals operated by franchisees or non-exclusive agents. The Company believes that the development and operation of Company-owned and exclusive agent-owned service centers under the supervision of the Company's management have enabled it to provide a higher degree of financial and operational control and service assurance than that offered by franchise-based networks. - OCEAN. The ocean freight forwarding industry is highly fragmented, consisting of dedicated freight forwarders, private owners and operators of shipping fleets, and state-controlled shipping companies. The demand for ocean freight forwarding services is largely a factor of the level of worldwide economic activity and the distance between major trade areas. Freight rates are determined in a highly competitive global market and have been characterized by a steady decline since the early 1990s. - TRUCKING. The largest segment of the non-local trucking industry is comprised of private fleets owned and operated by shippers. This segment has been gradually shrinking since 1980 as truckload carriers have become more service oriented in a deregulated environment. The shipper's focus on profitability has driven a trend toward outsourcing of private fleets. The next largest segment, for-hire truckload, is comprised primarily of specialized niches such as household goods, temperature-controlled flats and tanks. Truckload carriers have traditionally focused on providing services within 60 only one of these niches, with few dominating any particular niche or operating equipment in multiple niches. Less than truckload services are provided by a large number of carriers who specialize in consolidating smaller shipments into truckload quantities for transportation across regional and national networks. Freight forwarders such as the Company have been able to capitalize on these trends in the trucking industry by purchasing excess capacity at reduced rates and by providing incremental freight business to truckload carriers in regions where the marketing presence of the truckload carriers may not be as strong as the freight forwarders. LOGISTICS SERVICES. The U.S. logistics services industry generated approximately $25.0 billion in revenues in 1996, having experienced an average annual growth rate of approximately 20.0% from 1992 to 1996. The Company believes that the global logistics services industry is three to four times the size of the U.S. logistics services industry. Such growth is a result of increasing demands by traditional freight forwarding customers for more than the simple movement of freight from their transportation suppliers. To meet these needs, suppliers, such as the Company, seek to customize their services by, among other things, providing information on the status of materials, components and finished goods through the logistics pipeline and providing performance reports on and proof of delivery for each shipment. The growing emphasis of some manufacturers on just-in-time manufacturing and production practices has also added to the demand for rapid deliveries that are available through air freight. As a result of these developments, many companies are realizing that they perform freight transportation management and logistics functions less effectively than third-party providers, such as the Company, and are relying increasingly on partial or complete outsourcing of these functions. At the same time, major shippers are seeking to utilize fewer firms to service their transportation management and logistics needs. The Company believes that the continuing trend toward outsourcing and the continuing concentration of transportation suppliers by major shippers offers significant opportunities for those forwarders, such as the Company, with extensive, well-managed global networks and advanced logistics information systems. RELOCATION SERVICES. The top 15 HHG carriers, which accounted for approximately 83.0% of total revenues generated by the 61 carriers who filed with the STB according to the American Movers Conference, generated approximately $3.2 billion of revenues in 1996, an increase of 5.5% over 1995. The domestic HHG relocation services market is competitive and highly fragmented. The Company competes with approximately 2,000 carriers for the domestic interstate transportation of household goods. These carriers are generally van lines that use the services of independent moving and storage agencies that contractually affiliate with the carrier, although some carriers own and operate company-owned branches. The relocation services industry generally markets to three distinct customer groups: (i) corporate accounts who pay for the relocations of their employees, (ii) private transferees paying for their own moves and (iii) the U.S. Government, which pays for both civilian and military relocations of their personnel. The Motor Carrier Act of 1980 (the "Motor Carrier Act") reduced regulation in the trucking industry and provided the opportunity for increased competition which has resulted in generally low profit margins due to the escalation of discounts against tariffs within the HHG industry. The international HHG relocation services market has grown due to increasing globalization of economics and the advent of free trade. International relocation services are principally offered by specialist companies that generally provide services through non-exclusive agents at the destination locations around the world. There are a few larger companies that own and operate their own businesses in major markets, although that is the exception rather than the rule. A significant number of domestic HHG carriers offer international relocation services through wholly-owned subsidiaries or separate departments that specialize in international relocation services. GLOBAL NETWORK As of December 31, 1997, the Company operated a global network in 75 countries consisting of 693 locations in 33 countries and strategic partnerships in 42 countries with 382 locations. Within this 61 network of over 1,000 locations, the Company maintains a strong local presence in North America, Europe and Asia/Pacific. NORTH AMERICA. As of December 31, 1997, the Company had 35 Company-owned offices located in 35 cities with approximately 1,673 employees and had 339 agents covering an additional 408 locations in the United States. The Company developed its North American network through the acquisition and integration of Bekins in May 1996 and LEP in October 1996. The Company has successfully integrated the major road transportation and logistics services hubs of Bekins and LEP-USA in Columbus, Ohio. The Company believes that this combined system, which supports the Bekins TimeLok System and LEP-USA's Profitnet Logistics System, is one of the largest of its type in the United States. The Company expects the synergy benefits of the combined system to be (i) reduced fixed costs, (ii) better utilization of linehaul equipment between the hub and service centers, (iii) improved cycle time for Bekins customers, (iv) the ability to offer improved service schedules and time-definite service and (v) combination of the previously separate operating networks of Bekins and LEP-USA, which enable the Company to view its U.S.-domestic business as an integrated product offering. In addition, as of December 31, 1997, LEP-USA and LEP-Canada provided international freight forwarding, customs brokerage, and logistics services through 68 offices located throughout the United States, Puerto Rico and Canada. Matrix provides project cargo and HHG relocation services through five offices located in the United States. EUROPE. LIW is a major provider of freight forwarding and transportation and logistics services throughout Europe. As of December 31, 1997, LIW employed approximately 2,617 employees in 156 locations in 11 European countries. Through its U.K. subsidiary, LIW is one of the largest freight forwarders in the United Kingdom, with approximately 43 locations with 884 employees as of December 31, 1997. Matrix maintains international operations through eight joint venture offices in the former Soviet Union and numerous non-exclusive and unaffiliated HHG agents worldwide. ASIA/PACIFIC. As of December 31, 1997, LIW had 55 locations in 14 countries in the Asia/Pacific region with approximately 1,862 employees. LIW is a major participant in the freight forwarding markets of Hong Kong, Singapore and the Philippines. In March 1997, LIW's Asia/Pacific operations were recognized by CARGONEWS ASIA as one of the top two multi-modal forwarders in 1996 and received a total of three Asian Freight Industry Awards which were awarded by CARGONEWS ASIA based on input from its 13,000 readers. SERVICES PROVIDED The Company's services can be broadly classified into the following categories: FREIGHT FORWARDING SERVICES. The Company offers domestic and international air, ocean, road and rail freight forwarding for shipments of heavy cargo that are generally larger than shipments handled by integrated carriers of primarily small parcels such as Federal Express Corporation and United Parcel Service of America. The Company's basic freight forwarding business includes the following services which are complemented by numerous value-added, customized and information technology-based options to meet customers' specific needs: - International door-to-door shipment of freight, including service to remote destinations, lesser developed countries and locations which are difficult to reach. - One-, two- and five-day express transport service within the United States and between the United States and Puerto Rico. - Value-added complementary services including customs brokerage, full tracking of goods in transit, warehousing, packing/unpacking and insurance. LOGISTICS SERVICES. Logistics services involve taking responsibility for several or all steps in the supply chain of products. The Company's access to worldwide distributions systems, together with its experience 62 in coordinating deliveries from various supply sources and its advanced information systems have enabled the Company to capitalize on outsourcing of distribution functions by manufacturers and retailers and other companies. Shippers that avail themselves of the Company's logistics services often realize financial savings due to reduced fixed costs associated with outsourcing distribution, the Company's volume discounts and information base and the Company's ability to reliably and efficiently perform complex, multi-phased distribution projects. The Company's logistics services provide value to the Company's customers by providing reliable access to low cost materials and product sources, reducing distribution times and facilitating rapid movement and integration of products and materials. For example, the Company currently provides the following logistics-based management services: - Pharmaceutical distributions including high-speed, time-definite distributions of sales samples to pharmaceutical companies' sales forces to enable their pharmaceutical customers to comply with United States federal regulations. The Company's distribution systems permit the Company to deliver pharmaceutical samples to over 3,000 distribution points in a 24- to 48-hour period with 2-hour delivery windows. - Direct to store logistics for retail clients involving coordination of product receipt directly from manufacturers and dividing large shipments from the manufacturer into numerous smaller shipments for delivery directly to retail outlets or distribution centers to meet time-definite product launch dates. - Merge-in-transit logistics involving movement of products from various vendors at multiple locations to a Company facility and the subsequent merger of the various deliveries into a single coordinated delivery to the final destinations. For example, such services are useful to technology manufacturers and resellers where major installations are organized to meet a customer's need to minimize disruptions to its clients' businesses and maximize the efficiency of the customer's technical support staff/field engineers. - Value-added, high-speed, time-definite, total-destination programs that include packaging, transportation, unpacking and placement of a new product. The Company will also package and remove the old equipment that is being replaced by the equipment that the Company delivers. - Packaging, transportation, unpacking and stand installation for domestic and international trade shows and major expositions. - Global project cargo logistics for major infrastructure developments, including shipments of equipment to prepare a site for the development, materials used in construction of the project and final products manufactured following construction of the project. - Reverse logistics involving the return of products from end users to manufacturers, retailers, resellers or remanufacturers, including verification of working order, defect analysis, serial number tracking, inventory management and disposal of sensitive materials in accordance with regulations. An example of such services is the removal of an old photocopying system for reuse, recycling or remanufacture at the time of delivery of a new photocopying system. RELOCATION SERVICES. The Company's domestic and international relocation services are generally provided through the Bekins and Matrix subsidiaries in the United States. The domestic business is generally handled by Bekins and offers a full range of relocation services within the United States focusing on the corporate account, private transferee and government/military sectors. As of December 31, 1997, Bekins operated through a network of 245 independent agents covering 284 locations. Based on 1996 revenue data filed with the STB, Bekins is the sixth largest carrier of household goods. The Company's international relocation services are provided primarily through Matrix from its New York, Virginia and California offices. The Company's principal customers for international relocation services are U.S.-based multi-national corporations, various United States government agencies and the 63 United Nations. The Company handles relocations from the United States to other countries, relocations from other countries to the United States and relocations between two international destinations on behalf of its customers. The Company uses a number of non-exclusive HHG agents in the countries in which it provides services. OPERATIONS As of December 31, 1997, the Company provided transportation and logistics services in 75 countries through the following facilities:
NUMBER OF LOCATIONS ----------- Company-owned offices............................................................. 268 Agent-owned offices............................................................... 425 Offices owned by strategic partners............................................... 382(1) ----- Total........................................................................... 1,075 ----- -----
- ------------------------ (1) Approximate number. COMPANY LOCATIONS. Offices operated by Company employees rather than agents are generally structured as stand-alone business units that operate in largely the same manner as the independent, exclusive agents. Customers and carriers generally do not distinguish between agent locations and Company-owned locations as both must display, utilize and promote the Company's image, information technology systems and processes. EXCLUSIVE AGENTS. The Company's contracts with its agents have terms ranging from 30 days to as much as 10 years. Short-term cancelable contracts are the exception rather than the norm, particularly for larger agents, and the majority of the Company's contracts with agents range from 3 to 5 years. Contracts with agents call for exclusive representation of the Company in respect of the services provided by the Company. Agents are required to utilize the logo, image and information systems of the Company. Each agent operates as an independent business responsible for all costs associated with sales, operations, billing and any related overhead for these items and are compensated by sharing in the revenue generated by the business handled by such agent. An agent can (i) generate sales which generally result in a sales commission or sharing of the gross profit produced and (ii) provide services on behalf of the Company such as origin, destination or other transportation services for which the agent is compensated based on a prescribed revenue distribution formula. STRATEGIC ALLIANCE PARTNERS. Arrangements with LIW's strategic alliance partners are generally less stringent than with independent agents but generally involve exclusive representation by the strategic partner on behalf of the Company. Although strategic alliance partners are encouraged to utilize the logo and image of the Company, they are required to acknowledge that they have no rights to the Company's trademarks and use it only with the Company's permission. Strategic alliance partners are encouraged to utilize the Company's information technology systems but are not required to do so. Strategic alliance agreements are generally not for a specified period and are terminable by either party providing various periods of notice. NON-EXCLUSIVE AGENTS. In countries where the Company does not have Company-owned operations, exclusive agents or strategic alliance partners, the Company utilizes the services of non-exclusive agents. Non-exclusive agents have no contractual commitment to the Company and do not use its name, logo or systems. 64 EQUIPMENT. As of December 31, 1997, the Company owned approximately 208 vehicles and 843 trailers and leased approximately 63 vehicles and 325 trailers. Approximately 65 vehicles and 903 trailers are located in the United States, 29 vehicles and 257 trailers are located in Europe, 39 vehicles and 8 trailers are located in Puerto Rico and 138 vehicles are located in Asia. Such equipment is used for transportation of freight by the Company and its agents. INFORMATION SYSTEMS The Company believes that its ability to provide its customers with timely access to accurate information regarding the status of cargo in transit is a point of differentiation from its competitors and is a critical factor to customer retention and expansion on a multi-modal basis of the Company's customer base and services provided to existing customers. The Company also believes that the ability to monitor all purchased transportation costs and compare them to anticipated costs on a job-by-job basis is critical to maintaining and growing margins. The Company utilizes FAST 400, a global, multi-modal, multi-currency and multi-lingual integrated freight forwarding and job costing system that provides international tracking, custom services, document preparation, document transmittal and electronic data interchange ("EDI") interfaces with customers and carriers. FAST 400 is currently installed in the majority of the Company's operations in Europe, the United States and key locations in Asia. The Company plans to install FAST 400 at its facilities worldwide. The Company's Purchase Order Management System ("POMS") provides item level tracking at the purchase order level and links multiple purchase orders to fulfill customer service requirements. POMS is currently installed in the Company's operations in Europe and the Company plans to extend use of POMS to its facilities worldwide. BUSINESS 400 is a financial system that is fully integrated with FAST 400 and is utilized in the Company's operations in parts of Europe and part of Asia and the Company plans to extend the use of BUSINESS 400 throughout Europe and Asia. The Company's Bekins operations currently utilize the BECOM System, a mainframe system that provides ground transportation, warehouse and reverse logistic information services including a nationwide asset/inventory tracking and shipment monitoring systems which feature state-of-the-art barcoding technology. The Company's Matrix operations currently utilize MATRAK. The Company's LEP-USA subsidiary utilizes FAST 400 for all international shipments, and for its domestic business it uses a proprietary system called PACER. The Company intends to integrate the LEP PACER domestic system and the Bekins BECOM domestic logistics system into a single domestic system, based on the FAST 400 international system prior to the end of the year 2000, which will result in a single global system that processes all of the Company's business on a common platform. The Company expects to spend approximately $30.0 million, which it plans to fund through a combination of cash provided by operations and borrowings under the New Credit Facility, over the next three years to expand its existing FAST 400 system to all of its facilities and improve its existing information technology to ensure that the Company remains competitive with other logistics providers. The Company believes that its information systems that integrate independent agents and select strategic alliance partners with the Company's operations are a competitive advantage and provide an incentive for the Company's independent agents and strategic alliance partners to continue to do business with the Company. The information technology systems result in increased efficiencies and reduced costs by providing direct interface between the Company, its customers, agents and strategic alliance partners. MARKETING An important part of the Company's business strategy is its approach to a single global brand and identity, its treatment of distinct customer segments and its emphasis on vertical industry know-how and logistics services. The Company's strategy of providing network-based global logistics requires that all operating units and agent-managed operations reflect the same corporate brand. In March 1998, the Company introduced the "Geologistics" global brand name and initiated its program to market all of its services under the Geologistics brand name. The Company believes that its business and operations will be 65 positively affected by the new company-wide brand name because it will encourage all of its employees, suppliers, agents, partners and customers to share the same perception of the Company's business strategy, products, values and culture. The Company believes that its target customer base consists of: buyers of traditional transportation services that are motivated by cost and transit-time considerations and buyers of logistics management services that are seeking operating efficiencies, increased revenues and improved customer service resulting from the end-to-end management of inventory. To enjoy the benefits of both customer segments, the Company has organized its sales and marketing efforts along two lines: global/national sales personnel and a global logistics solutions team. Global and national sales personnel focus their sales efforts on senior transportation executives, financial officers and materials managers of companies that are complex users of international transportation logistics services. The Company's goal is to provide such customers with effective transportation programs that reduce the customers' total cost of shipping goods. Because multi-national companies increasingly require complex analysis of their logistics activities, the Company is currently organizing a Global Logistics Solutions Team to perform consulting, transportation management, inventory management and order fulfillment services that enhance the Company's traditional transportation services. The Global Logistics Solutions Team will operate as an independent division that works in partnership with global account representatives who are primarily responsible for clients, and will be responsible for the implementation of the clients' logistics solutions. The Company intends to offer global solutions programs on a three to five year contractual basis and may feature incentive pricing based on performance, resulting in increased margins when the Company's performance exceeds client expectations. The Company has determined that its customers are increasingly seeking logistics answers and services tailored to specific industries. Accordingly, the Company believes that service providers that organize sales, marketing and product development along industry lines will have a competitive advantage over providers that address the transportation and logistics needs of all industries similarly. The Company is organizing product development and marketing groups for life sciences (health care and pharmaceuticals), office technology, medical equipment and products, aviation and defense and retail. The Company believes that if it achieves recognition as an industry-based expert in logistics, it will develop longer-lasting client relationships with customers in targeted industries and secure higher-margin business from such customers. COMPETITION AND BUSINESS CONDITIONS The Company's principal businesses are directly impacted by the volume of domestic and international trade. The volume of such trade is influenced by many factors, including economic and political conditions in the United States and abroad, major work stoppages, exchange controls, currency fluctuations, war and other armed conflicts, and United States and international laws relating to tariffs, trade restrictions, foreign investments and taxation. The global logistics services and transportation services industries are intensively competitive and are expected to remain so for the foreseeable future. The Company competes against other integrated logistics companies, as well as transportation services companies, consultants and information technology vendors. The Company also competes against carriers' internal sales forces and shippers' transportation departments. This competition is based primarily on freight rates, quality of service (such as damage-free shipments, on-time delivery and consistent transit times), reliable pickup and delivery and scope of operations. The Company also competes with transportation services companies for the services of independent agents, and with trucklines for the services of independent contractors and drivers. The Company encounters competition from a large number of firms with respect to the services provided by the Company. Much of this competition comes from local or regional firms which have only one or a small 66 number of offices and do not offer the breadth of services and integrated approach offered by the Company. However, some of this competition comes from major United States and foreign-owned firms which have networks of offices and offer a wide variety of services. The Company believes that quality of service, including information systems capability, global network capacity, reliability, responsiveness, expertise and convenience, scope of operations, customized program design and implementation and price are important competitive factors in its industry. Competition within the domestic freight forwarding industry is intense. Although the industry is highly fragmented, with a large number of participants, the Company competes most often with a relatively small number of freight forwarders with nationwide networks and the capability to provide the breadth of services offered by the Company and with fully integrated carriers focusing on heavy cargo, including Burlington Air Express, Inc., Eagle USA Freight Inc. and Emery Air Freight Corp. The Company also encounters competition from passenger and cargo air carriers, trucking companies and others. As the Company expands its international operations, it expects to encounter increased competition from those freight forwarders that have a predominantly international focus, including Air Express International Corporation, Expeditors International of Washington, Inc., Fritz Companies Inc. and Circle International Group. Many of the Company's competitors have substantially greater financial resources than the Company. The Company also encounters competition from regional and local air freight forwarders, cargo sales agents and brokers, surface freight forwarders and carriers and associations of shippers organized for the purpose of consolidating their members' shipments to obtain lower freight rates from carriers. As an ocean freight forwarder, the Company encounters strong competition in every country in which it operates. This includes competition from steamship companies and both large forwarders with multiple offices and local and regional forwarders with one or a small number of offices. As an air freight forwarder, the Company encounters strong competition from other air freight forwarders in the United States and overseas. The Company believes that quality of service, including reliability, responsiveness, expertise and convenience, scope of operations, information technology and price are the most important competitive factors in its industry. Competition for the domestic interstate transportation of household goods is intense and long-term relationships with corporate accounts are difficult to obtain and retain. In the HHG market, the Company encounters competition from larger van lines such as north American Van Lines Inc., Allied Van Lines Inc., Atlas Van Lines, Inc. and UniGroup, Inc. (United Van Lines, Inc. and Mayflower Transit, Inc.). Based on revenue data filed with the STB, Bekins has been the sixth largest HHG carrier in the United States for more than a decade. According to reports filed with STB, 1996 operating revenues aggregated approximately $3.2 billion for the 15 largest HHG carriers, of which approximately 79.0% was accounted for by the six largest carriers and approximately 6.0% was accounted for by the Company. The Motor Carrier Act reduced regulation in the trucking industry, and provided the opportunity for increased competition, which resulted in generally lower profit margins within the domestic HHG relocation industry. The international relocations services industry is competitive and much more highly fragmented than the domestic HHG business. Matrix competes with a large number of specialized competitors although the Company believes that Matrix differentiates its service offerings from many of its competitors by focusing on "high-end" executive relocation services for leading multinational companies and organizations. REGULATION The Company's domestic air freight forwarding business is subject to regulation, as an indirect air cargo carrier, under the Federal Aviation Act by the DOT, the successor to the Civil Aeronautics Board, although Part 296 of the DOT's Economic Aviation Regulations exempts air freight forwarders from most of such act's requirements. The Company's foreign air freight forwarding operations are subject to similar regulation by the regulatory authorities of the respective foreign jurisdictions. The air freight forwarding industry is subject to regulatory and legislative changes which can affect the economics of the industry by 67 requiring changes in operating practices or influencing the demand for, and the costs of providing, services to customers. In its ocean freight forwarding business, the Company is licensed as an ocean freight forwarder by the Federal Maritime Commission ("FMC"). The FMC does not regulate the level of Company's fees in any material respect. The Company's ocean freight NVOCC business is subject to regulation as an NVOCC under the FMC tariff filing and surety bond requirements, and under the Shipping Act of 1984, particularly those terms proscribing rebating practices. In the United States, the Company is subject to federal, state and local provisions relating to the discharge of materials into the environment or otherwise for the protection of the environment. Similar laws apply in many foreign jurisdictions in which the Company presently operates or may operate in the future. Although the Company's current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its business. The Company does not anticipate making any material capital expenditures for environmental control purposes during the remainder of the current or succeeding fiscal years. Certain federal officials are considering implementing increased security measures with respect to air cargo. There can be no assurance as to what, if any, regulations will be adopted or, if adopted, as to their ultimate effect on the Company. The Company does not believe that costs of regulatory compliance have had a material adverse impact on its operations to date. However, failure of the Company to comply with the applicable regulations or to maintain required permits or licenses could result in substantial fines or revocation of the Company's operating permits or authorities. There can be no assurance as to the degree or cost of future regulations on the Company's business. As a customs broker operating in the United States, the Company is licensed by the United States Department of the Treasury and regulated by the United States Customs Service. The Company's fees for acting as a customs broker are not regulated. The Company's local pick-up and delivery operations are subject to various state and local regulations and, in many instances, require registrations with state authorities. In addition, certain of the Company's local pick-up and delivery operations are regulated by the STB and FHWA. Federal authorities have broad power to regulate the delivery of certain types of shipments and operations within certain geographic areas, and the STB has the power to regulate motor carrier operations, approve certain rates, charges and accounting systems and require periodic financial reporting. Interstate motor carrier operations are also subject to safety requirements prescribed by the FHWA. In some potential locations for the Company's delivery operations, state and local registrations may be difficult to obtain. The Company is regulated as a motor carrier of property by the FHWA, previously the ICC, by which the Company is registered as both a common carrier, freight forwarder and a property broker. For dispatch purposes, the Company also holds Federal Communications Commission radio licenses. Certain of the Company's offshore operations are subject to similar regulation by the regulatory authorities of the respective foreign jurisdictions. Certain of the Company's warehouse operations are licensed as container freight stations, public bonded warehouses and customs examination sites by the United States and other sovereign countries' customs services. Traditionally, HHG pricing had been based upon tariffs accepted by the ICC for each class of goods hauled by an interstate carrier. These tariffs are generally based upon the weight of the shipment, distance traveled, type of goods transported and points of origin and destination. Most HHG moves are now priced significantly below tariffs through individual discount programs, binding estimates negotiated between the carrier and individual residential customers or on the basis of a contract between the carrier and a corporate customer. HHG carriers participate in rate bureaus through which competitors jointly establish and publish tariffs and rates. The Company is currently a member of the Household Goods Carrier Bureau, which is comprised of approximately 2,000 other common carriers of household goods, including the ten largest carriers in the industry. The Motor Carrier Act permits certain collective ratemaking 68 activities through rate bureaus by exempting such ratemaking from the antitrust laws. Management believes prices in the industry are determined by market forces. The Company operates nationwide as an interstate common carrier through its subsidiary, Bekins, that holds Certificates of Public Convenience and Necessity that were granted by the ICC. These certificates authorize Bekins to transport various classes of goods and products. The Company's subsidiaries also operate as contract carriers, pursuant to contract authority originally granted by the ICC. The Company is required to comply with STB and FHWA regulations. In addition, the FHWA regulates the hours of service of the Company's drivers and other safety related aspects of operations. The Company is also subject to similar and other laws in the foreign jurisdictions in which it operates. Numerous jurisdictions in Asia prohibit or restrict United States ownership of local logistics operations, and although the Company believes its ownership structure in Asia conforms to such laws, the matter is often subject to considerable regulatory discretion and there can be no assurance local authorities would agree with the Company. A failure by the Company to comply with the foregoing laws, rules and regulations could subject it to suspension or revocation of its operating authority or civil or criminal liabilities, or any combination of such penalties or both. In addition, the Company-owned service centers hold intrastate operating authority which subjects them to the jurisdiction of various state regulatory commissions. See "Risk Factors-- Government Regulation." From time to time, U.S. tax authorities have sought to assert that owner-operators in the trucking industry are employees, rather than independent contractors. No such claim has been successfully made with respect to owner-operators serving the Company, and management is confident the owner-operators of the Company could not be properly characterized as employees of the Company under existing interpretations of federal and state tax law. However, there can be no assurance that tax authorities will not successfully challenge this position, or that such interpretations will not change, or that the tax laws will not change. See "Risk Factors--Characteristics of the Logistics Industry; Seasonality." TRADEMARKS The Company has registered trademarks on a number of variations of the Bekins name and corporate logo in the United States. Depending on the jurisdiction of registration, trademarks are generally protected for ten to twenty years (if they are in continuous use during that period) and are renewable. These trademarks are material to the Company in the marketing of its services because of the high name recognition possessed by Bekins in the transportation services industry. In connection with the acquisitions by the Company, LEP-USA and LEP-Canada entered into certain Trademark License Agreements whereby they obtained the non-exclusive right to use LEP trademarks in their North American operations for a period of at least ten years. With the recent acquisition of LIW, the Company obtained ownership of the LEP trademarks with numerous variations and in the vast majority of countries in which LEP operates. See "Recent Acquisitions." Additionally, the Company has recently applied for trademark registration in various classes of the GeoLogistics name and a related "G" logo in the countries in which the Company operates. EMPLOYEES As of December 31, 1997, the Company and its subsidiaries had approximately 6,388 employees, excluding employees of agents and strategic alliance partners. Management believes that it has good relationships with its employees. In the United States, a total of approximately 184 employees at five LEP-USA locations are members of collective bargaining units affiliated with the teamsters, out of a total of approximately 1,658 employees in the United States as of December 31, 1997. Two of the five collective bargaining contracts expired on August 31, 1997 and two other collective bargaining contracts expired on March 31, 1998. Each of such expired collective bargaining contracts has been extended to April 30, 1998. The Company is currently renegotiating the terms of these four contracts and hopes to reach a settlement 69 with the unions on the remaining issues. The Company believes that any action resulting from a failure to reach a settlement with the unions is unlikely to have a material adverse effect on the Company; however, there can be no assurance that the Company's operations would not be materially adversely affected if the Company is unable to reach such a settlement. PROPERTIES The properties used in the Company's operations consist principally of freight forwarding offices and warehouse and distribution facilities. As of December 31, 1997, the Company had 130 office facilities, 11 of which were owned and 119 of which were leased, and 171 warehouse facilities, 27 of which were owned and 144 of which were leased, constituting, in the aggregate, approximately 624,714 square feet of office space and 4.2 million square feet of warehouse space in 33 countries. The Company is headquartered in Golden, Colorado at an approximately 6,500 square foot facility leased through March, 2002. The Company operates a major distribution center of approximately 300,000 square feet in Columbus, Ohio which serves as the national cross-docking facility for Bekins TimeLok and LEP-USA's Profitnet Logistics system where the Company sorts freight originating from across the United States. The following table sets forth certain information relating to the Company's domestic and foreign properties as of December 31, 1997.
NUMBER OF FACILITIES --------------------------------------- OWNED LEASED TOTAL ------------- ----------- ----------- U.S............................................................... -- 49 49 Canada............................................................ 1 12 13 Asia/Pacific...................................................... 5 56 61 Europe............................................................ 32 146 178 -- --- --- Total........................................................... 38 263 301 -- -- --- --- --- ---
The Company believes that its office and warehouse facilities are generally well-maintained, are suitable to support the Company's business and are adequate for the Company's present needs. OWNERSHIP OF LIW SUBSIDIARIES Certain countries in which LIW operates have regulations limiting foreign ownership of freight forwarders. To comply with such regulations, the Company has established trust or nominee relationships in certain countries, including Malaysia, Philippines, Taiwan and Thailand. As a result of such arrangements, the Company has legal ownership of only 30%, 30%, 33% and 49% of the LIW operations in Malaysia, Philippines, Taiwan and Thailand, respectively. The Company reports such subsidiaries as consolidated for financial reporting purposes. See "Selected Consolidated Financial Data of LIW." Certain LIW subsidiaries, including the principal Hong Kong subsidiary, have minority shareholders who have rights to participate in the profits and cash flows of such subsidiaries and who have rights which limit LIW's ability to take certain actions without the consent of the minority holder. For certain subsidiaries, such events include changes in the capital structure, changes in allocation of net profits, liquidation, merger, disposal of a material part of the assets, capital expenditures and contracts with related parties. LIW currently owns 50.0% of the outstanding shares, and has entered into an agreement to purchase the remaining 50.0% of the outstanding shares, of its Italian partner. The purchase agreement requires the Company to pay installments aggregating approximately L593,000 (approximately $960,000) plus an amount equal to 24.0% of the proceeds derived from the sale of certain assets specified in the purchase agreement and sold during the term of the agreement. Payment of the final installment is due and payable on or before July 31, 1999. Upon payment of the fifth installment on or before July 31, 1998, the holder of 70 the other 50.0% of the outstanding shares must transfer to LIW a number of shares equal to the proportion of the consideration paid, but will retain a security interest in such shares to guarantee the remaining payments. Until completion of the sale, most significant business decisions require the unanimous written consent of all shareholders. Since 1996, LIW has committed additional funds for the purpose of supporting the Italian operations and in return for such commitment, LIW has been allowed broad authority to manage the day-to-day operations and finances of such subsidiary. LITIGATION LIW is currently defending a claim brought by Danish Customs and Excise for payment of customs duties and excise taxes of approximately L2.9 million ($4.7 million) related to alleged irregularities in connection with a number of shipments of freight out of Denmark. Additionally, LIW is subject to a challenge by German tax authorities relating to approximately L2.0 million ($3.2 million) of alleged liabilities relating to the status of LIW's historical tax filings. LIW has other tax disputes, including non-deduction, under-valuation, non-provision, disallowance, transfer, and non-compliance matters relating to value added taxes, payroll taxes, income taxes, custom duties and property taxes which, in the aggregate, involve amounts of L7.0 million ($11.6 million). The Company believes it has a number of defenses to the alleged tax liabilities and it intends to defend the tax claims vigorously. LIW has not recorded any reserves for the Danish customs matters but believes it has established adequate reserves for the remaining total alleged tax liabilities. Any adverse decision relating to such tax claims could materially adversely affect the Company's liquidity and capital resources. The Company and its subsidiaries are also defendants in legal proceedings arising in the ordinary course of business and are subject to certain claims. Although the outcome of the proceedings cannot be determined, it is the opinion of management, that the resolution of these matters will not have a material adverse effect on the Company. 71 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the directors, executive officers and certain key management personnel of the Company and certain of its subsidiaries as of April 1, 1998. Members of the Board of Directors are elected annually and hold office from the time of their election and qualification until the annual meeting of stockholders at which their term expires or their successor is elected and qualified or until their earlier resignation or removal. Executive officers are elected by and serve at the discretion of the Board of Directors until their successors are duly chosen and qualified.
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Roger E. Payton(1)................................... 42 President, Chief Executive Officer and Director Gary S. Holter....................................... 43 Chief Financial Officer Luis F. Solis........................................ 40 Executive Vice President of Strategic Marketing Larry Tieman......................................... 49 Chief Information Officer Ronald Jackson....................................... 45 Vice President, Secretary and General Counsel Terry G. Clarke...................................... 42 Vice President--Treasurer Kenneth R. Batko..................................... 47 Vice President--Corporate Controller William E. Simon, Jr.(2)............................. 46 Chairman of the Board Vincent J. Cebula(1)(2).............................. 34 Director Richard J. Goldstein(2).............................. 32 Director Stephen A. Kaplan(2)................................. 39 Director Michael B. Lenard(1)(2).............................. 42 Director Conor T. Mullett(2).................................. 31 Director William E. Myers, Jr................................. 38 Director
- ------------------------ (1) Member of Executive Committee of the Board of Directors. (2) Pursuant to the Stockholders Agreement, Logistical Simon has the right to designate three members to the Board of Directors, the Opportunities Fund has the right to designate two members of the Board of Directors and the Principal Fund has the right to designate one member of the Board of Directors. Messrs. Simon, Lenard and Mullett are designees of Logistical Simon, Messrs. Cebula and Goldstein are designees of the Opportunities Fund and Mr. Kaplan is the designee of the Principal Fund. ROGER E. PAYTON has been a director of the Company and the President and Chief Executive Officer of the Company since May 1996. From 1982 to 1995 Mr. Payton was the Chief Executive Officer of the following subsidiaries of NFC plc, a logistics company: (i) Pickfords Industrial Ltd. (1982 to 1984), a U.K.-based industrial and manufacturing services company providing transport, shipping, installation and electrical and mechanical services, (ii) Merchants Home Delivery Services Inc. (1985 to 1987 and 1991 to 1995), a U.S.-based delivery and logistics services company providing logistics-related services to United States and Canadian home furnishing retailers and manufacturers, and (iii) Allied Van Lines Inc. (1988 to 1990), a U.S.-based van line offering relocation services, high value product logistics services, international shipping and freight forwarding services and insurance products to a wide array of industries and consumers. GARY S. HOLTER has been Chief Financial Officer of the Company since January 1997. From February 1995 through December 1996, he was Executive Vice President and Chief Financial Officer of Bekins. From 1989 to 1995, Mr. Holter served as Executive Vice President and Chief Operating Officer of Knapp Shoes Inc., a manufacturing and distribution company. From 1986 to 1988, Mr. Holter was the Executive Vice President of Finance at Simmons Airlines, Inc. a publicly held regional transportation carrier. Mr. Holter is a certified public accountant. 72 LUIS F. SOLIS has been the Executive Vice President of Strategic Marketing of the Company since March 1997. From May 1996 to February 1997, Mr. Solis was Vice President of Business Development of GE Capital Logistics, a logistics services venture of GE Capital Corporation. Prior to joining GE, Mr. Solis served as Vice President of Strategic Marketing, Global Strategies for Skyway Freight Systems, a third-party logistics subsidiary of Union Pacific Corporation, from 1994 to 1996. Mr. Solis served as Vice President of Global Marketing for Circle International, a global freight forwarder, from 1991 to 1994. LARRY TIEMAN has been Chief Information Officer of the Company since March 1997. He was Chief Information Officer for GE Capital Logistics from May 1996 to February 1997. Prior thereto, Mr. Tieman was Senior Vice President and Chief Information Officer for Schneider National Incorporated, a logistics company, from October 1993 to May 1996, and the Chief Technology Officer of the Nielson division of Dunn & Bradstreet, a market research company, from 1990 to 1993. RONALD JACKSON has been Vice President and General Counsel of the Company since September 1997. Mr. Jackson was Legal Director and Secretary of LIW from January 1996 to September 1997 and was Group Legal Advisor for LEP Group plc from October 1989 to December 1995. TERRY G. CLARKE has been Vice President--Treasurer of the Company since September 1997. From October 1995 to November 1996, Mr. Clarke was Assistant Treasurer with the M.A. Hanna Company, a Cleveland based chemicals company. Prior to that, Mr. Clarke served as Director of Planning and Control of B.F. Goodrich's ("Goodrich") Water Systems Group, was Director, Finance and Banking for Goodrich and held various other management positions in the United States and Canada for Goodrich from 1988 to 1995. KENNETH R. BATKO has been Vice President-Corporate Controller since November 1997. From 1994 to 1997, Mr. Batko was Assistant Controller with Anixter International Inc., a supplier of wiring systems and networking products. From 1982 to 1993, Mr. Batko was the Director of Financial Reporting for Anixter Inc., a subsidiary of Anixter International. Mr. Batko is a certified public accountant. WILLIAM E. SIMON, JR. has been the Chairman of the Board of Directors of the Company since May 1996. Mr. Simon has been the Executive Director of WESS since 1988. In addition, Mr. Simon is a director of William E. Simon & Sons (Asia), LDC, WESS's affiliate merchant bank based in Hong Kong. Mr. Simon also serves on the boards of directors of Hanover Compressor Co. and various private companies. VINCENT J. CEBULA has been a director of the Company since May 1996. He is also a Managing Director of Oaktree, where he has worked since 1995. Pursuant to a subadvisory agreement with TCW Asset Management Company ("TCW"), the general partner of the Principal Fund, Oaktree provides investment management services to the Principal Fund. Mr. Cebula was a Senior Vice President of Trust Company of the West and TCW from 1994 to 1995. Prior thereto, Mr. Cebula was Executive Assistant to the Vice Chairman of Brooke Group Ltd. where he was responsible for the coordination of financing and investment banking activities. Mr. Cebula also serves on the boards of directors of various private companies. RICHARD J. GOLDSTEIN has been a director of the Company since May 1996 and is a Senior Vice President of Oaktree where he has worked since 1995. Mr. Goldstein was an Assistant Vice President of Trust Company of the West and TCW from 1994 to 1995. Prior thereto, Mr. Goldstein was an Associate in the Corporate Finance Department of Jefferies & Company, Inc. Mr. Goldstein also serves on the boards of directors of Decorative Home Accents, Inc. and various private companies. STEPHEN A. KAPLAN has been a director of the Company since May 1996 and is a principal of Oaktree. Prior to joining Oaktree in June 1995, Mr. Kaplan was a Managing Director of Trust Company of the West and TCW. Prior to joining TCW in 1993, Mr. Kaplan was a partner in the law firm of Gibson, Dunn & Crutcher. Mr. Kaplan serves on the boards of directors of Acorn Products, Inc., Chief Auto Parts Inc., KinderCare Learning Centers, Inc., Roller Bearing Holding Company, Inc. and various private companies. 73 MICHAEL B. LENARD has been a director of the Company since April 1996 and is a Managing Director and the Counsellor of WESS. In addition, Mr. Lenard is a director of William E. Simon & Sons (Asia), LDC, WESS affiliate merchant bank based in Hong Kong, and the President of WESSHIP, Inc., the general partner of certain WESS affiliated limited partnerships that have invested in the shipping industry. Prior to joining WESS in early 1993, Mr. Lenard was a partner in the international law firm of Latham & Watkins. Mr. Lenard is also a director of various private companies. CONOR T. MULLETT has been a director of the Company since May 1996 and is a Senior Vice President of WESS. From 1996 to 1998 Mr. Mullet was a Vice President of WESS and from 1994 to 1996 Mr. Mullett was an Associate at WESS. From 1993 to 1994 Mr. Mullett was an Associate at GE Capital Corporation. Mr. Mullett is also a director of various private companies. WILLIAM E. MYERS, JR. has been a director of the Company since May 1996 and, for more than five years, has been Chairman of the Board and Chief Executive Officer of W.E. Myers & Co., a private merchant bank. Mr. Myers is also a director of Aftermarket Technology Corp. and Roller Bearing Holding Company, Inc. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has an Executive Committee (the "Executive Committee"). The Executive Committee is composed of Messrs. Cebula, Payton and Lenard. Pursuant to the terms of the Stockholders Agreement, the Executive Committee is authorized to take any action on behalf of the Board of Directors in between meetings of the Board of Directors upon the unanimous approval of the Executive Committee. In addition, the bylaws of the Company provide for an audit committee (the "Audit Committee") which is responsible for reviewing the scope of the Company's independent auditors' examination of the Company's financial statements and reviewing their reports, and a compensation committee (the "Compensation Committee"), which is responsible for determining the Company's policies with respect to the nature and amount of all compensation to be paid to the Company's executives and administering the Company's benefit plans. The Audit Committee and Compensation Committee will consist of two members, Messrs. Cebula and Mullett. COMPENSATION OF DIRECTORS Non-employee directors are not currently compensated for their services, but receive reimbursement of reasonable out-of-pocket expenses incurred in connection with board meetings or director-related activities. The Stockholders Agreement does, however, provide that certain members of the Board of Directors will be entitled to receive compensation if directors who are employees of the Company or directors who were admitted after November 7, 1996 receive additional compensation in their capacity as directors. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The Summary Compensation Table below sets forth the annual base salary and other annual compensation earned in 1996 and 1997 by Mr. Payton the four other most highly- 74 paid executive officers of the Company whose cash salary and bonus compensation exceeded $100,000 in 1997 (the "Named Executive Officers").
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------- ------------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER FISCAL SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR $ $ $ # $ - ----------------------------------- ----------- ------------ --------- ----------------- ------------- ------------- Roger E. Payton.................... 1997 349,726 100,000 -- -- 41,623(3) Director, President and Chief 1996 165,416(1) 75,000 -- 175,000 19,432(3) Executive Officer Gary S. Holter..................... 1997 212,500 62,500 -- 37,500 21,818(4) Chief Financial Officer 1996 160,000(2) 100,000 -- -- 12,219(4) Luis F. Solis...................... 1997 208,340(1) 62,500 -- 37,500 22,159(5) Executive Vice President of Strategic Marketing Larry Tieman....................... 1997 208,340(1) 62,500 -- 37,500 16,839(6) Chief Information Officer Ronald Jackson..................... 1997 42,500(1) -- 8,000 14,309(7) Vice President, Secretary and General Counsel
- ------------------------ (1) Mr. Payton began his employment with the Company in May 1996. Messrs. Solis and Tieman began their employment with the Company in March 1997 and Mr. Jackson began his employment with the Company in October 1997. (2) Mr. Holter was Executive Vice President and Chief Financial Officer of Bekins during 1996. (3) Mr. Payton received an automobile allowance of $6,500 and $12,000 in 1996 and 1997, respectively. Additionally, the Company paid $4,965 and $23,198 in premiums for a life insurance policy for Mr. Payton in 1996 and 1997, respectively, and contributed $7,967 and $6,425 in 1996 and 1997, respectively, as a matching payment to the account established for Mr. Payton's benefit pursuant to the Deferred Plan (as defined). (4) Mr. Holter received an automobile allowance of $6,600 and $11,100 in 1996 and 1997, respectively. Additionally, in 1996 and 1997 the Company paid $537 and $1,145, respectively, in premiums for a life insurance policy for Mr. Holter and contributed $5,082 and $9,573 in 1996 and 1997, respectively, as matching payments to accounts established for Mr. Holter's benefit pursuant to the Deferred Plan and the Company's 401(k) plan. (5) Mr. Solis received an automobile allowance of $10,000 in 1997. Additionally, in 1997 the Company paid $909 in premiums for a life insurance policy for Mr. Solis and contributed $11,250 as matching payments to an account established for Mr. Solis' benefit pursuant to the Deferred Plan. (6) Mr. Tieman received an automobile allowance of $10,000 in 1997. Additionally, in 1997 the Company paid $2,151 in premiums for a life insurance policy for Mr. Tieman and contributed $4,688 as matching payments to an account established for Mr. Tieman's benefit pursuant to the Deferred Plan. (7) Mr. Jackson received an automobile allowance of $3,000 in 1997. Additionally, in 1997 the Company paid $1,116 in premiums for a life insurance policy for Mr. Jackson, and reimbursed $10,193 of relocation expenses. 75 WARRANT GRANTS IN 1997. The following table contains information concerning the grant of warrants made during the year ended December 31, 1997 to the Named Executive Officers. The table also lists potential realizable value of such warrants on the basis of assumed annual compounded stock appreciation rights of 5% and 10% over the life of the warrants, which is set for a maximum of ten years.
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL RATES OF STOCK ---------------------------------- NUMBER OF PRICE APPRECIATION SECURITIES PERCENT OF TOTAL FOR UNDERLYING WARRANTS GRANTED TO EXERCISE OF WARRANT TERM WARRANTS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($) - -------------------------------- ------------- ------------------- ----------- ----------- --------- ---------- Gary S. Holter.................. 7,500 6.2% $ 52.00 3/3/07 (1) $ 193,592 7,500 6.2% 55.00 3/3/07 (1) 171,092 7,500 6.2% 60.00 3/3/07 (1) 133,592 5,000 4.1% 48.00 3/3/07 $ 4,334 149,061 5,000 4.1% 50.00 3/3/07 (1) 139,061 5,000 4.1% 55.00 3/3/07 (1) 114,061 Luis F. Solis................... 12,500 10.4% 52.00 3/3/07 (1) 322,653 12,500 10.4% 55.00 3/3/07 (1) 285,153 12,500 10.4% 60.00 3/3/07 (1) 222,653 Larry Tieman.................... 12,500 10.4% 52.00 3/3/07 (1) 322,653 12,500 10.4% 55.00 3/3/07 (1) 285,183 12,500 10.4% 60.00 3/3/07 (1) 222,653 Ronald Jackson.................. 2,668 2.2% 52.00 9/30/07 (1) 68,867 2,666 2.2% 55.00 9/30/07 (1) 60,817 2,666 2.2% 60.00 9/30/07 (1) 47,487
- ------------------------ (1) The potential realizable value at a 5% assumed annual rate of stock price appreciation is below zero. FISCAL YEAR END WARRANT VALUES. The following table sets forth information concerning the fiscal year-end value of unexercised warrants held by Mr. Payton and the Named Executive Officers. There were no warrants exercised during 1997.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED WARRANTS IN THE MONEY WARRANTS AT 12/31/97 AT 12/31/97 NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/NONEXERCISABLE - ------------------------------------------------------------- ------------------------ ------------------------ Roger E. Payton.............................................. 43,750/131,250 $ 156,250/$343,750 Gary S. Holter............................................... 0/37,500 (1) Luis F. Solis................................................ 0/37,500 (1) Larry Tieman................................................. 0/37,500 (1) Ronald Jackson............................................... 0/8,000 (1)
- ------------------------ (1) None are in-the-money. EMPLOYMENT AGREEMENTS Mr. Payton entered into an employment agreement with the Company effective as of April 30, 1996 which terminates on April 30, 2000 (the "Payton Agreement"). The Payton Agreement provides for a base salary of not less than $315,000, with annual increases and bonuses at the discretion of the Board of Directors. In November 1996, Mr. Payton's base salary was increased to $365,000 per year. The Payton 76 Agreement also provides for the payment by the Company of the premium on one of Mr. Payton's personal life insurance policies and an automobile allowance in the amount of $12,000 per year. The Payton Agreement may be terminated by the Company for "cause" (as defined in the Payton Agreement) or upon the death or, under certain circumstances, disability of Mr. Payton. In the event that the Company terminates the Payton Agreement without cause or if a constructive discharge has occurred, Mr. Payton is entitled to receive his salary for the lesser of a period of two years from the date of termination or the remaining term under the Payton Agreement, but in no event less than one year's salary. Pursuant to the terms of the Payton Agreement, a constructive termination will have occurred if there has been a substantial diminution in Mr. Payton's duties and responsibilities with the Company as directed by the Board of Directors since April 30, 1996. During the term of the Payton Agreement and any period during which Mr. Payton receives severance pay, Mr. Payton is prohibited from competing with the Company and is precluded from engaging in any form of solicitation of the Company's customers or employees. If the Payton Agreement has not been renewed on or before the expiration date and Mr. Payton's employment with the Company terminates pursuant to the terms of the employment agreement on the expiration date, Mr. Payton is entitled to receive his salary for a period of one year from the expiration date. Mr. Holter entered into an employment agreement with the Company effective as of March 1, 1997 which terminates on March 1, 2000 (the "Holter Agreement"). The Holter Agreement provides for a base salary of not less than $200,000 per year and provides that Mr. Holter may receive performance-based cash bonus compensation and performance-based equity compensation if certain financial and other defined management objectives to be agreed upon annually between the executive and the Company at the beginning of each fiscal year are satisfied. In October 1997, Mr. Holter's base salary was increased to $250,000 per year. If the equity incentive objectives are not fully achieved for any fiscal year, the equity compensation may still be granted at the discretion of the Board. On March 1, 1998, the Company granted Mr. Holter warrants to purchase an aggregate of 5,000 shares of Common Stock at $45.00 per share as performance-based equity compensation for 1997. The Holter Agreement also provides for an automobile allowance of $12,000 per year. The Holter Agreement may be terminated by the Company for "cause" (as defined in the Holter Agreement) or upon the death or, under certain circumstances, the disability of Mr. Holter. The employment agreement provides for constructive discharge if there has been a substantial diminution in Mr. Holter's duties and responsibilities as directed by the Board since the date of the Holter Agreement. In the event that the Company terminates the Holter Agreement without cause or if there has been a constructive discharge, Mr. Holter is entitled to receive his salary for a period of one year from the date of termination and a proportionate share of the cash bonus compensation due to him for the fiscal year in which the date of termination has occurred. During the term of the Holter Agreement and for one year thereafter, Mr. Holter is prohibited from competing with the Company and is precluded from engaging in any form of solicitation of the Company's customers or employees. Mr. Tieman entered into an employment agreement with the Company effective as of March 3, 1997 which terminates on March 3, 2000 (the "Tieman Agreement"). The Tieman Agreement provides for a base salary of not less than $250,000 per year and provides that Mr. Tieman may receive performance-based cash bonus compensation and performance-based equity compensation if certain financial and other defined management objectives to be agreed upon annually between the executive and the Company at the beginning of each fiscal year are satisfied. If the equity incentive objectives are not fully achieved for any fiscal year, the equity compensation may still be granted at the discretion of the Board. On March 1, 1998, the Company granted Mr. Tieman warrants to purchase an aggregate of 5,000 shares of Common Stock at $45.00 per share as performance-based equity compensation for 1997. The Tieman Agreement also provides for an automobile allowance of $12,000 per year. The Tieman Agreement may be terminated by the Company for "cause" (as defined in the Tieman Agreement) or upon the death or, under certain circumstances, the disability of Mr. Tieman. The employment agreement provides for constructive discharge if there has been a substantial diminution in Mr. Tieman's duties and responsibilities as directed by the Board since the date of the Tieman Agreement. In the event that the Company terminates the Tieman Agreement without cause or if there has been a constructive discharge, Mr. Tieman is entitled to receive 77 his salary for a period of one year from the termination date and a proportionate share of the cash bonus compensation due to him for the fiscal year in which the date of termination has occurred. During the term of the Tieman Agreement and for one year thereafter, Mr. Tieman is prohibited from competing with the Company and is precluded from engaging in any form of solicitation of the Company's customers or employees. Mr. Solis entered into an employment agreement with the Company effective as of March 3, 1997 which terminates on March 3, 2000 (the "Solis Agreement"). The Solis Agreement provides for a base salary of not less than $250,000 per year and provides that Mr. Solis may receive performance-based cash bonus compensation and performance-based equity compensation if certain financial and other defined management objectives to be agreed upon annually between the executive and the Company at the beginning of each fiscal year are satisfied. If the equity incentive objectives are not fully achieved for any fiscal year, the equity compensation may still be granted at the discretion of the Board. On March 1, 1998, the Company granted Mr. Solis warrants to purchase an aggregate of 5,000 shares of Common Stock at $45.00 per share as performance-based equity compensation for 1997. The Solis Agreement also provides for an automobile allowance of $12,000 per year. The Solis Agreement may be terminated by the Company for "cause" (as defined in the Solis Agreement) or upon the death or, under certain circumstances, disability of Mr. Solis. The Solis Agreement provides for constructive discharge if there has been a substantial diminution in Mr. Solis's duties and responsibilities as directed by the Board since the date of the employment agreement. In the event that the Company terminates the Solis Agreement without cause or if there has been a constructive discharge, Mr. Solis is entitled to receive his salary through March 3, 2000 and a proportionate share of the cash bonus compensation due to him for the fiscal year in which the date of termination has occurred. During the term of the Solis Agreement and for one year thereafter, Mr. Solis is prohibited from competing with the Company and is precluded from engaging in any form of solicitation of the Company's customers or employees. Mr. Jackson entered into a five-year employment agreement with the Company effective upon the occurrence of each of (i) the acquisition by the Company of a majority of the outstanding ordinary shares of LIW stock (including all interest exchangeable therefor or convertible thereto) and (ii) the delivery to the Company of all warrants to purchase LIW ordinary shares and other equity interests of LIW held by Mr. Jackson (the "Jackson Agreement"). The Jackson Agreement provides for a base salary of not less than $170,000 per year and provides that Mr. Jackson may receive performance-based cash compensation if certain financial and other defined management objections to be agreed upon annually between the executive and the Company at the beginning of each fiscal year are achieved. The Jackson Agreement also provides for an automobile allowance of $12,000 per year. The Jackson Agreement may be terminated by the Company for "cause" (as defined in the Jackson Agreement) or upon the death or, under certain circumstances, disability of Mr. Jackson. In the event that the Company terminates the Jackson Agreement without cause, Mr. Jackson is entitled to receive his salary for a period of one year from the termination date. During the term of the Jackson Agreement and for one year thereafter, Mr. Jackson is prohibited from competing with the Company and is precluded from engaging in any form of solicitation of the Company's customers or employees. The Company has agreements with certain other significant employees. See "Recent Acquisitions." INCENTIVE COMPENSATION PLANS EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase Plans (the "Purchase Plans") provide certain employees of the Company with the right to purchase any or all of such employee's allocated portion, as determined by the Board of Directors of the Company, of an aggregate of 8,500 shares of Common Stock of the Company at a purchase price of $20.00 per share and 150,000 shares of Common Stock at a purchase price of $30.00 per share. The right to acquire shares of Common Stock under the first two Purchase Plans has terminated. The third Purchase Plan makes an aggregate of 75,000 shares of Common Stock available for purchase by certain employees of the Company and expires on 78 December 31, 1998. As of April 6, 1998, 29 employees of the Company had purchased an aggregate of 52,434 shares of Common Stock under the third Purchase Plan. The Board of Directors has the right under the third Purchase Plan to increase the purchase price per share for unsold shares. As of April 6, 1998, a total of 61 employees had purchased an aggregate of 107,493 shares of Common Stock pursuant to the Purchase Plans. The Purchase Plans provide that, if at any time prior to an initial public offering, an employee who has purchased shares under the Purchase Plans is terminated for any reason whatsoever, including without limitation, death, disability, resignation, retirement or termination with or without cause, (i) the Company has an option (a "call") to repurchase, in whole or in part, the shares of Common Stock of the Company that are then owned by such employee or any transferee which were acquired pursuant to the Purchase Plans and (ii) the terminated employee has an option (a "put"), to sell to the Company, in whole or in part, the shares of Common Stock then owned by such employee which were acquired pursuant to the Purchase Plans. The purchase price for the exercise of either the call or the put option is based on the Company's earnings for the most recent fiscal quarter prior to termination and the number of shares of Common Stock outstanding and subject to options and warrants to the extent such options and warrants are in the money. DEFERRED COMPENSATION PLAN. Effective April 28, 1997 the Company adopted the International Logistics Deferred Compensation Plan (the "Deferred Plan") to acknowledge and reward certain key employees of the Company. The Deferred Plan permits certain key employees to elect to reduce their regular compensation and/or bonus compensation on a pre-tax basis by a fixed percentage up to a maximum specified amount. The Company may, in its sole discretion, make an allocation on behalf of employees who meet certain requirements. Each participant in the Deferred Plan may designate one or more of the funds specified in the Deferred Plan for the purpose of attributing investment experience to his accounts. Upon eligibility for retirement, death or disability, a participant, or his beneficiary, will have a 100% vested interest in such participant's accounts. Upon termination of employment for any other reason, a participant will be vested with respect to (i) 100% of that portion of his account attributable to his voluntary deferral allocations and any applicable investment experience credited to such allocation and (ii) a percentage of the portion of his account attributable to Company discretionary allocations based on years of service. Notwithstanding the foregoing, the committee which administers the Deferred Plan may, in its sole discretion, accelerate any specified vesting period. The Company has established a trust with Key Trust Company as trustee (the "Trustee") to hold and invest amounts contributed pursuant to the Deferred Plan. The Company may from time to time, at its sole discretion, direct the Trustee to purchase shares of the Company's common stock (the "Plan Shares"). The Company may, by written action, designate which employees are entitled to receive Plan Shares. If at any time prior to an initial public offering, a participant's employment is terminated for any reason whatsoever, the Company has the option to repurchase any Plan Shares held in such participant's account. As of December 31, 1997, 3,168 Plan Shares were held by the Trustee on behalf of participants under the Deferred Plan. EMPLOYEE STOCK OWNERSHIP. In addition to shares of Common Stock issued to employees under the Purchase Plans and the Deferred Plan, certain shares of Common Stock and warrants to purchase shares of Common Stock held by employees are required to be repurchased by the Company under certain circumstances. An aggregate of 46,712 shares of Common Stock and warrants to purchase 175,000 shares of Common Stock held by employees of the Company are subject to put and call options on substantially the same terms as the shares of Common Stock purchased pursuant to the Purchase Plans described above. Warrants to purchase an additional 318,500 shares of Common Stock, or shares purchased upon exercise thereof, held by employees of the Company are subject to repurchase by the Company pursuant to the terms of such warrants upon the termination of employment of any holder of such warrants prior to an initial public offering of the Company's Common Stock. The repurchase price depends upon, among other factors, the circumstances surrounding termination of employment, the fair market value of the Common Stock on the date of termination and the purchase price paid by the employee. 79 PRINCIPAL STOCKHOLDERS The following table sets forth as of April 1, 1998 certain information regarding the shares of Common Stock beneficially owned by (i) each stockholder who is known by the Company to beneficially own in excess of 5% of the outstanding shares of Common Stock, (ii) each director, Named Executive Officer and New Executive Officer and (iii) all executive officers and directors as a group. Unless otherwise indicated, each of the stockholders shown in the table below has sole voting and investment power with respect to the shares beneficially owned.
BENEFICIAL OWNERSHIP ------------------------- NUMBER OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES(2) CLASS - ------------------------------------------------------------------------------------------ ---------- ------------- Oaktree Capital Management, LLC(3)........................................................ 1,295,575 60.9% The TCW Group, Inc.(4).................................................................... 695,575 32.7 TCW Special Credits Fund V--The Principal Fund............................................ 695,575 32.7 OCM Principal Opportunities Fund, L.P..................................................... 600,000 28.2 Logistical Simon, L.L.C.(5)............................................................... 544,532 24.7 Stephen A. Kaplan(6)...................................................................... 1,295,575 60.9 Vincent J. Cebula(6)...................................................................... 1,295,575 60.9 Richard J. Goldstein(6)................................................................... 1,295,575 60.9 William E. Simon, Jr.(7).................................................................. 544,532 24.7 Michael B. Lenard(7)...................................................................... 544,532 24.7 Conor T. Mullett(7)....................................................................... 544,532 24.7 Roger E. Payton(8)........................................................................ 110,000 5.0 William E. Myers(9)....................................................................... 59,938 2.7 Luis F. Solis(10)......................................................................... 24,500 1.1 Gary S. Holter(10)........................................................................ 27,500 1.3 Larry Tieman(10).......................................................................... 18,500 * Ronald Jackson............................................................................ 0 * Executive Officers and Directors as a Group (12 persons)(11).............................. 2,080,545 86.6
- ------------------------ * Less than one percent (1) The address of The TCW Group, Inc. and the Principal Fund is 865 South Figueroa Street, Los Angeles, California 90017. The address of Oaktree Capital Management, LLC, the Opportunities Fund, Mr. Kaplan, Mr. Goldstein and Mr. Cebula is 550 Hope Street, 22nd Floor, Los Angeles, California 90071. The address of Logistical Simon, L.L.C., Mr. Simon and Mr. Lenard is 10990 Wilshire Boulevard, Suite 500, Los Angeles, California 90024. The address of Mr. Mullett is 310 South Street, P.O. Box 1913, Morristown, New Jersey 07692. (2) As used in the table above, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise has or shares (i) the power to vote, or direct the voting, of such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. (3) All such shares are owned by the Principal Fund and the Opportunities Fund. Pursuant to a subadvisory agreement with TCW Asset Management Company ("TAMCO"), the general partner of the Principal Fund, Oaktree manages the investments and assets of the Principal Fund. In such capacity, Oaktree shares voting and dispositive power with TAMCO, a wholly-owned subsidiary of the TCW Group, Inc., as to shares owned by the Principal Fund. Oaktree also manages the investments and assets of the Opportunities Fund. 80 (4) All such shares are owned by the Principal Fund. TAMCO is the general partner of the Principal Fund. TAMCO is a wholly-owned subsidiary of TCW Group, Inc. (5) Includes 75,000 shares of Common Stock issuable upon exercise of warrants which are currently exercisable. (6) All such shares are owned by the Principal Fund and the Opportunities Fund and are also shown as beneficially owned by Oaktree. To the extent Mr. Kaplan, Mr. Cebula or Mr. Goldstein, on behalf of Oaktree, participates in the process to vote or dispose of any such shares, they may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares. Each of Mr. Kaplan, Mr. Cebula and Mr. Goldstein disclaims beneficial ownership of such shares. (7) All such shares are owned by Logistical Simon. To the extent Mr. Simon, Mr. Lenard or Mr. Mullett, on behalf of Logistical Simon, participates in the process to vote or dispose of any such shares, they may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares. Each of Mr. Simon, Mr. Lenard and Mr. Mullett disclaims beneficial ownership of such shares. (8) Includes 2,488 shares held by the Deferred Plan for the benefit of Roger E. Payton and 87,500 shares of Common Stock issuable upon exercise of warrants which are currently exercisable. (9) Includes 59,938 shares of Common Stock issuable upon exercise of warrants which are currently exercisable. (10) Includes 17,500 shares of Common Stock issuable upon exercise of warrants which are currently exercisable. (11) See notes (6)-(9). 81 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 1996, Mr. Payton purchased a total of 22,500 shares of Common Stock for the aggregate purchase price of $450,000. In 1996 and 1997, Mr. Holter purchased a total of 10,000 shares of Common Stock for the aggregate purchase price of $250,000. In June 1997, Mr. Solis purchased a total of 7,000 shares of Common Stock for the aggregate purchase price of $210,000 and Mr. Tieman purchased a total of 1,000 shares of Common Stock for the aggregate purchase price of $30,000. The Company loaned money to Messrs. Payton and Solis to finance the purchase of certain shares of Common Stock by such individuals. Messrs. Payton and Solis executed promissory notes in the amounts of $150,240 and $157,500, respectively, in favor of the Company and pledged their shares of Common Stock as collateral for such promissory notes pursuant to a stock pledge agreement. The promissory notes executed by Messrs. Payton and Solis bear interest at rates of 8% and 10% per annum, respectively, and mature on April 30, 2000 and March 1, 1998, respectively. Mr. Solis repaid his note in full in January 1998. The aggregate principal amount outstanding as of March 1, 1998 on the promissory note executed by Mr. Payton was $150,240. In addition, pursuant to the terms of the promissory note, Mr. Payton will make additional mandatory prepayments on his promissory note equal to (i) 80% of the after-tax amount of any dividend or distribution made by the Company with respect to the shares of Common Stock subject to the pledge agreement as a mandatory prepayment of principal and interest on the promissory note executed by Mr. Payton and (ii) 75% of the after-tax amount of any cash bonus paid to him prior to maturity of the promissory note. The Company has waived the obligation for Mr. Payton to apply amounts received as a bonus for 1997 as a mandatory prepayment of his promissory note. On October 31, 1996, WESS and the Company entered into an executive management agreement (the "WESS Management Agreement") pursuant to which WESS agreed to provide executive management services to the Company, including consultation, advice and direct management assistance with respect to operations, strategic planning, financing and other aspects of the business of the Company. The WESS Management Agreement terminates on May 2, 2000, subject to earlier termination upon the occurrence of specified events, and provides that the Company will pay WESS a management fee equal to $350,000 per year so long as there is no continuing or uncured material event of default under the material terms of indebtedness of the Company. The Company also agreed to reimburse WESS for reasonable out-of-pocket expenses incurred by WESS or its personnel in connection with performance of services under the WESS Management Agreement. The Company paid WESS management fees in the aggregate amount of $350,000 for services provided by WESS in 1997. The Company has entered into a management agreement with the Oaktree Entities which has substantially the same terms as the WESS Management Agreement and paid Oaktree management fees in the aggregate amount of $57,000 for services provided to Oaktree in 1997. In addition, each of WESS and the Opportunities Fund received a $750,000 transaction fee upon consummation of the Company's 1996 acquisition of LEP and Matrix. The Company paid a total of $2.5 million in transaction fees to WESS and the Oaktree Entities in connection with the 1997 LIW Acquisition, the Old Notes Offering and the New Credit Facility. On September 29, 1995, WESS executed agreements (the "Myers Agreement") with W.E. Myers & Co. ("WEMCO"), a company formed by William E. Myers, Jr., a director of the Company ("Myers"), entitling WEMCO to receive a $50,000 per year retainer and cash and equity compensation upon the consummation, during the one year term of the Myers Agreement and for a period of two years following the termination thereof, of acquisitions of companies introduced by WEMCO to WESS or its affiliates. The amount of cash fees payable and warrants to purchase Common Stock issuable to WEMCO is based on the value of any consummated transaction. On February 29, 1996, WESS delivered notice to WEMCO terminating the Myers Agreement. In 1996, the Company paid WEMCO fees in the amount of $697,000, $574,000 and $300,000 in connection with the acquisition of Bekins, LEP and Matrix, respectively, in consideration for consulting services provided by WEMCO to the Company in connection with such acquisitions. The Company did not make any payments to WEMCO in 1997 under the Myers Agreement. 82 The Company and the holders of all of the Company's issued and outstanding shares of Common Stock and warrants to purchase Common Stock have executed an amended and restated Stockholders Agreement. Each of the parties to the Stockholders Agreement has agreed to vote the Company securities held by such party to elect a Board of Directors consisting of three directors nominated by Logistical Simon, two directors nominated by the Opportunities Fund, one director nominated by the Principal Fund, the Chief Executive Officer of the Company and William E. Myers, Jr. (the "Initial Voting Agreement"). The Initial Voting Agreement will terminate upon (i) consummation of an initial public offering by the Company, (ii) certain sales of Company securities by Logistical Simon, (iii) failure of the Oaktree Entities or Logistical Simon to purchase Common Stock under certain circumstances, (iv) the occurrence of a deadlock of the Board of Directors in the event of a default by the Company with respect to certain of its indebtedness or the acceleration of certain of the Company's indebtedness, a bankruptcy of the Company or the entry of a judgement exceeding a specified level against the Company and (v) May 2, 2002. Each of the parties to the Stockholders Agreement has agreed that, following the termination of the Initial Voting Agreement for any reason other than an initial public offering, it will vote its Company securities to elect a Board of Directors consisting of five directors. Under such circumstances, the number of directors that the Oaktree Entities and Logistical Simon may nominate will depend on the percentage of voting stock of the Company held by the Oaktree Entities. Prior to termination of the Initial Voting Agreement, the approval of six members of the Board of Directors is required for the Company to issue securities, borrow money, spend money, incur any obligation or take any action, except with respect to the daily affairs and operations of the Company arising in the ordinary course of business. In addition, prior to termination of the Initial Voting Agreement, the Executive Committee of the Board of Directors, which consists of one director nominated by the Oaktree Entities, one director nominated by Logistical Simon and the Chief Executive Officer of the Company, may take any action on behalf of the Board of Directors upon unanimous approval of the Executive Committee. Prior to the termination of the Initial Voting Agreement, the Audit Committee and Compensation Committee are to be comprised of one member designated by the Oaktree Entities and one member designated by WESS. Finally, prior to the termination of the Initial Voting Agreement, all actions taken by the holders of Common Stock require the approval of the holders of at least 80% of the issued and outstanding shares entitled to vote. The Stockholders Agreement also contains certain rights of first refusal with respect to transfers of Company securities, preemptive rights with respect to future issuances of Common Stock or securities convertible into Common Stock by the Company, and tag-along and drag-along rights. RECENT ACQUISITIONS ACQUISITION OF BEKINS On May 2, 1996 the Company acquired Bekins for an aggregate cash payment of $32.2 million and an aggregate of 45,560 shares of the Common Stock pursuant to an Agreement and Plan of Merger dated April 10, 1996. The Company financed the Bekins' acquisition with a portion of the $18.5 million in proceeds received by the Company from the issuance of an aggregate of 923,440 of shares of Common Stock and an aggregate of approximately $32.0 million of borrowings under the Company's $50.0 million credit facility. ACQUISITION OF LEP-USA AND LEP-CANADA On October 31, 1996, the Company acquired all of the issued and outstanding capital stock of LEP-USA, a subsidiary of LIW, for an aggregate purchase price of $4.5 million and LEP-Canada, a subsidiary of LIW, for an aggregate purchase price of $6.5 million. The purchase price for the acquisition of LEP-USA and LEP-Canada was financed with borrowings made pursuant to a $110.0 million credit facility syndicated by the banks acting as agents under Bekins' previous credit facility (the "Loan Agreement"). The Company's acquisitions of LEP-USA and LEP-Canada were the initial steps in the Company's acquisition of LIW. In August 1996, the Company advanced LIW $1.0 million in the form of a demand note 83 (the "LIW Note"). In exchange for extending such advance, LIW issued a warrant to the Company to purchase 420,000 ordinary shares, par value L.01 per share of LIW capital stock ("Ordinary Shares"). In addition, concurrently with the Company's acquisition of LEP-USA and LEP-Canada, (i) the Company released LIW from its obligations pursuant to the LIW Note, (ii) LIW cancelled the warrant to purchase Ordinary Shares that had been previously issued to the Company, (iii) LIW issued 100 Ordinary Shares to the Company; (iv) LIW issued a warrant to the Company to purchase 419,900 Ordinary Shares (the "LIW Warrant"), and (v) certain holders of Ordinary Shares and warrants to purchase Ordinary Shares entered into stockholder agreements and option agreements relating to the transfer of such securities for the three year period ending on October 31, 1999. As a result of such transactions, the Company held a 33.3% interest in LIW's fully-diluted equity and appointed two of its executives to serve as members of the LIW Board of Directors. In connection with the acquisition of LEP-USA and LEP-Canada, the Company entered into two operational working agreements providing that, for a term of seven years, each of LEP-USA, LEP-Canada and LIW will operate their respective freight forwarding businesses as part of global network with shared information systems platforms based on LIW's FAST 400 system software. ACQUISITION OF MATRIX On November 7, 1996, the Company purchased all of the issued and outstanding capital stock of Matrix for the aggregate consideration of approximately $19.2 million in cash and 96,000 shares of Common Stock. In connection with the acquisition of Matrix, the Company entered into a stock purchase agreement with the minority holder of equity securities of certain subsidiaries of Matrix. The aggregate consideration paid by the Company to acquire the minority interests of the Matrix subsidiaries was $754,988 in cash and 4,000 shares of Common Stock. The Company financed the acquisition of Matrix with borrowings made pursuant to the Loan Agreement and the proceeds from the sale of equity securities to the Principal Fund, the Opportunities Fund, Logistical Simon and an affiliate of one of the Company's lenders. See "Certain Relationships and Related Transactions." In connection with the acquisition, the Company entered into employment agreements with each of the four selling stockholders of Matrix. On December 31, 1997, employment agreements with three of the Matrix selling stockholders were terminated and replaced with new employment agreements (the "New Agreements") and the employment agreement with one of the Matrix selling stockholders was terminated pursuant to a Separation Agreement and Mutual Release (the "Separation Agreement"). The Separation Agreement provides for the resignation and termination of the executive's employment with Matrix as of December 31, 1997 and the mutual release of all claims, including claims under the terminated employment agreement and claims arising from the Company's acquisition of Matrix. The Separation Agreement requires the Company to pay the terminated executive an aggregate of $1,000,000 in quarterly installments beginning in January 1998 and ending in July 2000 so long as the executive does not breach certain non-competition and non-solicitation provisions of the Separation Agreement. All shares of Common Stock owned by the terminated executive are subject to put rights of the executive at a purchase price equal to the fair market value of the shares of Common Stock; provided, however, that if the executive exercises his put right within 30 days of June 30, 2000 and is not in material breach of certain non-competition and non-solicitation provisions of the Separation Agreement, the purchase price will be equal to the higher of fair market value or $75.00 per share. In addition, shares of Common Stock owned by the terminated executive are subject to call rights of the Company at a purchase price equal to the fair market value of the shares of Common Stock. The Company's call option is exercisable beginning on the earlier of December 31, 2001 and the date on which the terminated executive materially breaches the Separation Agreement. The put and call options expire upon the first to occur of (i) a public offering of Common Stock with proceeds to the Company or its stockholders in excess of $30,000,000, (ii) listing of the Common Stock on the Nasdaq National Market System or on the New York or American Stock Exchange and (iii) an exercise of the put or call option. 84 Each New Agreement terminates on December 31, 2001 and provides that the Company will pay the Matrix executive who is a party to such agreement a base salary of $347,725 per year. Pursuant to the terms of the New Agreements, the Company agreed to issue warrants to purchase 4,800 shares of Common Stock to each such executive. Such warrants have an exercise price of $60.00 per share, expire on November 7, 2007 and vest in equal installments on April 1, 1999, 2000 and 2001 if the Company achieves specified EBITDA targets for 1998, 1999 and 2000, respectively. In addition, each New Agreement provides that the Company will issue 14,400 shares of Common Stock to the Matrix executive who is a party to such agreement upon the first to occur of (i) such executive's employment being terminated pursuant to a constructive discharge or for reasons other than a voluntary resignation, termination for cause or death or disability of such executive and (ii) a registered public offering of the Company's Common Stock with aggregate offering proceeds to the Company or any of its stockholders in excess of $20,000,000 and which results in the Common Stock being listed on the Nasdaq Stock Market or the New York or American Stock Exchange. The New Agreements provide that the executives will be elected to the board of directors of Matrix. Pursuant to the terms of the New Agreements, shares of Common Stock issued to each of the three continuing executives in consideration for the acquisition by the Company of the Matrix capital stock and shares of Common Stock issued to each of the three continuing Matrix executives are subject to certain put rights of such executive in the event of a termination of such executive's employment by Matrix under certain circumstances. The purchase price for such put and call options is subject to and based upon the circumstances under which such executive's employment was terminated. ACQUISITION OF LIW In the period from May 1997 through September 1997, the Company entered into option agreements (the "LIW Options") with all of the holders of Ordinary Shares and warrants to purchase Ordinary Shares of LIW. The LIW Options provided for the future acquisition of all of LIW's outstanding Ordinary Shares (other than shares previously acquired by the Company in October 1996). On September 30, 1997, the Company exercised four of the LIW Options for consideration consisting of L4,500 ($7,539) and warrants to purchase an aggregate of 19,045 shares of Common Stock at an initial exercise price of $45.00 per share (the "Company Warrants"). The Company Warrants are exercisable prior to December 31, 2007. Additionally, on September 30, 1997, the Company exercised the LIW Warrant for L4,199 ($7,036) and exercised warrants to purchase 306,000 Ordinary Shares of LIW for aggregate consideration of L253,980 ($418,614). As a result of the foregoing transactions, the Company owned 726,120 Ordinary Shares, or 75.2% of LIW's issued and outstanding Ordinary Shares as of September 30, 1997 (the "LIW Acquisition"). On October 1, 1997, certain employees of LIW returned their warrants to purchase Ordinary Shares to LIW for cancellation and entered into employment agreements with LIW. In October 1997, the Company purchased warrants to purchase Ordinary Shares held by a former Company employee for $35,000 pursuant to the terms of a pre-existing agreement. In December 1997, the Company exercised all remaining LIW Options for an aggregate exercise price of L462,467 ($763,533). Upon exercise of such remaining LIW Options, the Company became the holder of 100% of LIW's issued and outstanding voting Ordinary Shares. In connection with the LIW Acquisition, the Company entered into an option agreement to acquire all 50,000 of LIW's issued and outstanding LIW preference shares (the "Preference Shares") for an aggregate purchase price of L5.3 million ($8.8 million). The Company exercised said option in December 1997. Upon exercise of the Preference Shares option in December 1997, LIW became a wholly-owned subsidiary of the Company. The LIW Options contain limited representations and warranties and only three of the LIW Options relating to Ordinary Shares entitle the Company to receive indemnification for breaches of representations, warranties and covenants of the transferring holders. In addition, the three LIW Options that contain indemnification provisions limit the indemnity that the Company may receive from the transferring holder to $400,000 and provide that the Company may not recover under the indemnification provisions 85 unless the losses suffered by the Company exceed $50,000 in the aggregate. Such LIW Options contain similar provisions relating to the indemnity obligations of the Company. The options relating to the acquisition of the Preference Shares do not contain any provisions relating to indemnification obligations of the Company or the transferring holders of the Preference Shares. In connection with the LIW Acquisition, LIW entered into employment agreements with three of its executives, who were also selling stockholders. The agreements have terms ranging from three to five years and provide for salaries ranging from L125,000 ($208,000) to L200,000 ($333,000) per year and benefits consistent with such executives' historic employment arrangements with LIW. Certain of these agreements provide for annual performance based cash bonus compensation of up to 70% of such executive's annual salary payable upon satisfaction of certain financial targets and other clearly defined management objectives to be agreed upon by LIW and such executive. The executives are entitled to receive minimum bonuses aggregating approximately $2.6 million over the terms of such agreements. Subject to the continuing employment of the relevant executive, such bonuses may be paid in specified installments over the term of such agreements. The employment agreements provide that, under certain circumstances, bonuses must be refunded to the Company upon termination of employment or other events. Each employment agreement requires the executive to be bound by noncompetition and nonsolicitation provisions similar to those of other executives of the Company. In connection with the execution of the LIW Options, the Company issued and delivered warrants (the "Performance Warrants") to purchase a total of 73,000 shares of Common Stock at an exercise price of $45.00 per share to entities (the "Performance Warrant Holders") related to selling stockholders who are also executives of LIW. The shares of Common Stock that may be purchased by the Performance Warrant Holders pursuant to the terms of the Performance Warrants vest in annual installments over periods of three to five years based upon achievement of specified annual consolidated EBITDA targets by certain subsidiaries of LIW. The vesting of shares of Common Stock subject to each of the Performance Warrants is subject to acceleration in the event of a change of control of the Company or termination of employment of the relevant executive by the Company without cause or as a result of constructive discharge. The Company has agreed, subject to limitations contained in the Company's debt and equity financing arrangements, to purchase the Performance Warrants and shares of Common Stock issued upon the exercise of the Performance Warrants in the event of a termination of the relevant executive dependent upon the circumstances giving rise to such termination or, in certain circumstances, if the Company has not completed an initial public offering of its Common Stock prior to specified dates. NEW CREDIT FACILITY GENERAL In connection with the Old Notes Offering, certain of the Company's direct subsidiaries (the "Borrowers"), the Company and certain other direct and indirect subsidiaries of the Company (including LEP-Canada), as guarantors, and LEP UK, the Company's indirect U.K. subsidiary, as a foreign borrower, entered into the New Credit Facility with ING (U.S.) Capital Corporation ("ING"), as agent. The New Credit Facility consists of a revolving credit facility in an aggregate principal amount of $100.0 million (the "Loans"). The New Credit Facility includes a $60.0 million sub-limit for letters of credit, a $30.0 million sub-limit for British Pounds Sterling borrowings by LEP UK and a $5.0 million sub-limit for the issuance of letters of credit in Canadian Dollars. The obligations of the Borrowers under the New Credit Facility are joint and several. The obligations of LEP UK under the New Credit Facility are several to LEP UK. The Loans will mature in October 2002. Indebtedness under the New Credit Facility, including the Loans to LEP UK, is secured by a first priority security interest upon all of the Company's, the Borrowers' and their domestic subsidiaries' accounts receivable, 100% of the stock of each domestic active subsidiary of the Company, including LEP-Canada (except in the case of foreign subsidiaries, in which case only 66% of the stock of such foreign 86 subsidiaries will be pledged), and certain intercompany obligations. In addition, LEP UK secured its borrowings under the New Credit Facility by a first priority security interest upon all of its accounts receivable. REVOLVING CREDIT FACILITY The New Credit Facility consists of a revolving credit facility in an aggregate principal amount of $100.0 million. The Borrowers are entitled to draw amounts under the New Credit Facility, subject to availability pursuant to a borrowing base formula based upon eligible accounts receivable, in order to meet the Company's working capital requirements and for general corporate purposes. Loans are available to LEP UK upon the release of certain liens and claims of the holder of the Preference Share against the assets of LEP UK and its subsidiaries. GUARANTIES The loans are guaranteed by the Company. In addition, certain indirect domestic subsidiaries of the Company, guaranteed the Loans, including the Loans to LEP UK. LEP UK is only responsible for its own obligations under the New Credit Facility. The direct subsidiary that holds the stock of LIW pledged 66% of that stock. INTEREST RATES At the Company's option, interest will accrue on the Loans with reference to either the average of prime commercial lending (or equivalent) rates publicly announced by certain banks (the "Prime Rate") or the offered rate for deposits in dollars in the London interbank eurodollar market ("LIBOR"), plus the applicable interest margin. The Prime Rate is defined as, on any date, the arithmetic average of the prime rates in effect from time to time as announced by the Chase Manhattan Bank, Citibank and Morgan Guaranty Trust Company. LIBOR is defined as the London Interbank Offered Rate, as adjusted to include any reserve requirement of the Lenders. The applicable interest margin will be 0.5% until March 31, 1998 for Prime Rate loans and 2.0% for LIBOR loans. Between April 1, 1998 and October 27, 1998, the applicable interest margin will be the lower of (i) the foregoing margins or (ii) a percentage which will fluctuate between 0.0% and 1.0% for Prime Rate loans and between 1.5% and 2.5% for LIBOR loans, based on the ratio of the Company's funded indebtedness to EBITDA (as defined in the New Credit Facility) (the "Floating Margin"). From October 28, 1998, the Floating Margin will determine the applicable interest margin. MANDATORY AND OPTIONAL PREPAYMENT With the exception of mandatory prepayments in connection with certain change of control events and certain asset dispositions involving a borrowing base reduction, the New Credit Facility does not contain any mandatory prepayment provisions as long as the aggregate amount of the Loans does not exceed the level of borrowing base availability or the commitments under the New Credit Facility. The New Credit Facility provides that the Company may prepay Loans in whole or in part without penalty, subject to reimbursement of the lender's breakage and redeployment costs in the case of prepayment of LIBOR loans. The definition of Change of Control in the New Credit Facility in certain circumstances is be more restrictive than that contained in the Indenture. COVENANTS The New Credit Facility contains certain covenants and other requirements of the Company and its subsidiaries. In general, the affirmative covenants provide for mandatory reporting by the Company of financial and other information to the agent and notice by the Company to the agent upon the occurrence of certain events, maintenance of its properties and compliance with regulation. 87 The New Credit Facility also contains certain negative covenants and restrictions on actions by the Company including, without limitation, restrictions on indebtedness, liens, guarantee obligations, mergers, creation or dissolution of subsidiaries, asset dispositions not in the ordinary course of business, investments, acquisitions, loans, advances, dividends and other restricted junior payments, transactions with affiliates, sale and leaseback transactions, prepayment of or amendments to junior obligations, entering other lines of business and amendments of other indebtedness. The New Credit Facility requires the Company to meet certain financial covenants including minimum EBITDA (as defined in the New Credit Facility) and, in certain circumstances, interest coverage tests. EVENTS OF DEFAULT The New Credit Facility specifies certain customary events of default including, without limitation, nonpayment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties in any material respect, cross default to certain other indebtedness and agreements, bankruptcy and insolvency events, material judgments and liabilities, material adverse pension plan events and unenforceability of certain documents under the New Credit Facility, determination that any subordinated obligation is not subordinated and change of control. The events of default under the New Credit Facility are substantially similar to the events of default under the Indenture except for the following material differences: (i) the Company's failure to pay other indebtedness or judgments entered against the Company, including failure to pay amounts due with respect to the New Notes, trigger a cross-default under the New Credit Facility at lower dollar amounts than in the Indenture and without the requirement of actual acceleration by the holders of such indebtedness; (ii) the creation of liens on or failure of any security interest in collateral securing the New Credit Facility trigger a default under the New Credit Facility and (iii) the New Credit Facility generally has shorter grace periods and lower default thresholds. The description of the New Credit Facility set forth above is qualified in its entirety to the complete text of the documents entered into in connection therewith. 88 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER; REGISTRATION RIGHTS The Old Notes were sold by the Company on October 29, 1997 (the "Closing Date") to Credit Suisse First Boston Corporation, BT Alex. Brown Incorporated, Smith Barney Inc. and ING Baring (U.S.) Securities, Inc. (collectively, the "Initial Purchasers"). As a condition to the sale of the Old Notes, the Company and the Initial Purchasers entered into the Registration Rights Agreement on the Closing Date. The Registration Statement, of which this Prospectus is part, is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement summarized below. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." The Company has agreed pursuant to the Registration Rights Agreement with the Initial Purchasers, for the benefit of the Holders, that the Company will, at its cost, (i) within 60 days after the date of original issue of the Old Notes, file the Exchange Offer Registration Statement with the SEC with respect to a registered exchange offer (the "Registered Exchange Offer") to exchange the Old Notes for the New Notes having terms substantially identical in all material respects to the Old Notes (except that the New Notes will not contain terms with respect to transfer restrictions) and (ii) use all reasonable efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act within 195 days after the date of original issue of the Old Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Company will offer the New Notes in exchange for surrender of the Old Notes. The Registration Rights Agreement provides that the Company is required to keep the Registered Exchange Offer open for not less than 30 days (or longer if required by applicable law) after the date notice of the Registered Exchange Offer is mailed to the Holders. For each Old Note surrendered to the Company pursuant to the Registered Exchange Offer, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. Interest on each New Note will accrue from the last interest payment date on which interest was paid on the Old Note surrendered in exchange therefor or, if no interest has been paid on such Old Note, from the date of its original issue. Under existing SEC interpretations, the New Notes will be freely transferable by Holders other than affiliates of the Company after the Registered Exchange Offer without further registration under the Securities Act if the Holder of the New Notes represents that it acquired the New Notes in the ordinary course of its business, that it has no arrangement or understanding with any person to participate in the distribution of the New Notes and that it is not an affiliate of the Company, as such terms are interpreted by the SEC; PROVIDED, HOWEVER, that broker-dealers ("Participating Broker-Dealers") receiving New Notes in the Registered Exchange Offer will have a prospectus delivery requirement with respect to resales of such New Notes. Under similar SEC interpretations, Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to New Notes (other than a resale of an unsold allotment from the original sale of the Old Notes) with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Rights Agreement the Company is required to allow Participating Broker-Dealers and other persons, if any, with similar prospectus delivery requirements to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of such New Notes. A Holder (other than certain specified holders) who wishes to exchange such Old Notes for New Notes in the Registered Exchange Offer will be required to represent, among other things, that any New Notes to be received by it will be acquired in the ordinary course of its business, that at the time of the commencement of the Registered Exchange Offer it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes and that it is not an "affiliate" of the Company, as defined in Rule 405 under the Securities Act, or if it is an affiliate, 89 that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. In the event that (i) applicable law or interpretations of the staff of the SEC do not permit the Company to effect such a Registered Exchange Offer, (ii) if for any other reason the Registered Exchange Offer is not consummated within 230 days of the date of the original issue of the Old Notes, or (iii) any Holder notifies the Company within 30 days after commencement of the Registered Exchange Offer that such holder (x) is prohibited by applicable law or SEC policy from participating in the Registered Exchange Offer, (y) may not resell New Notes acquired by it to the public without delivery of a prospectus and that the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (z) is a broker-dealer and holds Old Notes acquired directly from the Company or an affiliate of the Company, then in lieu of conducting the Registered Exchange Offer, the Company will, at its cost, (a) as promptly as practicable, file a Shelf Registration Statement covering resales of the Old Notes or the New Notes, as the case may be, (b) use all reasonable efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act and (c) keep the Shelf Registration Statement effective until two years from the date of its effectiveness or such shorter period that will terminate when all of the Old Notes covered by the Shelf Registration Statement have been disposed of pursuant to the Shelf Registration Statement. The Company is required to in the event a Shelf Registration Statement is filed, among other things, provide to each Holder for whom such Shelf Registration Statement was filed copies of the prospectus which is a part of the Shelf Registration Statement, notify each such Holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the Old Notes or the New Notes, as the case may be. A Holder selling such Old Notes or New Notes pursuant to the Shelf Registration Statement generally would be required to be named as a selling security Holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such Holder (including certain indemnification obligations). In addition, each Holder of the Old Notes or New Notes to be registered under the Shelf Registration Statement is required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time period set forth in the Registration Rights Agreement in order to have such Holder's Old Notes or New Notes included in the Shelf Registration Statement and to benefit from the provisions regarding additional interest set forth in the following paragraph. If (i) by December 28, 1997, the Exchange Offer Registration Statement has not been filed with the SEC; (ii) by June 16, 1998, neither the Registered Exchange Offer is consummated nor, within the time period specified in the Registration Rights Agreement, the Shelf Registration Statement is declared effective; or (iii) after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Notes or New Notes in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (i) through (iii), a "Registration Default"), additional interest ("Special Interest") will accrue on the Old Notes and the New Notes from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Special Interest will accrue at a rate of 0.25% per annum during the 90-day period following the occurrence of any Registration Default and shall increase by 0.25% per annum at the beginning of each subsequent 90-day period, but in no event shall such rate exceed 1.0% per annum. Special Interest is payable in addition to any other interest payable from time to time with respect to the Old Notes and the New Notes. If the Company effects the Registered Exchange Offer, it is entitled to close the Registered Exchange Offer 30 days after the commencement thereof provided that it has accepted all Old Notes theretofore validly tendered in accordance with the terms of the Registered Exchange Offer. 90 The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which is available upon request to the Company. TRANSFER RESTRICTED SECURITIES For purposes of the foregoing, "Transfer Restricted Securities" means each Old Note until (i) the date on which such Old Note has been exchanged by a person other than a broker-dealer for a New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note, the date on which such New Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Old Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Old Note may be distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act or another applicable resale exemption under the Securities Act. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all the Old Notes validly tendered and not withdrawn prior to the Expiration Date. As of the date of this Prospectus, $110.0 million aggregate principal amount of the Old Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about [ ], 1998, to all Noteholders known to the Company. The Company's obligation to accept the Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth under "--Certain Conditions to the Exchange Offer" below. The Company will issue $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Noteholders may tender some or all of their Old Notes pursuant to the Exchange Offer. See "--Consequences of Failure to Exchange." However, the Old Notes may be tendered only in integral multiples of $1,000. The New Notes will evidence the same debt as the Old Notes for which they are exchanged, and are entitled to the benefits of the Indenture. The form and terms of the New Notes are the same as the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof. Noteholders do not have any appraisal or dissenters' rights under the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of Regulation 14E under the Exchange Act. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Noteholders for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, such unaccepted tenders of Old Notes will be returned, without expense to the Noteholder thereof, as promptly as practicable after the Expiration Date. Noteholders whose Old Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the Noteholders will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Noteholders to provide for the registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be 91 adversely affected. See "Risk Factors--Restrictions Upon Transfer of and Limited Trading Market for Old Notes." Noteholders who tender Old Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offer. See "--Fees and Expenses; Solicitation of Tenders." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time on May 30, 1998, unless the Company extends the Exchange Offer, in which case the term "Expiration Date" shall mean the date and time to which the Exchange Offer is extended. June 16, 1998 is the latest date through which the Exchange Offer may be extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice, mail to the registered Noteholders an announcement thereof and will make a release to the Dow Jones News Services each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right at its sole discretion (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) to terminate the Exchange Offer and not accept the Old Notes not previously accepted if any of the conditions set forth below under "--Certain Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (iv) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the Noteholders. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a Prospectus supplement that will be distributed to all Noteholders, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to Noteholders, if the Exchange Offer would otherwise expire during such five to ten business day period. During any extension of the Expiration Date, all Old Notes previously tendered will remain subject to the Exchange Offer and may be accepted for exchange by the Company. The Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. INTEREST ON THE NEW NOTES Interest accrues on the New Notes at the rate of 9 3/4% per annum and will be payable in cash semiannually in arrears on each April 1 and October 15, commencing April 15, 1998. No interest will be payable on the Old Notes on the date of the exchange for the New Notes and therefore no interest will be paid thereon to the Noteholders at such time. PROCEDURES FOR TENDERING THE OLD NOTES The tender to the Company of the Old Notes by a beneficial owner thereof as set forth below and the acceptance by the Company thereof will constitute a binding agreement between the tendering Noteholder and the Company upon the terms and subject to the conditions set forth in this Prospectus and the Letter of Transmittal. Except as set forth below, a Noteholder who wishes to tender the Old Notes for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, (i) certificates for such Old Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes into the 92 Exchange Agent's account at the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the Noteholder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE NOTEHOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant thereto are tendered (i) by a registered Noteholder who has not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States or otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Old Notes are registered in the name of a person other than the person signing the Letter of Transmittal, the Old Notes surrendered for exchange must be endorsed by, or be accompanied by, a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered Noteholder with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal is signed by a person or persons other than the registered Noteholder or Noteholders, such Old Notes must be endorsed by the registered Noteholder with signature guaranteed by an Eligible Institution or accompanied by appropriate powers of attorney with signature guaranteed by an Eligible Institution, in either case signed exactly as the name or names of the registered Noteholder or Noteholders that appear on the Old Notes. If the Letter of Transmittal or any Old Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company of its authority so to act must be submitted with the Letter of Transmittal. By crediting Old Notes to the Exchange Agent's Account at DTC in accordance with DTC's Automated Tender Offer Program ("ATOP") and by complying with applicable ATOP procedures with respect to the Exchange Offer, including transmitting an Agent's Message to the Exchange Agent in which the holder of Old Notes acknowledges and agrees to be bound by the terms of the Letter of Transmittal, the participant in ATOP confirms on behalf of itself and the beneficial owners as if it had completed the information required therein and executed and transmitted the Letter of Transmittal to the Exchange Agent. The term "Agent's Message" means a message transmitted by DTC to and received by the Exchange Agent and forming a part of a book-entry confirmation, which states that DTC has received an express acknowledgment from the tendering participant, which acknowledgment of Transmittal (including the representations contained therein) and that the Company may enforce the Letter of Transmittal against such participant. By tendering, each Noteholder will represent to the Company that, among other things, (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the Noteholder, (ii) neither the Noteholder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes, (iii) if the Noteholder is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for the Old Notes, neither the Noteholder nor any such other person is engaged in or intends to participate in the distribution of such New Notes and 93 (iv) neither the Noteholder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. If the tendering Noteholder is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. DELIVERY OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY OR THE COMPANY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of the Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all tenders of any particular Old Notes not properly tendered or to not accept any particular Old Notes which acceptance might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right in its sole discretion to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any Noteholder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the Letter of Transmittal and instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with the tenders of Old Notes for exchange must be cured within such reasonable period of time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Old Notes for exchange, nor shall any of them incur any liability for failure to give such notification. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." ACCEPTANCE OF THE OLD NOTES FOR EXCHANGE; DELIVERY OF THE NEW NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Old Notes properly tendered and will issue the New Notes promptly after acceptance of the Old Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange Offer, the Company shall be deemed to have accepted properly tendered Old Notes for exchange when, and if the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuance of the New Notes for the Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if certificates representing the Old Notes are submitted for a greater principal amount than the Noteholder desires to exchange, such unaccepted or non-exchanged Old Notes will be returned without expense to the tendering Noteholder thereof (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. 94 BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer promptly after the date of this Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of the Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP") procedures for transfer. However, the exchange for the Old Notes so tendered will only be made after timely confirmation of such book-entry transfer of Old Notes into the Exchange Agent's account, and timely receipt by the Exchange Agent of an Agent's Message (as such term is defined in the next sentence) and any other documents required by the Letter of Transmittal on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. The term "Agent's Message" means a message, transmitted by the Book-Entry Transfer Facility and received by the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgement from a participant tendering Old Notes that are the subject of such Book-Entry Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal, and that the Company may enforce such agreement against such participant. GUARANTEED DELIVERY PROCEDURES If a registered Noteholder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available, or time will not permit such Noteholder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the Noteholder and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates of all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the principal amount of such Old Notes), and (where certificates for Old Notes have been transmitted) specify the name in which such Old Notes are registered, if different from that of the withdrawing Noteholder. If certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing Noteholder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such Noteholder is an Eligible Institution. If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any note of withdrawal must specify the name and number of the account at the Book- 95 Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Noteholder thereof without cost to such Noteholder (or, in the case of Old Notes tendered by book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "Procedures for Tendering the Old Notes" above at any time on or prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange Offer, if at any time before the acceptance of such Old Notes for exchange or the exchange of the New Notes for such Old Notes, there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, or assessing or seeking any damages as a result thereof, or (ii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Old Notes pursuant to the Exchange Offer; or any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clause (i) or (ii) above or, in the sole judgment of the Company, might result in the holders of New Notes having obligations with respect to resales and transfers of New Notes which exceed those described herein, or would otherwise make it inadvisable to proceed with the Exchange Offer. If the Company determines in good faith that any of the conditions are not met, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to exchanging Noteholders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Noteholders to withdraw such Old Notes (see "--Withdrawal Rights") or (iii) waive certain of such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn or revoked. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a Prospectus supplement that will be distributed to all Noteholders. Noteholders have certain rights and remedies against the Company under the Registration Rights Agreement, including liquidated damages of up to 1.0% per annum, should the Company fail to consummate the Exchange Offer within a certain period of time. The foregoing conditions are for the benefit of the Company and may be asserted by the Company in good faith regardless of the circumstances giving rise to such condition or may be waived by the Company in whole or in part at any time and from time to time in its discretion. The failure by the Company at any time to exercise the foregoing rights shall not be deemed a wavier of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 96 EXCHANGE AGENT U.S. Bank Trust (formerly First Trust National Association) has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: BY REGISTERED OR CERTIFIED MAIL; BY OVERNIGHT COURIER; OR BY HAND. U.S. Bank Trust 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Specialized Finance Department Telephone: (612) 244-1215 Facsimile: (612) 244-1537 DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. FEES AND EXPENSES; SOLICITATION OF TENDERS The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company and are estimated in the aggregate to be $450,000 which includes fees and expenses of the Exchange Agent and Trustee and accounting and legal fees. The Company will pay all transfer taxes, if any, applicable to the exchange of the Old Notes pursuant to the Exchange Offer. If, however, certificates representing the New Notes or the Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Noteholders tendered, or if a transfer tax is imposed for any reason other than the exchange of the Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering Noteholder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted to the Exchange Agent, the amount of such transfer taxes will be billed directly to such tendering Noteholder. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) Noteholders in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. 97 ACCOUNTING TREATMENT The New Notes will be recorded by the Company at the same carrying value as the Old Notes, which is face value, as recorded in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The costs of the Exchange Offer will be expensed over the term of the New Notes. CONSEQUENCES OF FAILURE TO EXCHANGE Noteholders who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not intend to register the Old Notes under the Securities Act. The Company believes that, based upon interpretations contained in no-action letters issued to third parties by the staff of the Commission, the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold or otherwise transferred by Noteholders thereof (other than any such Noteholder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Noteholders' business and such Noteholders have no arrangement with any person to participate in the distribution of such Old Notes, and provided, further, that each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." If any Noteholder (other than a broker-dealer described in the preceding sentence) has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such Noteholder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and is complied with. DESCRIPTION OF THE NEW NOTES GENERAL The Old Notes were issued and the New Notes are to be issued under the Indenture, dated as of October 29, 1997 (the "Indenture"), among the Company, the Subsidiary Guarantors and U.S. Bank Trust (formerly First Trust National Association), as Trustee (the "Trustee"). The form and terms of the New Notes will be substantially identical to those of the Old Notes except that the New Notes will have been registered under the Securities Act and hence are not subject to certain transfer restrictions, registration rights and related liquidated damages applicable to the Old Notes. The Old Notes and the New Notes are referred to collectively as the "Notes." The following is a summary of certain provisions of the Indenture and the New Notes, a copy of which Indenture and the form of New Notes is available upon request to the Company. The following summary of certain provisions of the Indenture and the New Notes, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture and the New Notes, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. As used in this "Description of the New Notes" section, references to the "Company" include only International Logistics Limited and not its Subsidiaries. Principal of, premium, if any, and interest on the New Notes will be payable, and the New Notes may be exchanged or transferred, at the office or agency of the Company in the Borough of Manhattan, The 98 City of New York, which initially shall be the corporate trust office of the Trustee's agent, at First Trust New York, 100 Wall Street, 20th Floor, New York, New York 10005, except that, at the option of the Company, payment of interest may be made by check mailed to the address of the Holders as such address appears in the Note register. The New Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. See "--Book Entry, Delivery and Form." No service charge shall be made for any registration or exchange of the New Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. TERMS OF THE NEW NOTES The New Notes will be unsecured senior obligations of the Company, limited to $110.0 million aggregate principal amount, and will mature on October 15, 2007. The New Notes will bear interest at the rate per annum shown on the cover page hereof from October 29, 1997, or from the most recent date to which interest has been paid or provided for, payable semiannually to Holders of record at the close of business on the April 1 or October 1 immediately preceding the interest payment date on April 15 and October 15 of each year, commencing April 15, 1998. The Company will pay interest on overdue principal and, to the extent permitted by applicable law, on overdue installments of interest borne by the New Notes. Interest on the New Notes will be computed on the basis of a 360-day year of twelve 30-day months. OPTIONAL REDEMPTION Except as set forth in the following paragraph, the New Notes will not be redeemable at the option of the Company prior to October 15, 2002. Thereafter, the New Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on October 15 of the years set forth below:
REDEMPTION PERIOD PRICE - --------------------------------------------------------------------------------- ----------- 2002............................................................................. 104.875% 2003............................................................................. 103.250 2004............................................................................. 101.625 2005 and thereafter.............................................................. 100.000
In addition, at any time and from time to time prior to October 15, 2000, the Company may redeem in the aggregate up to 35% of the original principal amount of the New Notes with the proceeds of one or more Public Equity Offerings, at a redemption price (expressed as a percentage of principal amount) of 109.75% plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); PROVIDED, HOWEVER, that at least $71.5 million aggregate principal amount of the Notes must remain outstanding after each such redemption. In the case of any partial redemption, selection of the New Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Note of $1,000 in original principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal 99 to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. SUBSIDIARY GUARANTIES Each of the Company's Restricted Subsidiaries that is organized and existing under the laws of any State of the United States or the District of Columbia and that is an obligor or guarantor with respect to the New Credit Facility will irrevocably and unconditionally Guarantee, as a primary obligor and not merely as a surety, on an unsecured senior basis the performance and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Company under the Indenture and the New Notes, whether for payment of principal of or interest on the New Notes, expenses, indemnification or otherwise (all such obligations guaranteed by the Subsidiary Guarantors being herein called the "Guaranteed Obligations"). The Subsidiary Guarantors will agree to pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the Trustee or the Holders in enforcing any rights under the Subsidiary Guaranties. Each Subsidiary Guaranty will be limited in amount to an amount not to exceed the maximum amount that can be Guaranteed by the applicable Subsidiary Guarantor without rendering such Subsidiary Guaranty voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. After the Issue Date, the Company will cause each Restricted Subsidiary that is organized and existing under the laws of any State of the United States or the District of Columbia and that becomes an obligor or guarantor with respect to any of the obligations under one or more of the Bank Credit Agreements to execute and deliver to the Trustee a supplemental indenture pursuant to which such Restricted Subsidiary will Guarantee on an unsecured senior basis the payment of the New Notes. See "Certain Covenants--Future Subsidiary Guarantors" below. Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in full force and effect until payment in full of all the Guaranteed Obligations, (b) be binding upon each Subsidiary Guarantor and (c) inure to the benefit of and be enforceable by the Trustee, the Holders and the successors, transferees and assigns thereof. Each Subsidiary Guarantor may consolidate with, or merge into, or sell its assets to the Company or another Subsidiary Guarantor that is a Wholly Owned Subsidiary of the Company without limitation, or with other Persons upon the terms and conditions set forth in the Indenture. See "--Certain Covenants--Merger and Consolidation." A Subsidiary Guaranty will be released upon the sale of all the Capital Stock, or all or substantially all of the assets, of the applicable Subsidiary Guarantor if such sale is made in compliance with the Indenture. RANKING The indebtedness evidenced by the New Notes and the Subsidiary Guaranties will be senior unsecured obligations of the Company and the Subsidiary Guarantors, respectively, ranking PARI PASSU with all other senior unsecured Indebtedness of the Company and the Subsidiary Guarantors, respectively, and senior to all Subordinated Obligations. The New Notes and the Subsidiary Guaranties will also be effectively subordinated to all Secured Indebtedness of the Company and the Subsidiary Guarantors, respectively, to the extent of the value of the assets securing such Indebtedness and to all Indebtedness and other obligations (including trade payables) of the Company's Subsidiaries other than the Subsidiary Guarantors. As of December 31, 1997, the Company had $0.8 million of outstanding Secured Indebtedness, the Subsidiary Guarantors had approximately $0.4 million of outstanding Secured Indebtedness and the Company's Subsidiaries other than the Subsidiary Guarantors had approximately $100.1 million of Indebtedness and other obligations (including trade payables) outstanding. Although the Indenture contains limitations on the amount of additional Indebtedness that the Company and its Restricted Subsidiaries may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Secured Indebtedness. See "--Certain Covenants--Limitation on Indebtedness." 100 BOOK-ENTRY, DELIVERY AND FORM The New Notes sold will be issued in the form of a Global Note. The Global Note will be deposited with, or on behalf of, the Depository and registered in the name of the Depository or its nominee. Except as set forth below, the Global Note may be transferred, in whole and not in part, only to the Depository or another nominee of the Depository. Investors may hold their beneficial interests in the Global Note directly through the Depository if they have an account with the Depository or indirectly through organizations which have accounts with the Depository. New Notes that are issued as described below under "Certificated New Notes" will be issued in definitive certificated form. Upon the transfer of a New Note in definitive certificated form to a QIB, such New Note will, unless the Global Note has previously been exchanged for New Notes in definitive certificated form, be exchanged for an interest in the Global Note representing the principal amount of New Notes being transferred. The Depository has advised the Company as follows: The Depository is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and "a clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depository was created to hold securities of institutions that have accounts with the Depository ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers (which may include the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to the Depository's book-entry system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, whether directly or indirectly. Upon the issuance of the Global Note, the Depository will credit, on its book-entry registration and transfer system, the principal amount of the New Notes represented by such Global Note to the accounts of participants. The accounts to be credited shall be designated by the Initial Purchasers of such New Notes. Ownership of beneficial interests in the Global Note will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the Global Note will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the Depository (with respect to participants' interest) and such participants (with respect to the owners of beneficial interests in the Global Note other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to transfer or pledge beneficial interests in the Global Note. So long as the Depository, or its nominee, is the registered holder and owner of the Global Note, the Depository or such nominee, as the case may be, will be considered the sole legal owner and holder of the related New Notes for all purposes of such New Notes and the Indenture. Except as set forth below, owners of beneficial interests in the Global Note will not be entitled to have the New Notes represented by the Global Note registered in their names, will not receive or be entitled to receive physical delivery of certificated New Notes in definitive form and will not be considered to be the owners or holders of any New Notes under the Global Note. The Company understands that under existing industry practice, in the event an owner of a beneficial interest in the Global Note desires to take any action that the Depository, as the holder of the Global Note, is entitled to take, the Depository would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. 101 Payment of principal of and interest on New Notes represented by the Global Note registered in the name of and held by the Depository or its nominee will be made to the Depository or its nominee, as the case may be, as the registered owner and holder of the Global Note. The Company expects that the Depository or its nominee, upon receipt of any payment of principal of or interest on the Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Note as shown on the records of the Depository or its nominee. The Company also expects that payments by participants to owners of beneficial interests in the Global Note held through such participants will be governed by standing instructions and customary practices and will be the responsibility of such participants. The Company will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Global Note for any Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between the Depository and its participants or the relationship between such participants and the owners of beneficial interests in the Global Note owning through such participants. Unless and until it is exchanged in whole or in part for certificated New Notes in definitive form, the Global Note may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository. Although the Depository has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of the Depository, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Trustee nor the Company will have any responsibility for the performance by the Depository or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED NEW NOTES The New Notes represented by the Global Note are exchangeable for certificated New Notes in definitive form of like tenor as such New Notes in denominations of $1,000 and integral multiples thereof if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for the Global Note or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act or (ii) the Company in its discretion at any time determines not to have all of the New Notes represented by the Global Note. Any New Note that is exchangeable pursuant to the preceding sentence is exchangeable for certificated New Notes issuable in authorized denominations and registered in such names as the Depository shall direct. Subject to the foregoing, the Global Note is not exchangeable, except for a Global Note of the same aggregate denomination to be registered in the name of the Depository or its nominee. In addition, such certificates will bear substantially the legend referred to under "Transfer Restrictions" (unless the Company determines otherwise in accordance with applicable law) subject, with respect to such New Notes, to the provisions of such legend. Neither the Company nor the Trustee will be liable for any delay by the Depository or its nominee in indemnifying the beneficial owners of the New Notes, and the Company and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Depository or its nominee for all purposes. CHANGE OF CONTROL Upon the occurrence of any of the following events (each a "Change of Control"), each Holder shall have the right to require that the Company repurchase such Holder's New Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date): 102 (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (i) such person shall be deemed to have "beneficial ownership" of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the then outstanding Voting Stock of the Company; PROVIDED, HOWEVER, that for purposes of this clause (i), the Permitted Holders shall be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own (as so defined), directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of the parent corporation; (ii) during any period of two consecutive years after the Company's initial Public Equity Offering, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of 66 2/3% of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; or (iii) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company to another Person (in each case other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation or a parent corporation that owns all of the capital stock of such corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation or such parent corporation, as the case may be. Within 30 days following any Change of Control, unless notice of redemption of the New Notes has been given pursuant to the provisions of the Indenture described under "--Optional Redemption" above, the Company shall mail a notice to the Trustee and to each Holder stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's New Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control; (3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with the covenant described hereunder, that a Holder must follow in order to have its New Notes purchased. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of New Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of 103 Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of Indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. Restrictions on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness are contained in the covenant described under "--Certain Covenants--Limitation on Indebtedness." Such restrictions can only be waived with the consent of the Holders of a majority in principal amount of the New Notes then outstanding. Except for the limitations contained in such covenants, however, the Indenture will not contain any covenants or provisions that may afford Holders protection in the event of a highly leveraged transaction. If a Change of Control offer is made, there can be no assurance that the Company will have available funds sufficient to pay the purchase price for all of the New Notes that might be delivered by Holders seeking to accept the Change of Control offer. The failure of the Company to make or consummate the Change of Control offer or pay the purchase price when due will give the Trustee and the Holders the rights described under "--Defaults." The existence of a Holder's right to require the Company to offer to repurchase such Holder's New Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction which constitutes a Change of Control. The New Credit Facility contains, and future indebtedness of the Company may contain, prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repaid or repurchased upon a Change of Control. Moreover, the exercise by the Holders of their right to require the Company to repurchase the New Notes will cause a default under the New Credit Facility, and could cause a default under such other indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the Holders following the occurrence of a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The provisions under the Indenture relating to the Company's obligation to make an offer to repurchase the New Notes as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in principal amount of the New Notes. CERTAIN COVENANTS The Indenture contains covenants including, among others, the following: LIMITATION ON INDEBTEDNESS. (a) (i) The Company shall not Incur, directly or indirectly, any Indebtedness unless, on the date of such Incurrence, the Consolidated Coverage Ratio exceeds 2.25 to 1.0 and (ii) none of the Restricted Subsidiaries of the Company shall Incur, directly or indirectly, any Indebtedness unless, on the date of such Incurrence, the Consolidated Coverage Ratio exceeds 2.50 to 1.0. (b) Notwithstanding the foregoing paragraph (a), the Company and the Restricted Subsidiaries may Incur any or all of the following Indebtedness: (1) Indebtedness (including reimbursement obligations in respect of letters of credit outstanding under the Bank Credit Agreement that are Indebtedness) Incurred pursuant to any Bank Credit Agreement or any other credit or loan agreement in an aggregate principal 104 amount which, when taken together (without duplication) with the principal amount of all other Indebtedness Incurred pursuant to this clause (1) and then outstanding, does not exceed $100.0 million; (2) Indebtedness of the Company or any Restricted Subsidiary owed to and held by the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to another Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the Company or such Restricted Subsidiary; (3) the Notes, the Subsidiary Guaranties or any Indebtedness, the proceeds of which are used to Refinance the Notes in full; (4) Indebtedness (including reimbursement obligations in respect of letters of credit or guaranties outstanding under Foreign Credit Agreements that are Indebtedness) Incurred pursuant to any Foreign Credit Agreement; provided, that the aggregate principal amount of all such Indebtedness outstanding at any time under all such Foreign Credit Agreements, shall not exceed $30.0 million; (5) Indebtedness outstanding on the Issue Date (other than Indebtedness described in clause (1), (2), (3) or (4) of this covenant); (6) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (3), (5) or this clause (6); (7) Indebtedness in respect of customs duties guarantees, equipment leases, performance bonds, bankers' acceptances, letters of credit and surety or appeal bonds entered into by the Company or any Restricted Subsidiary in the ordinary course of business; (8) Hedging Obligations consisting of Interest Rate Agreements directly related to Indebtedness permitted to be Incurred by the Company or any Restricted Subsidiary pursuant to the Indenture; (9) Indebtedness of the Company or any Restricted Subsidiary consisting of obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets by the Company or any Restricted Subsidiary permitted under the Indenture; (10) Indebtedness incurred by the Company or any Restricted Subsidiary, constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims, self- insurance or similar matters, or other Indebtedness with respect to reimbursement obligations regarding workers' compensation claims, PROVIDED, HOWEVER, that upon the drawing of such letters of credit or the Incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such drawing or Incurrence; and (11) Indebtedness in an aggregate principal amount which, together with all other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (10) above or paragraph (a)), does not exceed $15.0 million at any one time outstanding. (c) Notwithstanding the foregoing, neither the Company nor any Restricted Subsidiary shall Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Indebtedness shall be subordinated to the Notes or the Subsidiary Guaranties, as applicable, to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with the covenant entitled "--Limitation on Indebtedness," (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company, in its sole discretion, will classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. LIMITATION ON LIENS. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or permit to exist any Lien upon any of its property or assets, now owned or hereafter acquired, securing any obligation unless concurrently with the creation of such Lien effective provision is made to secure the Notes and the Subsidiary Guaranties equally and ratably with such obligation for so long as such obligation is so secured; PROVIDED, THAT, if such obligation is a Subordinated Obligation, the Lien securing such obligation shall be subordinated and junior to the Lien securing the Notes and the Subsidiary Guaranties with the same or lesser relative priority as such Subordinated 105 Obligation shall have been with respect to the Notes and the Subsidiary Guaranties. The preceding restriction shall not require the Company or any Restricted Subsidiary to secure the Notes or the Subsidiary Guaranties if the Lien consists of the following: (a) Liens on accounts receivable of the Company and its Restricted Subsidiaries to secure Indebtedness permitted to be incurred pursuant to paragraph (a) or clause (7) or (10) of paragraph (b) of the covenant described under "--Limitation on Indebtedness;" (b) Liens created by the Indenture, Liens under any Bank Credit Agreement, Liens under any Foreign Credit Agreement and Liens existing as of the Issue Date; (c) Permitted Liens; (d) Liens to secure Indebtedness issued by the Company or a Restricted Subsidiary for the purpose of financing all or a part of the purchase price of assets or property acquired or constructed in the ordinary course of business after the Issue Date; PROVIDED, HOWEVER, that (i) the aggregate principal amount (or accreted value in the case of Indebtedness issued at a discount) of Indebtedness so issued shall not exceed the lesser of the cost or fair market value, as determined in good faith by the Board of Directors of the Company, of the assets or property so acquired or constructed, (ii) the Indebtedness secured by such Liens shall have been permitted to be Incurred under the "--Limitation on Indebtedness" covenant and (iii) such Liens shall not encumber any other assets or property of the Company or any of its Restricted Subsidiaries other than such assets or property or any improvement on such assets or property and shall attach to such assets or property within 90 days of the construction or acquisition of such assets or property; (e) Liens on the assets or property of a Restricted Subsidiary existing at the time such Restricted Subsidiary becomes a Restricted Subsidiary and not issued as a result of (or in connection with or in anticipation of) such Restricted Subsidiary becoming a Restricted Subsidiary; PROVIDED, HOWEVER, that such Liens do not extend to or cover any other property or assets of the Company or any of its other Restricted Subsidiaries; (f) Liens securing Capital Lease Obligations Incurred in accordance with the "--Limitation on Indebtedness" covenant; (g) Liens with respect to Sale/Leaseback Transactions or other Indebtedness permitted by clause (b)(11) of the "--Limitation on Indebtedness" covenant; (h) Liens securing Indebtedness issued to Refinance Indebtedness which has been secured by a Lien permitted under the Indenture and is permitted to be Refinanced under the Indenture; PROVIDED, HOWEVER, that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; or (i) Liens on assets of the Company, or any of its Restricted Subsidiaries, securing Indebtedness in an aggregate principal amount not to exceed $10.0 million. LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless (i) the Company or such Restricted Subsidiary would be (A) in compliance with the covenants described under "--Limitation on Indebtedness" immediately after giving effect to such Sale/ Leaseback Transaction and (B) entitled to create a Lien on such property securing the Attributable Debt with respect to such Sale/ Leaseback Transaction without securing the Notes pursuant to the covenant described under "--Limitation on Liens," (ii) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair market value (as determined by the Board of Directors of the Company) of such property and (iii) the Company or such Restricted Subsidiary applies the proceeds of such transaction in compliance with the covenant described under "--Limitation on Sales of Assets and Subsidiary Stock." 106 LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes, and after giving effect to, the proposed Restricted Payment: (i) a Default shall have occurred and be continuing (or would result therefrom); (ii) the Company or such Restricted Subsidiary, as applicable, is not able to Incur an additional $1.00 of Indebtedness pursuant to clause (i) or clause (ii), as applicable, of paragraph (a) of the covenant described under "--Limitation on Indebtedness"; or (iii) the aggregate amount of such Restricted Payment and all other Restricted Payments since the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter during which the Notes are originally issued to the end of the most recently ended fiscal quarter for which financial statements are available at the time of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Company from capital contributions or the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date, of any Indebtedness of the Company or a Restricted Subsidiary for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange), whether pursuant to the terms of such Indebtedness or pursuant to an agreement with a creditor to engage in an equity for debt exchange; and (D) an amount equal to the sum of (i) the net reduction in Investments in Unrestricted Subsidiaries resulting from the receipt of dividends, repayments of loans or advances or other transfers of assets or proceeds from the disposition of Capital Stock or other distributions or payments, in each case to the Company or any Restricted Subsidiary from, or with respect to, interests in Unrestricted Subsidiaries, and (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; PROVIDED, HOWEVER, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary subsequent to the Issue Date. (b) The provisions of the foregoing paragraph (a) shall not prohibit: (i) any purchase or redemption of Capital Stock or Subordinated Obligations of the Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than (A) Disqualified Stock or (B) Capital Stock issued or sold to a Subsidiary of the Company) or out of the proceeds of a substantially concurrent capital contribution to the Company; PROVIDED, HOWEVER, that (x) such purchase, capital contribution or redemption shall be excluded in the calculation of the amount of Restricted Payments and (y) the Net Cash Proceeds from such sale of Capital Stock or capital contribution shall be excluded from clause (iii)(B) of paragraph (a) above; (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Company which is permitted to be Incurred pursuant to the covenant described under "--Limitation on Indebtedness"; PROVIDED, HOWEVER, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; PROVIDED, HOWEVER, that such dividend shall be included in the calculation of the amount of Restricted Payments; (iv) the repurchase of Capital Stock of the Company from directors, officers or employees of the Company pursuant to the terms of an employee benefit plan or employment or other agreement; provided that the aggregate amount of all such repurchases shall not exceed $3.0 million in any fiscal year, and $10.0 million in total; (v) up to an aggregate of $10.0 million of Restricted Payments by the Company, so long as after giving effect to any such Restricted Payment on a pro forma 107 basis the Company could incur an additional $1.00 of Indebtedness pursuant to clause (i) of paragraph (a) of the covenant described under "--Limitation on Indebtedness"; and (vi) Investments in Unrestricted Subsidiaries or joint ventures in an amount not to exceed $10.0 million at any time outstanding. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary (a) to pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company, (b) to make any loans or advances to the Company or (c) to transfer any of its property or assets to the Company, except: (i) any encumbrance or restriction pursuant to any Bank Credit Agreement, any Foreign Credit Agreement or any other agreement in effect at or entered into on the Issue Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting Refinancing Indebtedness Incurred pursuant to an agreement referred to in clause (i) or (ii) of this covenant or this clause (iii) or contained in any amendment to an agreement referred to in clause (i) or (ii) of this covenant or this clause (iii); PROVIDED, HOWEVER, that the encumbrances and restrictions with respect to any such Restricted Subsidiary contained in any such refinancing agreement or amendment are no less favorable to the Noteholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such agreements; (iv) any such encumbrance or restriction (A) consisting of customary non-assignment provisions in leases to the extent such provisions restrict the subletting, assignment or transfer of the lease or the property leased thereunder or in purchase money financings or (B) by virtue of any Indebtedness, transfer, option or right with respect to, or any Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture; (v) in the case of clause (c) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; (vi) encumbrances or restrictions imposed by operation of any applicable law, rule, regulation or order; (vii) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition and (viii) any restriction imposed during an event of default under an agreement governing Indebtedness of any Foreign Subsidiary so long as such Indebtedness is permitted by the covenant entitled "--Limitation on Indebtedness." LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition, and at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) FIRST, to either (i) prepay, repay, redeem or purchase (and permanently reduce the commitments under) Indebtedness under any Bank Credit Agreement or any Foreign Credit Agreement or that is otherwise secured by its assets subject to such Asset Disposition within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash (the "Receipt Date") or (ii) to the extent the Company elects, to acquire Additional Assets; PROVIDED, HOWEVER, that the Company shall be required to commit such Net Available Cash to the acquisition of Additional Assets within one year from the later of the date of such Asset Disposition or the Receipt Date and shall be required to consummate the 108 acquisition of such Additional Assets within 18 months from the Receipt Date; (B) SECOND, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to make an offer pursuant to paragraph (b) below to the Holders to purchase Notes pursuant to and subject to the conditions contained in the Indenture; and (C) THIRD, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) or (B) to any other application or use not prohibited by the Indenture. Notwithstanding the foregoing provisions of this paragraph, the Company and the Restricted Subsidiaries shall not be required to apply the Net Available Cash in accordance with this paragraph except to the extent that the aggregate Net Available Cash from all Asset Dispositions which is not applied in accordance with this paragraph exceeds $5.0 million (at which time, the entire unutilized Net Available Cash, and not just the amount in excess of $5.0 million, shall be applied pursuant to this paragraph). Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Permitted Investments. For the purposes of this covenant, the following are deemed to be cash or cash equivalents: (x) the express assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition and (y) securities received by the Company or any Restricted Subsidiary from the transferee that are converted by the Company or such Restricted Subsidiary into cash within 90 days of closing the transaction. (b) In the event of an Asset Disposition that requires the purchase of the Notes pursuant to clause (a)(ii)(B) above, the Company will be required to purchase Notes tendered pursuant to an offer by the Company for the Notes at a purchase price of 100% of their principal amount (without premium) plus accrued but unpaid interest in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of Notes tendered pursuant to such offer is less than the Net Available Cash allotted to the purchase thereof, the Company will be required to apply the remaining Net Available Cash in accordance with clause (a)(ii)(C) above. The Company shall not be required to make such an offer to purchase Notes pursuant to this covenant if the Net Available Cash available therefor is less than $5.0 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required with respect to any subsequent Asset Disposition). (c) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue thereof. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Company other than the Company or a Restricted Subsidiary (an "Affiliate Transaction") unless the terms thereof (1) are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in a comparable transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) if such Affiliate Transaction involves an amount in excess of $2.0 million, (i) are set forth in writing and (ii) have been approved by a majority of the members of the Board of Directors having no material personal financial stake in such Affiliate Transaction and (3) if such Affiliate Transaction involves an amount in excess of $7.5 million, have been determined by a nationally recognized investment banking firm to be fair, from a financial standpoint, to the Company or its Restricted Subsidiary, as the case may be. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any Permitted Investment or Restricted Payment permitted to be made pursuant to the covenant described under "--Limitation on Restricted Payments," or any payment or transaction specifically excepted from the definition of Restricted 109 Payment, (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, collective bargaining arrangements, employee benefit plans, health and life insurance plans, deferred compensation plans, directors' and officers' indemnification agreements, retirement or savings plans, stock options and stock ownership plans or any other similar arrangement heretofore or hereafter entered into in the ordinary course of business and approved by the board of directors of the Company or any Restricted Subsidiary, (iii) the grant of stock options or similar rights to employees and directors pursuant to plans approved by the Board of Directors or the board of directors of the relevant Restricted Subsidiary, (iv) loans or advances to officers, directors or employees in the ordinary course of business or pursuant to compensation plans or employment agreements approved by the board of directors of the Company or any Restricted Subsidiary, (v) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries, (vi) any transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, (vii) the purchase of or the payment of Indebtedness of or monies owed by the Company or any of its Restricted Subsidiaries for goods or materials purchased, or services received, in the ordinary course of business, (viii) management agreements between the Company or any of its Restricted Subsidiaries and one or more Permitted Holders, or any of their respective Affiliates providing for management fees not to exceed $350,000 per year to WESS or any of its Affiliates and $350,000 per year to Oaktree or any of its Affiliates; (ix) transaction fees to WESS, Oaktree, or any of their respective Affiliates for services provided in connection with the LIW Acquisition, the New Credit Facility and the Old Notes Offering in an amount not to exceed $2.5 million in the aggregate and (x) the performance of the agreement between WESS, W.E. Myers & Co. and William E. Myers, Jr. as in effect on the Issue Date. LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company shall not sell or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any shares of its Capital Stock to any person (other than to the Company or a Wholly Owned Subsidiary) or permit any Person (other than the Company or a Wholly Owned Subsidiary) to own any Capital Stock of a Restricted Subsidiary, if in either case as a result thereof such Restricted Subsidiary would no longer be a Restricted Subsidiary; PROVIDED, HOWEVER, this provision shall not prohibit (x) the Company or any Restricted Subsidiary from selling, leasing or otherwise disposing of all of the Capital Stock of any Restricted Subsidiary or (y) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the Indenture. The foregoing shall not apply to any Lien granted on the Capital Stock of a Restricted Subsidiary. MERGER AND CONSOLIDATION. (a) The Company shall not, and shall not cause or permit any Subsidiary Guarantor to, and no Subsidiary Guarantor (other than any Subsidiary Guarantor whose Subsidiary Guaranty is to be released in accordance with the terms of the Subsidiary Guaranty and the Indebtedness in connection with the provisions of "--Certain Covenants--Limitation on Sale of Assets and Subsidiary Stock") shall consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, its assets substantially as an entirety to, any Person (other than, in the case of a Subsidiary Guarantor, to the Company or any other Subsidiary Guarantor), unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company or, in the case of a Subsidiary Guarantor, the Company or a Subsidiary Guarantor) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture or of a Subsidiary Guarantor under the applicable Subsidiary Guaranty, as applicable; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by such Successor Company or such Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Successor 110 Company would be able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)(i) in the case of the Company or paragraph (a)(ii) in the case of a Subsidiary Guarantor of the covenant described under "--Certain Covenants--Limitation on Indebtedness"; (iv) immediately after giving effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company or such Subsidiary Guarantor, as applicable, prior to such transaction minus any costs incurred in connection with such transaction; and (v) the Company or such Subsidiary Guarantor, as applicable, shall have delivered to the Trustee an officer's certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture. The Successor Company shall be the successor to the Company or the Subsidiary Guarantor, as applicable, and shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Subsidiary Guarantor, as applicable, under the Indenture, but the predecessor company, only in the case of a conveyance, transfer or lease, shall not be released from the obligation to pay the principal of and interest on the Notes. Notwithstanding the foregoing, (i) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (ii) the Company may merge with an Affiliate incorporated for the purpose of reincorporating the Company in another jurisdiction to realize tax or other benefits. FUTURE SUBSIDIARY GUARANTORS. The Company shall cause each Restricted Subsidiary that is organized and existing under the laws of any State of the United States or the District of Columbia and that at any time becomes an obligor or guarantor with respect to any obligations under one or more Bank Credit Agreements to execute and deliver to the Trustee a supplemental indenture pursuant to which such Restricted Subsidiary will Guarantee payment of the Notes on the same terms and conditions as those set forth in the Indenture. Each Subsidiary Guaranty will be limited in amount to an amount not to exceed the maximum amount that can be Guaranteed by the applicable Subsidiary Guarantor without rendering such Subsidiary Guaranty voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. SEC REPORTS. Notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC (unless the SEC will not accept such a filing) and provide within 15 days to the Trustee and Noteholders such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections. DEFAULTS An Event of Default is defined in the Indenture as (i) a default in the payment of interest on the Notes when due, continued for 30 days, (ii) a default in the payment of principal on any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon acceleration or otherwise, (iii) the failure by the Company to comply with its obligations under "--Certain Covenants--Merger and Consolidation" above, (iv) the failure by the Company to comply for 30 days after notice with any of its obligations in the covenants described above under "Change of Control" (other than a failure to purchase Notes) or under "--Certain Covenants--Limitation on Indebtedness," "--Limitation on Restricted Payments," "--Limitation on Sales of Assets and Subsidiary Stock," or "--Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries," (v) the failure by the Company to comply for 60 days after the Company receives written notice with its other agreements contained in the Indenture, (vi) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the Holders thereof because of a default and the total amount of such 111 Indebtedness unpaid or accelerated exceeds $10.0 million (the "cross acceleration provision"), (vii) certain events of bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (the "bankruptcy provisions") or (viii) any judgment or decree for the payment of money in excess of $10.0 million is entered against the Company or any Significant Subsidiary, remains outstanding for a period of 60 days following entry of such judgment and is not discharged, bonded, waived or stayed within 30 days after notice (the "judgment default provision"). However, a default under clause (iv) or (v) will not constitute an Event of Default until the Trustee or the Holders of 25% in principal amount of the outstanding Notes notify the Company of the default and the Company does not cure such default within the time specified after receipt of such notice. If an Event of Default (other than the bankruptcy provisions relating to the Company) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to the bankruptcy provisions relating to the Company occurs and is continuing, the principal of and interest on all the Notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in principal amount of the outstanding Notes may by notice to the Trustee rescind any acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except non-payment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder of a Note may pursue any remedy with respect to the Indenture or the Notes unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee to pursue the remedy, (iii) such Holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt thereof and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Note, the Trustee may withhold notice if and so long as the board of directors, the executive committee or a committee of its trust officers determines that withholding notice is not opposed to the interest of the Holders. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. 112 AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the Holders of a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for the Notes) and any past default or compliance with any provisions may also be waived with the consent of the Holders of a majority in principal amount of the Notes then outstanding. Without the consent of each Holder of an outstanding Note affected thereby, no amendment may (i) reduce the amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Note, (iii) reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption of any Note or change the time at which any Note may be redeemed as described under "--Optional Redemption" above, (v) make any Note payable in money other than that stated in the Note, (vi) impair the right of any Holder to receive payment of principal of and interest on such Holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Notes, (vii) make any change in the amendment provisions which require each Holder's consent or in the waiver provisions or (viii) affect the ranking of the Notes in any material respect. Without the consent of any Holder, the Company and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add guarantees with respect to the Notes, to secure the Notes, to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any Holder or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act. The consent of the Holders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to Holders a notice briefly describing such amendment. However, the failure to give such notice to all Holders, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER The New Notes will be issued in registered form and will be transferable only upon the surrender of the New Notes being transferred for registration of transfer. The Company may require payment of a sum sufficient to cover any tax, assessment or other governmental charge payable in connection with certain transfers and exchanges. The Company is not required to transfer or exchange any New Note selected for redemption or repurchase or to transfer or exchange any New Note for a period of 15 days prior to selection of New Notes to be redeemed or repurchased. DEFEASANCE The Company at its option at any time may terminate all of its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. In addition, the Company at its option at any time may terminate its obligations under "Change of Control" and under the covenants described under "Certain Covenants" (other than the covenant described under "--Merger and Consolidation") (and any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes), the operation of the cross acceleration provision, the bankruptcy 113 provisions with respect to Significant Subsidiaries and the judgment default provision described under "--Defaults" above and the limitations contained in clauses (iii) and (iv) of the first paragraph under "--Certain Covenants--Merger and Consolidation" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (iv), (vi), (vii) (with respect only to Significant Subsidiaries) or (viii) under "--Defaults" above or because of the failure of the Company to comply with clause (iii) or (iv) of the first paragraph under "--Certain Covenants--Merger and Consolidation" above. In order to exercise either defeasance option, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). SATISFACTION AND DISCHARGE The Indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when: (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee an amount in United States dollars sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for the principal of, premium, if any, and interest to the date of deposit; (ii) the Company has paid or caused to be paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in any of the Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company or any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such waiver is against public policy. CONCERNING THE TRUSTEE U.S. Bank Trust (formerly First Trust National Association) is to be the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Notes. Such bank may also act as a depository of funds for, or make loans to and perform other services for, the Company or its affiliates in the ordinary course of business in the future. The corporate trust office of the Trustee is located at First Trust New York, 100 Wall Street, 20th Floor, New York, New York, 10005. 114 The Holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture. The Trustee may resign at any time or may be removed by the Company. If the Trustee resigns, is removed or becomes incapable of acting as Trustee or if a vacancy occurs in the office of the Trustee for any cause, a successor Trustee shall be appointed in accordance with the provisions of the Indenture. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and the Indenture. The Indenture also contains certain limitations on the right of the Trustee, as a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received by it in respect of any such claims, as security or otherwise. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. CERTAIN DEFINITIONS Set forth below are certain definitions used in the section entitled "Description of the New Notes." "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; PROVIDED, HOWEVER, that any such Restricted Subsidiary described in clause (ii) or (iii) above is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger or consolidation (each referred to for the purposes of this definition as a "disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (ii) all or substantially all the assets (other than Capital Stock of an Unrestricted Subsidiary) of any division or line of business of the Company or any Restricted Subsidiary or (iii) any other assets (other than Capital Stock of an Unrestricted Subsidiary) of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above, (x) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary and (y) for purposes of the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a disposition that 115 constitutes a Restricted Payment permitted by the covenant described under "--Certain Covenants-- Limitation on Restricted Payments" or a disposition specifically excepted from the definition of Restricted Payment); PROVIDED, HOWEVER, that Asset Disposition shall not include (a) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration less than or equal to $1.0 million, (b) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under "--Certain Covenants--Merger and Consolidation" and "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" or (c) the disposition of assets of the Company or any Restricted Subsidiary for aggregate non-cash consideration not in excess of $20.0 million so long as the pro forma Consolidated Coverage Ratio after giving effect to any such disposition is at least 2.5 to 1.0. The foregoing shall not apply to any Lien granted on the Capital Stock of a Restricted Subsidiary. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. "Bank Credit Agreement" means the credit agreement, dated as of the Issue Date, among the Company, ING (U.S.) Capital Corporation, as agent, and the other financial institutions party thereto, as such agreement, in whole or in part, may be amended, renewed, extended, increased (but only so long as such increase is permitted under the terms of the Indenture), substituted, refinanced, restructured, replaced (including, without limitation, any successive renewals, extensions, increases, substitutions, refinancings, restructurings, replacements, supplements or other modifications of the foregoing). "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Change of Control" has the meaning ascribed thereto under the heading entitled "Description of the New Notes--Change of Control" herein. "Code" means the Internal Revenue Code of 1986, as amended. 116 "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days (or, if less than 45 days after the end of such fiscal quarter, ending as of the date the consolidated financial statements of the Company shall be available) prior to the date of such determination to (ii) Consolidated Interest Expense for such four fiscal quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted Subsidiary (x) has Incurred any Indebtedness (other than Indebtedness Incurred for working capital purposes under a Bank Credit Agreement) since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period or (y) has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination, or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average daily balance of such Indebtedness during such four quarter period), (2) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (3) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period or (4) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition, Investment or acquisition of assets that would have required an adjustment pursuant to clause (2) or (3) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate 117 Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, (i) interest expense attributable to Capital Lease Obligations, (ii) amortization of debt discount and debt issuance costs, (iii) capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) net costs associated with Hedging Obligations (including amortization of fees), (vii) dividends paid or payable in respect of any Disqualified Stock of the Company, (viii) cash dividends paid or payable by the Company and all dividends paid or payable by Restricted Subsidiaries, in each case in respect of all Preferred Stock held by Persons other than the Company or a Wholly Owned Subsidiary, (ix) interest incurred in connection with Investments in discontinued operations and (x) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by the Company or any Restricted Subsidiary. "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person if such Person is not a Restricted Subsidiary, except that (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (iii) below) and (B) with respect to the calculation of EBITDA only, the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income up to the aggregate amount invested by the Company or any Restricted Subsidiary in such Person during such period; (ii) any net income (or loss) of any Person acquired by the Company or a Subsidiary of the Company in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary to the extent that such Restricted Subsidiary is subject to restrictions, directly or indirectly, prohibiting the payment of dividends, the repayment of intercompany debt and the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income up to the aggregate amount invested by the Company or any Restricted Subsidiary in such Person during such period; (iv) any gain or loss realized upon the sale or other disposition of any assets of the Company or its consolidated Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the cumulative effect of a change in accounting principles. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the most recent fiscal quarter of the Company for which financial statements are available, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement to which such Person is a party or a beneficiary. 118 "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Depository" means The Depository Trust Company, its nominees and their respective successors. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (other than as a result of a Change of Control) (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the Notes; PROVIDED, HOWEVER, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "Change of Control." "EBITDA" for any period means the sum of Consolidated Net Income plus Consolidated Interest Expense plus the following to the extent deducted in calculating such Consolidated Net Income: (a) all income tax expense of the Company, (b) depreciation expense, (c) amortization expense and (d) all other non-cash items reducing such Consolidated Net Income (excluding any non-cash item to the extent it represents an accrual of, or reserve for, cash disbursement for any subsequent period) less all non-cash items increasing such Consolidated Net Income (such amount calculated pursuant to this clause (d) not to be less than zero), in each case for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Subsidiary of the Company shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agent" means U.S. Bank Trust (formerly First Trust National Association) as exchange agent for the Exchange Offer. "Foreign Credit Agreement" means any revolving credit agreement, invoice discounting, overdraft or guarantee facility or other similar arrangement providing for the Incurrence of Indebtedness by any Foreign Subsidiary, and the agreements governing such Indebtedness which may, in whole or in part, be amended, renewed, extended, substituted, refinanced, restructured, replaced (including, without limitation, any successive renewals, extensions, substitutions, refinancing, restructuring, replacement, supplements or other modifications of the foregoing). "Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a jurisdiction other than the United States or a State thereof or the District of Columbia and with respect to which more than 80% of any of its sales, earnings or assets (determined on a consolidated basis in accordance with GAAP) are located in, generated from or derived from operations located in territories outside of the United States of America and jurisdictions outside the United States of America. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth (i) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) in statements and pronouncements of the Financial Accounting Standards Board, (iii) in such other statements by such other entity as approved by a significant segment of the accounting profession, and (iv) in the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. 119 "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such Person (whether arising by virtue of agreements to keep well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for Indebtedness; PROVIDED, HOWEVER, that any Indebtedness of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination (without duplication), (i) the principal of and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (iii) all obligations of such Person issued or assumed as the deferred purchase price of property (which purchase price is due more than one year after taking title of such property), all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon, or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Subsidiary Guaranty (but only to the extent of the amount actually guaranteed); (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and (viii) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. For purposes of clarification, (i) Indebtedness shall not include undrawn commitments under the Bank Credit Agreement and the Foreign Credit Agreement or any obligation to purchase Capital Stock of LIW pursuant to option 120 agreements, purchase agreements or otherwise or the Company's Capital Stock pursuant to employment agreements and otherwise and (ii) any Guarantee of Indebtedness shall not be deemed to be an Incurrence of Indebtedness to the extent that the Indebtedness so Guaranteed is Incurred by the Company or any Restricted Subsidiary as permitted pursuant to the terms of the Indenture. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed solely to protect the Company or any Restricted Subsidiary against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the Person making the advance or loan) or other extensions of credit (including by way of Subsidiary Guaranty or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary," the definition of "Restricted Payment" and the covenant described under "--Certain Covenants--Limitation on Restricted Payments," (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that if such designation is made in connection with the acquisition of such Subsidiary or the assets owned by such Subsidiary, the "Investment" in such Subsidiary shall be deemed to be the consideration paid in connection with such acquisition; PROVIDED FURTHER, HOWEVER, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation, and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Issue Date" means the date of original issuance of the Old Notes. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or required by law to close. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record shall not be affected. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "LIW Acquisition" has the meaning ascribed thereto under the heading entitled "Recent Acquisitions--Acquisition of LIW" herein. "Moody's" means Moody's Investors Service, Inc. "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form) in each case net of (i) all legal, title and recording tax expenses, brokerage commissions, underwriting discounts or commissions or sales commissions and other reasonable fees and expenses (including, without limitation, fees and expenses of counsel, accountants and investment bankers) related to such Asset Disposition or converting to cash any other proceeds received, and any relocation and severance expenses as a result thereof, and all Federal, state, provincial, foreign and local taxes required to be accrued or paid as a liability under GAAP, as a 121 consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition or made in order to obtain a necessary consent to such Asset Disposition or to comply with applicable law, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (iv) appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Disposition. Further, with respect to an Asset Disposition by a Subsidiary which is not a Wholly Owned Subsidiary, Net Available Cash shall be reduced pro rata for the portion of the equity of such Subsidiary which is not owned by the Company. "Net Cash Proceeds," with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. In addition, for purposes of the calculations described in "--Certain Covenants--Limitation on Restricted Payments," Net Cash Proceeds shall also mean any cash amounts paid to the Company by members of management in respect of all promissory notes outstanding on the Issue Date and any amounts reflected on the records of the Company as additional paid in capital or equity contributions made in respect of employment-related stock price guarantees entered into prior to the Issue Date. "Permitted Holders" means (i) William E. Simon & Sons, L.L.C. and its Affiliates, (ii) Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts, or other entities managed by Oaktree and (iii) Roger E. Payton. For purposes of clarification, The TCW Group, Inc., Logistical Simon, L.L.C., OCM Principal Opportunities Fund, L.P., TCW Special Credits Fund V--The Principal Fund and their respective Affiliates are Permitted Holders. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; PROVIDED, HOWEVER, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, including without limitation, loans or advances made to employees in respect of stock purchase or other employee benefit plans; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; and (viii) any Person to the extent such Investment represents the non-cash portion of the consideration received for a disposition of Assets as permitted pursuant to the covenant described under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and as described in clause (c) of the definition of Asset Disposition. "Permitted Liens" means, with respect to any Person, (a) pledges or deposits by such Person under workers' compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits or 122 cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings; (c) Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review or time for appeal has not yet expired; (d) Liens for taxes, assessments or other governmental charges not yet subject to penalties for non-payment or which are being contested in good faith by appropriate proceedings; (e) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of, and for the account of such Person in the ordinary course of its business; PROVIDED, HOWEVER, that such letters of credit do not constitute Indebtedness; (f) survey exceptions, encumbrances, easements or reservations of or rights of others for licenses, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real properties or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (g) Liens securing an Interest Rate Agreement so long as the related Indebtedness is, and is permitted to be under the Indenture, secured by a Lien on the same property securing the Interest Rate Agreement; and (h) leases and subleases of real property which do not interfere with the ordinary conduct of the business of such Person, and which are made on customary and usual terms applicable to similar properties. "Person" means any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock," as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "principal" of a Note means the principal of the Note plus the premium, if any, payable on the Note which is due or overdue or is to become due at the relevant time. "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding 123 or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; PROVIDED, FURTHER, HOWEVER, that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of the Company on the Issue Date. "Restricted Payment" with respect to any Person means (i) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person), other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions payable solely to the Company or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation), (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying of a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition) or (iv) the making of any Investment in any Person (other than a Permitted Investment). "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Secured Indebtedness" of any Subsidiary Guarantor has a correlative meaning. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes pursuant to a written agreement to that effect. "Subordinated Obligation" of any Subsidiary Guarantor has a correlative meaning. "Subsidiary" means, in respect of any Person, any corporation, association, limited liability company, limited or general partnership or other business entity (x) of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, 124 (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person, or (y) that is consolidated for purposes of the Company's consolidated financial statements. "Subsidiary Guarantor" means each Restricted Subsidiary designated as such on the signature pages of the Indenture and any other Restricted Subsidiary that has issued a Subsidiary Guaranty. "Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of the Company's obligations with respect to the Notes. "S&P" means Standard & Poor's Ratings Service. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $10,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Restricted Subsidiary of the Company; PROVIDED, HOWEVER, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the covenant described under "--Certain Covenants--Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such designation (x) if such Unrestricted Subsidiary at such time has Indebtedness, the Company could Incur $1.00 of additional Indebtedness under clause (i) of paragraph (a) of the covenant described under "--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced by the Company to the Trustee by promptly filing with the Trustee a copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United 125 States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares and shares held by other Persons to the extent such shares are required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary) is owned by the Company or one or more Wholly Owned Subsidiaries. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE OFFER The exchange of New Notes for the Old Notes pursuant to the Exchange Offer will not be treated as an "exchange" for United States federal income tax purposes because the New Notes will not be considered to differ materially in kind or extent from the Old Notes. Rather, the New Notes received by a Noteholder will be treated as a continuation of the Old Notes in the hands of such Noteholder. As a result, there will be no United States federal income tax consequences to Noteholders exchanging the Old Notes for the New Notes pursuant to the Exchange Offer. The adjusted basis and holding period of the New Notes for any Noteholder will be the same as the adjusted basis and holding period of the Old Notes. Similarly, there would be no United States federal income tax consequences to a Noteholder of Old Notes that does not participate in the Exchange Offer. PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Issuer has agreed that, for a period of 180 days after the Expiration Date it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until April 28, 1999, all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, 126 by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters with regard to the validity of the New Notes will be passed upon for the Company by Milbank, Tweed, Hadley & McCloy, Los Angeles, California. EXPERTS The consolidated financial statements of the Company as of December 31, 1996 and 1997 and for the period May 2, 1996 to December 31, 1996 and for the year ended December 31, 1997, and of the Company Predecessor for the period April 1, 1996 to May 1, 1996, included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated statements of operations, stockholders' equity and cash flows of Bekins for the years ended March 31, 1995 and 1996 included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein, in reliance upon the authority of said firm as experts in giving said report. The combined and consolidated financial statements of LIW and its predecessor as of December 31, 1995 and 1996 and for the years ended December 31, 1994 and 1995 and for the periods January 1, 1996 to January 23, 1996 and January 24, 1996 to December 31, 1996 included in this Prospectus have been audited by Price Waterhouse, Chartered Accountants and Registered Auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form S-4 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the New Notes offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. While all material elements of the contracts and documents referenced in this Prospectus are contained herein, statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of such contract or other document which is filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the New Notes offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the charges prescribed by the Commission. 127 The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The Commission's address on the World Wide Web is http://www.sec.gov. In addition, the Company has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, it will furnish to the holders of the Notes and file with the Commission (unless the Commission will not accept such a filing) (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent auditors and (ii) all reports that would be required to be filed with the Commission on Form 8-K if the Company was required to file such reports. In addition, for so long as any of the Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Notes or beneficial owner of the Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act. 128 INDEX TO FINANCIAL STATEMENTS
PAGE --------- GEOLOGISTICS CORPORATION Independent Auditors' Reports............................................................................ F-2 Consolidated Balance Sheets.............................................................................. F-6 Consolidated Statements of Operations.................................................................... F-8 Consolidated Statements of Stockholders' Equity.......................................................... F-9 Consolidated Statements of Cash Flows.................................................................... F-10 Notes to Consolidated Financial Statements............................................................... F-11 LEP INTERNATIONAL WORLDWIDE LIMITED Statement of Directors' Responsibilities................................................................. F-29 Accountants' Report...................................................................................... F-30 Combined and Consolidated Balance Sheets................................................................. F-31 Combined and Consolidated Statements of Profit and Loss Accounts......................................... F-32 Combined and Consolidated Statements of Cash Flow........................................................ F-33 Statements of Total Recognised Gains and Losses.......................................................... F-34 Note of Historical Cost Profits and Losses............................................................... F-34 Notes to Combined and Consolidated Financial Statements.................................................. F-35 Principal Subsidiary and Associated Undertakings......................................................... F-57 Unaudited Interim Consolidated Balance Sheet............................................................. F-58 Unaudited Interim Consolidated Statements of Profit and Loss Accounts.................................... F-59 Unaudited Interim Consolidated Statements of Cash Flow................................................... F-60 Unaudited Interim Statement of Total Recognised Gains and Losses......................................... F-61 Unaudited Interim Reconciliation of Movements in Shareholders' Funds..................................... F-61 Notes to the Unaudited Interim Consolidated Financial Statements......................................... F-62
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of GeoLogistics Corporation Golden, Colorado: We have audited the accompanying consolidated balance sheets of GeoLogistics Corporation and subsidiaries (formerly known as International Logistics Limited and herein referred to as the "Company") as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from May 2, 1996 (date operations commenced) through December 31, 1996 and for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of GeoLogistics Corporation and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for the period from May 2, 1996 (date operations commenced) through December 31, 1996 and for the year ended December 31, 1997, in conformity with generally accepted accounting principles. As described in Note 3 to the financial statements, on May 2, 1996, the net assets of The Bekins Company were acquired by the Company. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the acquisition price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values on the date of acquisition. As such, the amounts reported for the Company are not comparable to the amounts shown for The Bekins Company in prior periods. DELOITTE & TOUCHE LLP Chicago, Illinois March 17, 1998 F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Bekins Company Hillside, Illinois: We have audited the consolidated statements of operations, stockholders' equity and cash flows (the "Statements") of The Bekins Company (the "Company") for the period from April 1, 1996 through May 1, 1996. These Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Company for the period from April 1, 1996 through May 1, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Chicago, Illinois September 8, 1997 F-3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of The Bekins Company Hillside, Illinois: We have audited the consolidated statements of operations, stockholders' equity and cash flows of The Bekins Company (a Delaware corporation) and Subsidiaries for the years ended March 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of The Bekins Company and Subsidiaries for the years ended March 31, 1995 and 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, May 16, 1996 F-4 (This page has been left blank intentionally.) F-5 GEOLOGISTICS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents......................... $ 3,424 $ 37,909 Accounts receivable: Trade, net...................................... 114,174 250,006 Other........................................... 8,979 11,139 Deferred income taxes............................. 882 6,528 Prepaid expenses.................................. 1,956 14,150 Net assets held for sale.......................... 5,621 -- ------------ ------------ Total current assets.......................... 135,036 319,732 ------------ ------------ PROPERTY AND EQUIPMENT: Transportation equipment.......................... 5,971 7,256 Operating equipment and other..................... 5,104 12,686 Buildings and leasehold improvements.............. 1,892 32,527 Land.............................................. 481 5,213 ------------ ------------ 13,448 57,682 Less accumulated depreciation..................... (1,667) (5,875) ------------ ------------ Property and equipment, net..................... 11,781 51,807 ------------ ------------ NOTES RECEIVABLE, less current portion.............. 138 2,329 DEFERRED INCOME TAXES, net.......................... 3,447 20,861 INTANGIBLE ASSETS, net.............................. 85,144 73,876 OTHER ASSETS........................................ 1,138 17,161 ------------ ------------ TOTAL......................................... $236,684 $485,766 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. F-6 GEOLOGISTICS CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996 1997 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................. $ 69,238 $128,138 Accrued expenses.................................. 48,816 165,098 Income taxes payable.............................. 580 5,993 Current portion of long-term debt................. 4,510 2,580 ------------ ------------ Total current liabilities..................... 123,144 301,809 LONG-TERM DEBT, Less current portion................ 61,804 112,790 OTHER NONCURRENT LIABILITIES........................ 11,117 46,647 ------------ ------------ Total liabilities............................. 196,065 461,246 ------------ ------------ MINORITY INTEREST................................... 1,601 STOCKHOLDERS' EQUITY: Common stock ($.001 par value, 5,000,000 shares authorized, 2,016,667 and 2,074,226 shares issued and outstanding at December 31, 1996 and 1997, respectively)............................. 2 2 Additional paid-in capital........................ 50,050 52,291 Accumulated deficit............................... (9,244) (28,902) Notes receivable from stockholders................ (150) (357) Cumulative translation adjustment................. (39) (115) ------------ ------------ Total stockholders' equity.................... 40,619 22,919 ------------ ------------ TOTAL......................................... $236,684 $485,766 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. F-7 GEOLOGISTICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COMPANY PREDECESSOR COMPANY ----------------------------------- -------------------------- PERIOD FROM YEAR ENDED MARCH 31 PERIOD FROM MAY 2, 1996 YEAR APRIL 1, 1996 TO ENDED -------------------- TO DECEMBER 31, DECEMBER 31, 1995 1996 MAY 1, 1996 1996 1997 --------- --------- ------------- ------------ ------------ REVENUES..................................... $ 242,966 $ 231,752 $ 17,458 $ 225,793 $ 978,249 TRANSPORTATION AND OTHER DIRECT COSTS............................... 191,278 179,611 13,634 181,208 759,049 --------- --------- ------------- ------------ ------------ NET REVENUES................................. 51,688 52,141 3,824 44,585 219,200 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 43,008 42,810 3,309 37,554 204,733 DEPRECIATION AND AMORTIZATION................ 5,675 4,194 337 16,310 30,398 --------- --------- ------------- ------------ ------------ OPERATING PROFIT (LOSS)...................... 3,005 5,137 178 (9,279) (15,931) INTEREST EXPENSE, NET AND AMORTIZATION OF DEBT ISSUANCE COSTS........................ 2,252 2,397 230 2,981 8,576 OTHER (INCOME/GAINS) EXPENSE/LOSSES.......... (259) 34 (73) -- 211 --------- --------- ------------- ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY LOSS........... 1,012 2,706 21 (12,260) (24,718) INCOME TAX PROVISION (BENEFIT)............... 816 1,508 48 (4,013) (8,420) --------- --------- ------------- ------------ ------------ INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS......................... 196 1,198 (27) (8,247) (16,298) MINORITY INTERESTS........................... -- -- -- -- 1,067 --------- --------- ------------- ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... 196 1,198 (27) (8,247) (17,365) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--NET OF TAX BENEFIT ($664 AND $1,528).................................... -- -- -- (997) (2,293) --------- --------- ------------- ------------ ------------ NET INCOME (LOSS)............................ $ 196 $ 1,198 $ (27) $ (9,244) $ (19,658) --------- --------- ------------- ------------ ------------ --------- --------- ------------- ------------ ------------ BASIC LOSS PER COMMON SHARE:................. LOSS BEFORE EXTRAORDINARY LOSS............. $ (6.58) $ (8.47) EXTRAORDINARY LOSS......................... (.79) (1.12) ------------ ------------ NET LOSS................................... $ (7.37) $ (9.59) ------------ ------------ ------------ ------------ DILUTED LOSS PER COMMON SHARE:............... LOSS BEFORE EXTRAORDINARY LOSS............. $ (6.58) $ (8.47) EXTRAORDINARY LOSS......................... (.79) (1.12) ------------ ------------ NET LOSS................................... $ (7.37) $ (9.59) ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................................ 1,254,200 2,049,800
See notes to consolidated financial statements. F-8 GEOLOGISTICS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
RETAINED NOTES COMMON STOCK ADDITIONAL EARNINGS RECEIVABLE CUMULATIVE ------------------------ PAID-IN (ACCUMULATED FROM TRANSLATION COMPANY PREDECESSOR SHARES STOCK CAPITAL DEFICIT) STOCKHOLDERS ADJUSTMENT - ---------------------------------------- ----------- ----- ----------- ------------ ------------- ------------- BALANCE, APRIL 1, 1994.................. 117,647 $ 1 $ 5,237 $ 1,026 $ -- $ -- Net income............................ -- -- -- 196 -- -- Issuance of stock to directors........ 1,021 -- 169 -- -- -- Value of options granted in conjunction with extension of credit agreement........................... -- -- 250 -- -- -- ----------- --- ----------- ------------ ----- ----- BALANCE, MARCH 31, 1995................. 118,668 1 5,656 1,222 -- -- Net income............................ -- -- -- 1,198 -- -- Issuance of stock to directors........ 64 -- 10 -- -- -- Sale of stock......................... 300 -- 50 -- -- -- ----------- --- ----------- ------------ ----- ----- BALANCE, MARCH 31, 1996................. 119,032 1 5,716 2,420 -- -- Net loss.............................. -- -- -- (27) -- -- Effect of merger...................... (119,032) (1) (5,716) (2,393) -- -- ----------- --- ----------- ------------ ----- ----- COMPANY BALANCE, MAY 2, 1996.................... -- -- -- -- -- -- Sale of stock......................... 1,873,773 2 46,842 -- (150) -- Bekins acquisition.................... 42,894 -- 208 -- -- -- Matrix acquisition.................... 100,000 -- 3,000 -- -- -- Net loss.............................. -- -- -- (9,244) -- -- Foreign currency translation adjustment.......................... -- -- -- -- -- (39) ----------- --- ----------- ------------ ----- ----- BALANCE, DECEMBER 31, 1996.............. 2,016,667 2 50,050 (9,244) (150) (39) Sale of stock......................... 85,119 -- 2,792 -- (207) -- Repurchase of common stock............ (27,560) -- (551) -- -- -- Net loss.............................. -- -- -- (19,658) -- -- Foreign currency translation adjustment.......................... -- -- -- -- -- (76) ----------- --- ----------- ------------ ----- ----- BALANCE, DECEMBER 31, 1997.............. 2,074,226 $ 2 $ 52,291 $ (28,902) $ (357) $ (115) ----------- --- ----------- ------------ ----- ----- ----------- --- ----------- ------------ ----- ----- TOTAL STOCKHOLDERS' COMPANY PREDECESSOR EQUITY - ---------------------------------------- ------------- BALANCE, APRIL 1, 1994.................. $ 6,264 Net income............................ 196 Issuance of stock to directors........ 169 Value of options granted in conjunction with extension of credit agreement........................... 250 ------------- BALANCE, MARCH 31, 1995................. 6,879 Net income............................ 1,198 Issuance of stock to directors........ 10 Sale of stock......................... 50 ------------- BALANCE, MARCH 31, 1996................. 8,137 Net loss.............................. (27) Effect of merger...................... (8,110) ------------- COMPANY BALANCE, MAY 2, 1996.................... -- Sale of stock......................... 46,694 Bekins acquisition.................... 208 Matrix acquisition.................... 3,000 Net loss.............................. (9,244) Foreign currency translation adjustment.......................... (39) ------------- BALANCE, DECEMBER 31, 1996.............. 40,619 Sale of stock......................... 2,585 Repurchase of common stock............ (551) Net loss.............................. (19,658) Foreign currency translation adjustment.......................... (76) ------------- BALANCE, DECEMBER 31, 1997.............. $ 22,919 ------------- -------------
See notes to consolidated financial statements. F-9 GEOLOGISTICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
COMPANY PREDECESSOR ------------------------------------- COMPANY ------------------------------ YEAR ENDED PERIOD FROM PERIOD FROM YEAR MARCH 31, APRIL 1, 1996 MAY 2, 1996 TO ENDED -------------------- TO DECEMBER 31, DECEMBER 31, 1995 1996 MAY 1, 1996 1996 1997 --------- --------- --------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................ $ 196 $ 1,198 $ (27) $ (9,244) $ (19,658) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization.......................... 6,175 4,700 337 16,310 30,398 Amortization of deferred items......................... (324) (437) -- 231 861 Deferred income taxes.................................. 696 1,318 -- (4,180) (10,070) (Gain) loss on sale of assets.......................... (259) 34 (69) -- 60 Extraordinary item, net of tax......................... -- -- -- 997 2,293 Change in operating assets and liabilities: Accounts receivable--trade, net........................ (398) 630 (205) (1,422) (2,129) Prepaid expenses and other current assets.............. (1,207) 1,639 356 1,180 1,945 Accounts payable and accrued expenses.................. (4,208) 184 (1,910) 1,119 (5,795) Other.................................................. -- -- (1,149) (2,564) (5,654) --------- --------- ------- -------------- -------------- Net cash from operating activities................... 671 9,266 (2,667) 2,427 (7,749) --------- --------- ------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions.................................. -- -- -- (107,057) (14,470) Purchases of property and equipment and software....... (3,251) (3,175) (130) (1,369) (11,744) Proceeds from the sale of net assets held for sale..... 584 1,083 -- 1,477 7,545 Collection of notes receivable......................... 771 1,520 -- -- Issuance of notes receivable........................... (2,146) (572) -- -- Other.................................................. (500) 675 (16) -- --------- --------- ------- -------------- -------------- Net cash from investing activities................... (4,542) (469) (146) (106,949) (18,669) --------- --------- ------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit................. 51,900 46,400 6,000 56,100 96,500 Proceeds from long-term debt........................... 1,566 -- -- 91,929 110,000 Payments on revolving line of credit................... (49,000) (55,000) (3,515) (52,200) (96,500) Payments on long-term debt............................. (2,140) (793) -- (32,771) (64,692) Debt issuance costs.................................... -- -- -- (6,076) (8,918) Issuance of common stock............................... -- 50 -- 46,494 2,585 Repurchase of common stock............................. -- -- -- -- (551) Dividend payments to minority interests................ -- -- -- -- (105) Repayments from related party.......................... 1,500 -- -- -- -- --------- --------- ------- -------------- -------------- Net cash from financing activities................... 3,826 (9,343) 2,485 103,476 38,320 --------- --------- ------- -------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............................................ -- -- -- (2) 395 --------- --------- ------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (45) (546) (328) (1,048) 12,297 CASH AND CASH EQUIVALENTS OF ACQUIRED COMPANIES.......... -- -- -- 4,472 22,188 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 1,987 1,942 1,396 -- 3,424 --------- --------- ------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 1,942 $ 1,396 $ 1,068 $ 3,424 $ 37,909 --------- --------- ------- -------------- -------------- --------- --------- ------- -------------- -------------- SUPPLEMENTAL DISCLOSURES: Interest paid.......................................... $ 2,558 $ 2,661 $ 78 $ 1,878 $ 7,715 --------- --------- ------- -------------- -------------- --------- --------- ------- -------------- -------------- Income taxes paid...................................... $ 649 $ 385 $ 2 $ 934 $ 2,021 --------- --------- ------- -------------- -------------- --------- --------- ------- -------------- -------------- NONCASH COMMON STOCK TRANSACTIONS ....................... $ 3,360 $ 207 NONCASH WARRANT TRANSACTIONS............................. $ 198 -- NEW CAPITAL LEASES....................................... $ 490 $ 1,260 NONCASH PROCEEDS FROM THE SALE OF NET ASSETS HELD FOR SALE................................................... $ 110 $ 2,496
See notes to consolidated financial statements. F-10 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. GENERAL INFORMATION GeoLogistics Corporation (formerly known as International Logistics Limited and herein referred to as "GeoLogistics" or the "Company") was formed and incorporated in Delaware in 1996 by William E. Simon and Sons, LLC ("WESS"), entities managed by Oaktree Capital Management, LLC ("OCM") and Roger E. Payton, President and Chief Executive Officer. As a platform to become a major factor in both the domestic and international logistics markets, GeoLogistics made three acquisitions during the period ended December 31, 1996, and one acquisition during the year ended December 31, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of GeoLogistics or The Bekins Company ("Bekins" or "Company Predecessor") and their respective majority owned subsidiaries, collectively. The Company records its investment in each unconsolidated affiliated company (20 to 50 percent ownership) at its related equity in the net assets of such affiliate. Other investments (less than 20 percent ownership) are recorded at cost. Intercompany accounts and transactions have been eliminated. The financial statements reflect minority interests in foreign affiliates acquired in connection with the acquisition of LEP International Worldwide Limited ("LIW") (see Note 3). RECLASSIFICATIONS--Certain amounts for prior years have been reclassified to conform with 1997 financial statement and footnote presentations. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less. PROPERTY AND EQUIPMENT--Property and equipment are stated at cost, less accumulated depreciation. Depreciation on owned assets and amortization on capital lease assets is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the lease or the useful life of the asset on a straight-line basis. Major repairs, refurbishments and improvements that significantly extend the useful lives of the related assets are capitalized. Maintenance and repairs are expensed as incurred:
DEPRECIATION/ AMORTIZATION PERIODS ------------- Transportation equipment....................................................... 4-8 years Operating equipment and other.................................................. 3-8 years Buildings and improvements..................................................... 25-40 years Furniture and fixtures......................................................... 3-10 years
INTANGIBLE ASSETS--Intangible assets include costs in excess of net assets acquired in connection with the acquisitions described in Note 3 which have been allocated among certain intangible items determined by management to have value such as software, agent and customer contracts and drivers' network. Provision for amortization has been made based upon the estimated useful lives of the intangible asset categories. F-11 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) It is the Company's policy to capitalize all external direct costs of materials and services consumed in developing or obtaining internal-use computer software, and payroll and payroll related costs for employees who are directly associated with a project to develop computer software. Training costs and maintenance fees are expensed as incurred or, if such costs are included in the price or the software, allocated over the term of the service provided. IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then the assets are written down to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. OTHER ASSETS--Other assets consists primarily of pension assets acquired in the LIW transaction ($12.7 million), investments in an affiliate and deposits related to certain operating leases. FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value at December 31, 1996 and 1997 due to their short-term nature; the carrying value of the Company's revolving debt approximates fair value due to its variable interest rates. Fair values of other debt instruments were calculated based on broker quotes or quoted market prices or rates for the same or similar investments. The carrying amount of other debt instruments subject to fair value disclosures was $110.0 million which approximated fair value at December 31, 1997. The fair value of the Company's interest rate cap agreement was based on termination value and approximated $.1 million in favor of the Company at December 31, 1996. The Company had no such agreements in place at December 31, 1997. FOREIGN CURRENCY TRANSLATION--The financial statements of subsidiaries outside the United States are generally measured using the local currency as the functional currency. Assets, including intangible assets, and liabilities of these subsidiaries are translated at the rate of exchange at the balance sheet date. The resultant translation adjustments are included in the cumulative translation adjustment, a separate component of stockholders' equity. Income and expenses are translated at average monthly rates of exchange. Gains and losses from foreign currency transactions are included in results of operations. FOREIGN CURRENCY RISK MANAGEMENT--The Company's objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign exchange rate changes and allow management to focus its attention on its core business issues and challenges. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to protect certain of its existing foreign assets, liabilities, commitments and anticipated foreign earnings. The Company may use a combination of financial instruments to manage these risks, including forward contracts or option related instruments. The principal currencies hedged are the British pound, German mark, Canadian dollar and some Asian currencies such as the Hong Kong and Singapore dollar. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for the next year. The gains and losses on these contracts are offset by changes in the value of the related exposures. At December 31, 1997 the Company had approximately $21.8 million F-12 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in forward contracts outstanding. The credit and market risks under these agreements are not considered to be significant since the counterparties have high credit ratings. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to meet its objective as stated above. The Company does not enter into foreign currency or interest rate transactions for speculative purposes. DEFERRED COMPENSATION PLAN--On July 1, 1996, the Company initiated a nonqualified deferred compensation plan (the "Plan") for certain key employees to supplement the retirement savings plans. Under the Plan, employees sign an irrevocable contribution commitment for a plan year based on a percentage of their salary. The Company matches this contribution subject to certain limitations, and agrees to distribute the deferred compensation, plus investment income, in accordance with the distribution method selected by the employee. Matching expense of the Company was $24 and $76 in 1996 and 1997, respectively. Employee deferrals and Company match funds have been deposited with a trustee. These funds and the related deferred compensation obligations are recorded as both a noncurrent asset and a noncurrent liability at December 31, 1996 and 1997 in the amounts of $118 and $754, respectively. The Company has established a trust to hold and invest amounts contributed pursuant to the Plan. The Company may from time to time, at its sole discretion, direct the trustee to purchase shares of the Company's common stock (the "Plan Shares"). The Company may, by written action, designate which employees are entitled to receive Plan Shares. If at any time prior to an initial public offering, a participant's employment is terminated for any reason whatsoever, the Company has the option to repurchase any Plan Shares held in such participant's account. As of December 31, 1997, 3,168 Plan Shares were held by the Trustee on behalf of participants under the Plan. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Company contributions are subject to various vesting schedules, ranging from immediate to three years. REVENUE RECOGNITION--The Company's policy is to recognize revenue when it has performed substantially all services required under the terms of its contracts, generally on the date shipment is completed. Revenue from export-forwarding services is recognized at the time the freight departs the terminal of origin. Customs brokerage revenue is recognized upon completing the documents necessary for customs clearance. Storage revenue is recognized as services are performed. Transportation and other direct costs are recognized concurrently with revenues. For both international and domestic revenues, the above methods of revenue recognition approximate recognizing revenues and expenses when a shipment is completed. CREDIT RISK CONSIDERATIONS--Concentration of credit risk with respect to accounts receivable is limited due to the wide variety of customers and markets into which services are sold, as well as their dispersion across many different geographic areas. The Company has recorded an allowance for doubtful accounts to estimate the difference between recorded receivables and ultimate collections. The allowance and provision for bad debts are adjusted periodically based upon the Company's evaluation of historical collection experience, industry trends and other relevant factors. The allowance for doubtful accounts was $3,675 and $17,710 at December 31, 1996 and 1997, respectively. INCOME TAXES--Deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of assets and liabilities at currently enacted tax rates. The deferred income tax F-13 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible in income tax returns for the year reported. EARNINGS PER SHARE--The Company adopted Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share at December 31, 1997. All prior period earnings per common share data have been restated to conform to the provisions of this statement. Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed under the treasury stock method using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding warrants to purchase common stock. Incremental shares of zero and .1 million in 1996 and 1997 respectively, were not used in the calculation of diluted loss per common share due to their antidilutive effect. USE OF ESTIMATES--The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ from those estimates. Accounts affected by significant estimates include accounts receivable and accruals for transportation and other direct costs, tax contingencies, insurance claims, cargo loss and damage claims. RECENT ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS 130, Reporting Comprehensive Income and FAS 131, Disclosures about Segments of an Enterprise and Related Information, which become effective for the Company's 1998 consolidated financial statements. FAS 130 requires the disclosure of comprehensive income, defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, in the Company's consolidated financial statements. FAS 131 requires that a public business enterprise report certain financial and descriptive information about its reportable operating segments. In the opinion of the Company's management, it is not anticipated that the adoption of these new accounting standards will have a material effect on the consolidated financial statements or disclosures of the Company. In 1997, the Securities and Exchange Commission amended its rules to require certain disclosures concerning derivatives and other financial instruments. These additional quantitative and qualitative disclosures will be required in the Company's 1998 consolidated financial statements. 3. ACQUISITIONS On May 2, 1996, the Company acquired all of the outstanding shares of Bekins, a major provider, through its Bekins Van Lines ("BVL") subsidiary, of interstate transportation of household goods and logistic services for high-tech, electronic, medical, and high-end consumer products, for $49.7 million including assumptions of debt and acquisition costs. The consideration was comprised of $49.5 million in cash and the exchange of 45,560 shares of Bekins stock valued at $0.2 million for shares of GeoLogistics. The value assigned to the Company's stock issued in the exchange was based on treatment required by Emerging Issues Task Force ("EITF") publication 88-16 BASIS IN LEVERAGED BUYOUT TRANSACTIONS, which states that residual interest in the accquired company should be carried over at the predecessor's basis. Therefore, the $.2 million of basis previously included in Bekins was carried over to the shares of common stock of the Company. The excess of the purchase price over the fair value of the net assets acquired was $17.9 million, has been recorded as goodwill, and is being amortized on a straight-line basis over 40 years. F-14 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 3. ACQUISITIONS (CONTINUED) The Company has pursued a strategy of converting company-owned Bekins Moving and Storage ("BMS") service centers into independent moving and storage agents, who will become part of the BVL agent network. At December 31, 1996 and 1997, 17 and zero company-owned BMS service centers, respectively, remained. Upon the acquisition of Bekins by the Company on May 2, 1996, BMS was treated as discontinued and the net remaining assets were classified as assets held for sale in the balance sheet. During 1997 all remaining assets of BMS were sold. Losses from operations since May 2, 1996 of $4.0 million, partially offset by the gain on sale of the assets of $2.6 million, have been considered in the allocation of the purchase price. On October 31, 1996, the Company acquired all of the outstanding shares of LEP Profit International, Inc. ("LEP-USA") and LEP International Inc. ("LEP-Canada") from LIW for $32 million in cash including assumption of debt and acquisition costs. LEP-USA and LEP-Canada (collectively "LEP") provide domestic and international freight forwarding services, as well as value-added domestic logistic services. The excess of the purchase price over the fair value of the net assets acquired was $20.9 million, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. In addition to the acquisition of LEP, the Company acquired 33.3% of the outstanding common stock and warrants to purchase the remaining 66.7% of LIW for the aggregate price of one dollar. On November 7, 1996, the Company acquired all of the outstanding shares of Matrix International Logistics, Inc. ("Matrix"), an international project cargo freight forwarder that also specializes in premium international household relocation services, for $30 million including assumption of debt and acquisition costs. The consideration was comprised of $27 million in cash and $3 million of the Company's common stock (valued at $30 per share, the same price paid by shareholders for additional stock purchases made on October 31, 1996). The excess of the purchase price over the fair value of the net assets acquired was $18.9 million, has been recorded as goodwill, and is being amortized on a straight-line basis over 25 years. On December 31, 1997, employment agreements with three of the Matrix selling stockholders were terminated and replaced with new employment agreements and the employment agreement with the fourth selling stockholder was terminated pursuant to a Separation Agreement and Mutual Release. Under the agreements, the Company is obligated for future payments of consulting fees to the terminated selling stockholder and salary for the three remaining selling stockholders through July 2000 and December 2001, respectively. The Company is also obligated to repurchase shares of common stock owned by the selling stockholders under certain conditions. In connection with the three new employment agreements, the contingent purchase price provisions of the acquisition contract were terminated. On September 30, 1997, the Company increased its holdings of LIW's common stock, a United Kingdom based international freight forwarder with operations primarily in Europe and Asia, from 33.3% to 75.2%. In December 1997, the Company acquired LIW's remaining outstanding common stock and acquired and retired LIW's outstanding preferred stock. Consideration included cash and warrants to purchase 19,045 shares of common stock of the Company at an exercise price of $45 per share under terms similar to previously issued warrants. The transaction has been accounted for under the purchase method of accounting. The purchase price ($14.5 million, including assumption of debt and acquisition costs) has been allocated to the assets acquired and liabilities assumed based on their fair value at the date of purchase. The Company continues to evaluate the fair value of certain assets acquired and liabilities assumed including those related to foreign pension plans, investments in affiliates and certain claims. In the opinion of management, no material adjustments from preliminary estimates and assumptions are F-15 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 3. ACQUISITIONS (CONTINUED) expected, however any required adjustment to the purchase price allocation will be recorded when the information becomes available. The operating results of each acquired company have been included in the consolidated statements of operations since the dates of acquisition. Pro forma unaudited operating results assuming the LIW acquisition was made on January 1, 1997 and adjusting for additional depreciation of property and equipment and additional interest on long-term debt (See Note 6), are as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ (UNAUDITED) Revenues........................................................................ $1,525,162 Net revenues.................................................................... 378,273 Operating loss.................................................................. 9,156 Net loss........................................................................ 17,617
4. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, ---------------------- AMORTIZATION 1996 1997 PERIOD ---------- ---------- ------------- Goodwill............................................... $ 52,878 $ 56,627 25-40 years Software............................................... 21,687 28,251 2-3 years Agent contracts........................................ 12,554 13,762 2-5 years Customer contracts..................................... 6,500 6,500 2 years Debt issuance costs.................................... 4,359 8,788 5-10 years Drivers' network....................................... 1,750 1,750 2 years Other.................................................. 255 255 4 years ---------- ---------- 99,983 115,933 Less accumulated amortization.......................... (14,839) (42,057) ---------- ---------- $ 85,144 $ 73,876 ---------- ---------- ---------- ----------
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER NONCURRENT LIABILITIES Accounts payable includes checks outstanding against the Company's central disbursement accounts. Arrangements with the Company's banks do not call for reimbursement until the checks are presented for payment. Such outstanding checks totaled $11.3 million and $20.1 million at December 31, 1996 and 1997, respectively. F-16 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER NONCURRENT LIABILITIES (CONTINUED) Accrued expenses and other noncurrent liabilities consist of the following:
DECEMBER 31, ----------------------- 1996 1997 ---------- ----------- ACCRUED EXPENSES Transportation...................................................... $ 22,116 $ 101,462 Employee related.................................................... 8,722 21,196 Rents and utilities................................................. -- 1,508 Insurance and litigation............................................ 7,621 10,057 Acquisition related................................................. 4,761 7,913 Customer programs................................................... 1,825 2,997 Accrued interest.................................................... -- 2,031 VAT/Sales tax payables.............................................. -- 3,382 Other............................................................... 3,771 14,552 ---------- ----------- $ 48,816 $ 165,098 ---------- ----------- ---------- ----------- OTHER NONCURRENT LIABILITIES Employee benefit programs........................................... $ 118 $ 22,275 Insurance........................................................... 5,717 5,288 Taxes other than income taxes payable............................... -- 10,610 Acquisition related................................................. 4,526 8,335 Other............................................................... 756 139 ---------- ----------- $ 11,117 $ 46,647 ---------- ----------- ---------- -----------
INSURANCE CLAIMS--Certain of the Company's insurance programs, primarily workers' compensation, public liability and property damage, and cargo loss and damage, are subject to substantial deductibles or retrospective adjustments. Accruals for insurance claims, except for cargo claims, are estimated for the ultimate cost of unresolved and unreported claims pursuant to actuarial determination. Cargo claims are accrued for based on the Company's historical claims experience and management's judgment. ACQUISITION RESERVES--In conjunction with the 1996 acquisitions of Bekins, LEP and Matrix (see Note 3), the Company recorded certain acquisition reserves related to the closure of duplicate administrative and warehouse facilities, consolidation of redundant business systems, and reduction of Bekins and LEP personnel performing duplicate tasks. Estimated termination benefits include approximately $3.8 million for severance, wage continuation, medical and other benefits for approximately 200 employees. Facility closures and related costs include estimated net losses on disposal of property, plant and equipment, lease payments and related costs of $3.9 million. Approximately $1.6 million was accrued for all other consolidation, relocation and related activities. In 1997, the Company adjusted certain of these reserves and recorded additional reserves in connection with the acquisition of LIW relating to redundant office facilities ($1.3 million), terminations and relocations of approximately 40 people ($2.6 million) and facility closures ($4.6 million). All costs were accrued as part of the purchase accounting in accordance with approved management plans. F-17 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------------- INTEREST RATES 1996 1997 ------------------- ------------ ------------- Senior Notes.............................. 9.75% $ -- $ 110,000 Term Notes................................ 8.25% -- 9.50% 59,275 -- Revolving Credit Facility................. 9.50% 3,900 -- Capital lease obligations, due in various installments through 2007, collateralized by certain computer equipment with a gross value of $5.7 million and $4.1 million at December 31, 1996 and 1997, respectively, and accumulated depreciation of $4.0 million and $0.9 million, respectively.......... 8.25% -- 9.90% 2,291 3,087 Other..................................... 6.19 -- 10.58% 848 2,283 ------------ ------------- 66,314 115,370 Less current portion...................... (4,510) (2,580) ------------ ------------- $ 61,804 $ 112,790 ------------ ------------- ------------ -------------
Future minimum payments of the Company's long-term debt (exclusive of payments for maintenance, insurance, taxes, and other expenses related to capital leases) as of December 31, 1997 are as follows:
CAPITAL LEASES DEBT TOTAL --------- ---------- ---------- 1998........................................................ $ 1,822 $ 1,087 $ 2,909 1999........................................................ 1,263 465 1,728 2000........................................................ 467 292 759 2001........................................................ 83 292 375 2002........................................................ 2 147 149 Thereafter.................................................. 110,000 110,000 --------- ---------- ---------- 3,637 112,283 115,920 Less amounts representing interest.......................... 550 -- 550 --------- ---------- ---------- $ 3,087 $ 112,283 $ 115,370 --------- ---------- ---------- --------- ---------- ----------
SENIOR NOTES--In October 1997 the Company issued and sold $110.0 million in aggregate principal amount of its 9 3/4% senior notes (the "Notes") which are due October 15, 2007, and are general unsecured obligations of the Company. The Notes are fully and unconditionally guaranteed on a joint and several senior basis by all existing and future domestic Restricted Subsidiaries (as defined in the indenture relating to the Notes). Three of the Company's domestic subsidiaries hold as their sole assets all of the issued and outstanding equity interests of the Company's non-guarantor foreign subsidiaries. The Notes are subject to various covenants, including, limitations on incurrence of additional indebtedness, restricted payments, F-18 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. LONG-TERM DEBT (CONTINUED) dividends and payment restrictions on the ability of the Company's subsidiaries to pay dividends. The Notes may not be redeemed at the option of the Company prior to October 15, 2002, except in connection with one or more public equity offerings by the Company. Upon the occurrence of a Change of Control, the holders of the Notes would have the right to require the Company to purchase their Notes at a price equal to 101% of the then outstanding aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The following is condensed combined financial information of guarantor and non-guarantor subsidiaries:
AS OF DECEMBER 31, 1997 ----------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED ---------- ----------- -------------- ------------ ---------- Cash and cash equivalents.................... $ 7,578 $ 2,276 $ 28,055 $ -- $ 37,909 Accounts receivable--trade, net.............. -- 107,843 166,874 (24,711) 250,006 Property, net................................ 1,076 8,092 42,639 -- 51,807 Intangible assets, net....................... 13,203 58,044 3,595 (966) 73,876 Other assets................................. 38,395 31,961 39,479 (37,667) 72,168 ---------- ----------- -------------- ------------ ---------- Total assets............................... $ 60,252 $ 208,216 $ 280,642 $ (63,344) $ 485,766 ---------- ----------- -------------- ------------ ---------- ---------- ----------- -------------- ------------ ---------- Current liabilities.......................... $ 6,188 $ 116,875 $ 204,427 $ (25,681) $ 301,809 Long-term debt............................... 110,534 38 2,218 -- 112,790 Other non-current liabilities................ (79,389) 72,138 55,495 4 48,248 Stockholders' equity......................... 22,919 19,165 18,502 (37,667) 22,919 ---------- ----------- -------------- ------------ ---------- Total liabilities and stockholders' equity..................... $ 60,252 $ 208,216 $ 280,642 $ (63,344) $ 485,766 ---------- ----------- -------------- ------------ ---------- ---------- ----------- -------------- ------------ ----------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED ---------- ----------- -------------- ------------ ---------- Revenues..................................... $ -- $ 661,201 $ 367,377 $ (50,329) $ 978,249 Transportation and other direct costs........ -- 519,892 289,486 (50,329) 759,049 Operating expenses........................... 2,917 159,664 72,550 -- 235,131 ---------- ----------- -------------- ------------ ---------- Operating profit (loss).................... (2,917) (18,355) 5,341 -- (15,931) Interest and other, net...................... (735) (7,016) (1,036) -- (8,787) Income taxes benefit (provision)............. 1,410 8,612 (1,602) -- 8,420 Minority interests........................... -- -- (1,067) -- (1,067) Extraordinary loss........................... (1,666) (420) (207) -- (2,293) ---------- ----------- -------------- ------------ ---------- Net (loss) income.......................... $ (3,908) $ (17,179) $ 1,429 $ -- $ (19,658) ---------- ----------- -------------- ------------ ---------- ---------- ----------- -------------- ------------ ----------
F-19 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. LONG-TERM DEBT (CONTINUED)
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED ---------- ----------- -------------- --------------- ---------- Cash flows from: Operating activities........................ $ 2,996 $ (8,116) $ (2,568) $ (61) $ (7,749) Investing activities: Business acquisitions, net................ (14,470) (14,470) Purchases of property and equipment, net.......................... (4,714) 1,937 (1,422) (4,199) Financing activities: Debt transactions, net.................... 21,671 5,238 9,316 61 36,286 Equity transactions, net.................. 2,034 2,034 Effect of exchange rate, changes in cash and cash equivalents.................... 395 395 ---------- ----------- ------- ----- ---------- Net increase in cash.......................... 7,517 (941) 5,721 -- 12,297 Cash of acquired companies.................... 22,188 22,188 Cash and cash equivalents, beginning of period...................................... 61 3,217 146 -- 3,424 ---------- ----------- ------- ----- ---------- Cash and cash equivalents, end of period...... $ 7,578 $ 2,276 $ 28,055 -- $ 37,909 ---------- ----------- ------- ----- ---------- ---------- ----------- ------- ----- ----------
REVOLVING CREDIT FACILITY--In October 1997, the Company entered into a new revolving credit facility for $100.0 million which matures in October 2002. At December 31, 1997, no amounts were outstanding and the Company had an eligible borrowing base of $95.8 million. Letters of credit of $27.5 million were outstanding, leaving approximately $68.3 million of unused availability under the facility. Interest on the facility accrues at either the Prime Rate or LIBOR plus an applicable interest margin. The applicable interest margin until March 31, 1998 is 0.5% for prime rate loans and 2.0% for LIBOR loans. Between April 1, 1998 and October 27, 1998, the applicable interest margin will be the lower of (i) the foregoing margins or (ii) a percentage which will fluctuate between 0.0% and 1% for prime rate loans and between 1.5% and 2.5% for LIBOR loans, based on the ratio of the Company's funded indebtedness to EBITDA (as defined) (the "Floating Margin"). From October 28, 1998, the Floating Margin will determine the applicable interest margin. The credit facility contains certain covenants and restrictions on actions by the Company including, without limitation, restrictions on indebtedness, liens, guarantee obligations, mergers, creation or dissolution of subsidiaries, asset dispositions not in the ordinary course of business, investments, acquisitions, loans, advances, dividends and other restricted junior payments, transactions with affiliates, sale and leaseback transactions, prepayment of or amendments to junior obligations, entering other lines of business and amendments of other indebtedness. The Company is required to meet certain financial covenants including minimum EBITDA (as defined) and, in certain circumstances, interest coverage tests. Certain subsidiaries are entitled to draw amounts under the revolving credit facility, subject to availability pursuant to a borrowing base formula based upon eligible accounts receivable, in order to meet working capital requirements and for general corporate purposes. Borrowings under the facility are guaranteed by Geologistics and certain indirect domestic subsidiaries of the Company. F-20 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. LONG-TERM DEBT (CONTINUED) TERM NOTES--The Company's loan agreement dated October 31, 1996 (the "Agreement") was repaid in 1997 from the proceeds of the Notes. In connection with this transaction, the Company has recorded an extraordinary loss of $3,821 ($2,293 net of tax benefit) related to the write off of unamortized deferred financing cost and interest rate caps. Additional information on the Company's bank borrowings is as follows:
PERIOD FROM MAY 2, 1996 TO YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 ----------------- ----------------- Average balance outstanding............................ $ 37,807 $ 82,838 Maximum balance outstanding............................ 66,375 119,218 Weighted average interest rate......................... 9.52% 9.28%
On May 2, 1996, the Company secured a $50.0 million loan under similar terms as the Agreement. On October 31, 1996, the Company used proceeds from the Agreement to retire the May 2, 1996 loan. In connection with this transaction, the Company recorded an extraordinary loss of $1.7 million ($997.0 net of tax) related to the write-off of unamortized deferred financing costs. INTEREST RATE PROTECTION--The Company enters into interest rate agreements to reduce the impact of changes in interest rates on its variable rate debt. The initial cost of interest rate caps was recorded in intangible assets and was amortized to interest expense over the life of the caps. At December 31, 1996, the Company had an interest rate cap which limited the maximum LIBOR rate on $16 million notional principal amount at 7.0% through August 1999. The interest rate caps were subsequently cancelled concurrent with the issuance of the Senior Notes in 1997. 7. INCOME TAXES The Company and its U.S. subsidiaries file their Federal income tax return on an consolidated basis. At December 31, 1997, the Company's U.S. net operating loss ("NOL") carryforwards available to offset future taxable income were approximately $16.5 million which expire in 2009 through 2012. The availability of tax benefits of such NOL carryforwards to reduce the Company's Federal income tax liabilities is subject to various limitations under the Internal Revenue Code of 1986, as amended (the "Code"). In addition, at December 31, 1997, various foreign subsidiaries of the Company have aggregate NOL carryforwards for foreign income tax purposes of approximately $90.6 million which are subject to significant restrictive provisions in certain countries. Approximately $6.2 million of the foreign NOL's expire between 1998 and 2004 and $84.4 million have an indefinite life. Approximately $42.0 million of the foreign NOL's relate to Germany where the tax authorities have challenged their availability to offset future income. An additional $24.0 million relate to the LIW parent company which does not have significant, separate return, future earnings generation potential. Management believes that the realization of the net deferred tax asset is subject to significant challenge and has established a valuation allowance to reflect this asset at its estimated realizable value. No provision was made at December 31, 1997 for accumulated earnings of certain overseas subsidiaries because it is expected that such earnings will be reinvested overseas indefinitely. Domestic loss from operations before income taxes was $14.2 million and $27.7 million for the periods ended December 31, 1996 and 1997, respectively. Foreign income before income taxes was $0.4 million and $1.9 million for the periods ended December 31, 1996 and 1997, respectively. F-21 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 7. INCOME TAXES (CONTINUED) The following summarizes the effect of deferred income tax items and the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and loss carry-forwards comprising the net deferred tax asset are as follows:
DECEMBER 31, -------------------- 1996 1997 --------- --------- Deferred tax assets: Net operating loss carry-forwards..................................... $ 4,196 $ 42,002 Insurance reserves.................................................... 5,027 5,363 Allowance for doubtful accounts....................................... 1,657 1,743 Property and equipment................................................ -- 1,884 Other assets.......................................................... 7,379 8,727 --------- --------- Gross deferred tax assets............................................... 18,259 59,719 --------- --------- Deferred tax liabilities: Property and equipment................................................ 1,852 158 Other intangible assets............................................... 10,239 784 Other liabilities..................................................... 1,839 556 --------- --------- Gross deferred tax liabilities.......................................... 13,930 1,498 --------- --------- Valuation allowance..................................................... (30,832) --------- --------- Net deferred tax assets................................................. $ 4,329 $ 27,389 --------- --------- --------- ---------
Income tax expense (benefit), exclusive of the extraordinary losses, was comprised of:
PERIOD FROM MAY 2, 1996 TO YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, ------------- -------------- 1995 1996 1996 1997 ------------- ----------- ------------- -------------- Current--Federal..................... -- -- $ (300) $ -- State........................ $ 120 $ 190 303 559 Foreign...................... -- -- 164 1,091 ----- ----------- ------ -------------- 120 190 167 1,650 Deferred--Federal.................... 696 1,318 (3,644) (8,403) State....................... -- -- (536) (2,039) Foreign..................... -- -- -- 372 ----- ----------- ------ -------------- 696 1,318 (4,180) (10,070) ----- ----------- ------ -------------- $ 816 $ 1,508 $ (4,013) $ (8,420) ----- ----------- ------ -------------- ----- ----------- ------ --------------
F-22 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 7. INCOME TAXES (CONTINUED) Reconciliation of income tax expense, exclusive of the extraordinary losses, to the statutory corporate Federal tax rate of 35% were as follows:
PERIOD FROM MAY 2, 1996 TO DECEMBER YEAR ENDED YEAR ENDED YEAR ENDED 31, DECEMBER 31, MARCH 31, MARCH 31, ------------ ------------ 1995 1996 1996 1997 ------------- ----------- ------------ ------------ Statutory tax expense (benefit)........ $ 354 $ 915 $ (4,291) $ (9,026) Effects of-- Amortization of goodwill............. 405 486 245 851 Foreign income taxed at various rates.............................. (370) State income taxes, net of Federal benefit............................ 57 107 (613) (1,388) Other, net............................. 646 1,513 ----- ----------- ------------ ------------ $ 816 $ 1,508 $ (4,013) $ (8,420) ----- ----------- ------------ ------------ ----- ----------- ------------ ------------
8. COMMITMENTS AND CONTINGENCIES OPERATING LEASES--The Company leases facilities and equipment under noncancelable operating leases which expire at various dates through 2006. Net rental expense for the years ended March 31, 1995 and 1996, the period from May 2, 1996 to December 31, 1996, and the year ended December 31, 1997 was $8.9 million, $8.3 million, $3.6 million and $18.4 million, respectively. Future minimum rental payments due under noncancelable operating leases at December 31, 1997 were as follows: 1998.............................................. $ 32,320 1999.............................................. 21,689 2000.............................................. 17,141 2001.............................................. 10,930 2002.............................................. 7,949 Thereafter........................................ 38,054 --------- Total..................................... $ 128,083 --------- ---------
LITIGATION AND CONTINGENT LIABILITIES--At December 31, 1997, the Company is contesting a claim made by Danish Customs and Excise for payment of customs duties and excise taxes of approximately $4.7 million related to alleged irregularities in connection with a number of historical LIW shipments of freight out of Denmark. Additionally, the Company is subject to a challenge by German tax authorities relating to approximately $3.2 million of alleged liabilities relating to the status of LIW's historical tax filings. The Company has other tax disputes which, in the aggregate, involve amounts of $11.6 million. The Company believes it has a number of defenses to the alleged tax liabilities and it intends to defend the tax claims vigorously. The Company believes it has established adequate reserves for the total alleged tax liabilities. F-23 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company and certain of its subsidiaries are defendants in legal proceedings arising in the ordinary course of business and are subject to unasserted claims. Although the outcome of these proceedings cannot be determined, it is the opinion of management, based on consultation with legal counsel, that the litigation reserves recorded at December 31, 1996 and 1997, and included in accrued expenses, are sufficient to cover losses which are probable to occur. 9. PENSION PLAN, POST RETIREMENT BENEFITS AND OTHER BENEFITS DEFINED BENEFIT PLANS--As a result of the LIW acquisition the Company now has a number of defined benefit pension plans that cover a substantial number of foreign employees. Retirement benefits are provided based on compensation as defined in the plans. The Company's policy is to fund these plans in accordance with local practice and contributions are made in accordance with actuarial valuations. The components of net periodic pension cost and the significant assumptions for the foreign plans consisted of the following in the thousands of dollars and percents:
1997 ------------ Service cost.................................................................... $ 756 Interest cost................................................................... 1,443 Return on assets................................................................ (1,487) Net amortization................................................................ 323 ------------ Net cost........................................................................ $ 1,035 ------------ ------------ Discount rates for obligations.................................................. 7.0 - 8.0% Discount rates for expenses..................................................... 7.0 - 8.0% Assumed rates of compensation increases......................................... 2.0 - 5.5% Expected long-term rate of return............................................... 6.0 - 9.0%
F-24 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 9. PENSION PLAN, POST RETIREMENT BENEFITS AND OTHER BENEFITS (CONTINUED) A reconciliation of the funded status of the foreign plans at December 31, 1997 in thousands of dollars follows:
ASSETS ACCUMULATED EXCEED BENEFITS ACCUMULATED EXCEED BENEFITS ASSETS ------------ ------------ Actuarial present value of benefit obligations Vested benefit obligation........................................................... $ (62,703) $ (16,481) Nonvested benefit obligation........................................................ (3,405) (536) ------------ ------------ Accumulated benefit obligation...................................................... (66,108) (17,017) Excess of projected benefit obligation over accumulated benefit obligation............ (4,159) (454) ------------ ------------ Projected benefit obligation.......................................................... (70,267) (17,471) Plan assets at fair value............................................................. 82,935 0 ------------ ------------ Projected benefit obligation compared to plan assets.................................. 12,668 (17,471) Unrecognized net (gain) loss.......................................................... (110) (5,201) Prior service cost not yet recognized in net periodic pension cost.................... 0 1,407 Remaining unrecognized net asset...................................................... 138 0 ------------ ------------ Pension asset (liability) recognized in the consolidated balance sheet................ $ 12,696 $ (21,265) ------------ ------------ ------------ ------------
Retirement savings plans are available to substantially all North American salaried and nonunion hourly employees, which allow eligible employees to contribute a portion of their annual salaries to the plans. Matching contributions are made at the discretion of each subsidiary. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Contributions are subject to various vesting schedules, ranging from immediate to seven years. Matching contributions for the period ended December 31, 1996 and for the year ended December 31, 1997 were $207 and $673, respectively. 10. STOCKHOLDERS' EQUITY WARRANTS--In connection with the Company's 1996 acquisitions of Bekins, LEP and Matrix fixed and variable price warrants for the purchase of 403,889 shares of common stock at a price range of $20 to $39 were issued to certain employees and nonemployees. During the year ended December 31, 1997, fixed price warrants for the purchase of 333,500 shares of common stock were issued to certain employees, at an exercise price ranging from $32 to $60 per share, and warrants to purchase 19,045 shares of common stock were issued in connection with the purchase of LIW at an exercise price of $45 per share. All warrants generally vest ratably over one to four years, although those issued to certain non-employee entities in connection with the Company's 1996 financings and acquisition-related activities vested immediately, and F-25 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 10. STOCKHOLDERS' EQUITY (CONTINUED) warrants issued prior to January 1, 1997 fully vest upon a registered public offering. All warrants expire in seven to ten years from the date of issuance. The following table summarizes the warrant activity:
WEIGHTED AVERAGE EXERCISE WARRANTS PRICE --------- ------------- Outstanding at May 2, 1996.......................................... -- -- Granted in 1996..................................................... 403,889 $ 26.25 --------- Outstanding at December 31, 1996.................................... 403,889 $ 26.25 Granted in 1997..................................................... 352,545 $ 51.69 Cancelled/forfeited................................................. (30,000) $ 55.67 --------- Outstanding at December 31, 1997.................................... 726,434 $ 37.38 --------- --------- Exercisable at: December 31, 1996................................... 128,889 $ 22.56 --------- --------- December 31, 1997...................................... 216,684 $ 26.50 --------- ---------
The following table summarizes information relating to warrants outstanding and exercisable at December 31, 1997, using various ranges of exercise prices:
RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE REMAINING YEARS - --------- ----------- ----------- ----------------- --------------------- $20-$33 363,890 185,139 $ 24.87 5.6 $34-$47 162,545 31,545 $ 42.69 8.6 $48-$60 199,999 -- $ 55.83 9.5
The Company accounts for warrants issued to nonemployees under the fair value method as required by FAS 123, Accounting for Stock Based Compensation. Approximately $200 of acquisition costs were recorded as part of the purchase price for the fair value of fixed price warrants issued to nonemployees for services rendered in connection with the Company's acquisitions during 1996. ACCOUNTING FOR STOCK BASED COMPENSATION--The Company has adopted the disclosure-only provisions of FAS 123, for purposes of warrants issued to employees. Accordingly, no compensation expense has been recognized for the stock warrants. Had compensation costs been determined based on the fair value at the grant date consistent with the provisions of FAS 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
1996 1997 --------- --------- Net Loss--as reported..................................................... $ 9,244 $ 19,658 Net Loss--pro forma....................................................... $ 9,630 $ 19,798 Net Loss common per share--as reported.................................... $ 7.37 $ 9.59 Net Loss common per share--pro forma...................................... $ 7.67 $ 9.66
F-26 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 10. STOCKHOLDERS' EQUITY (CONTINUED) The fair value of each warrant was estimated on the date of grant using the minimum value method as a result of the Company's non-public status, zero volatility of its stock and using risk free interest rates of 5.75% to 6.45%, expected life of four years and a dividend yield of zero. EMPLOYEE STOCK PURCHASE PLAN--The Company's Employee Stock Purchase Plans (the "Purchase Plans") provide certain employees of the Company with the right to purchase any or all of such employee's allocated portion, as determined by the Board of Directors of the Company, of an aggregate of 8,500 shares of Common Stock of the Company at a purchase price of $20.00 per share and 75,000 shares of Common Stock at a purchase price of $30.00 per share. The right to acquire shares of Common Stock under the Purchase Plans has terminated. A total of 33 employees purchased an aggregate of 55,150 shares of Common Stock pursuant to the Purchase Plans. Subsequent to December 31, 1997, a third Purchase Plan has been authorized for up to an additional 75,000 shares, which expires on December 31, 1998. The Purchase Plans provide that, if at any time prior to an initial public offering, an employee who has purchased shares under the Purchase Plans is terminated for any reason whatsoever, including without limitation, death, disability, resignation, retirement or termination with or without cause, (i) the Company has an option (a "call") to repurchase, in whole or in part, the shares of Common Stock of the Company that are then owned by such employee or any transferee, which were acquired pursuant to the Purchase Plans and (ii) the terminated employee has an option (a "put") to sell to the Company, in whole or in part, the shares of Common Stock then owned by such employee which were acquired pursuant to the Purchase Plans. The purchase price for the exercise of either the call or the put option is based on the Company's earnings for the most recent fiscal quarter prior to termination and the number of shares of Common Stock outstanding and subject to warrants to the extent such warrants are in the money. NOTES RECEIVABLE FROM STOCKHOLDERS--During the period ended December 31, 1996, the Company sold 7,512 shares of common stock to an officer of the Company in exchange for a note receivable of $150. During 1997, the Company sold 7,000 shares of stock to an officer of the Company in exchange for cash of $52 and a note of $157 and 3,333 shares of common stock to a management employee of the Company in exchange for $50 cash and a note receivable of $50. These notes have been recorded as a reduction of stockholders' equity. The notes are secured by the issued common stock, carry interest rates of 8% to 10%, and are payable in full by April 30, 2000, March 1, 1998 and June 30, 1998, respectively. Subsequent to December 31, 1997 the note for $157 was paid in full. 11. SEGMENT INFORMATION The Company operates in a single business segment providing worldwide logistics solutions to meet customer's specific requirements for transportation and related services by arranging and monitoring all aspects of material flow activities utilizing advanced information technology systems. No customer accounted for ten percent or more of consolidated revenue. F-27 GEOLOGISTICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS DOLLARS EXCEPT PER SHARE AMOUNT) 11. SEGMENT INFORMATION (CONTINUED) Certain information regarding the Company's operations by geographic region is summarized below.
U.S. AND CANADA EUROPE ASIA CORPORATE ELIMINATIONS CONSOLIDATED ---------- ---------- --------- ----------- ------------ ------------ YEAR ENDED DECEMBER 31, 1997 Total revenue......................... $ 755,116 $ 267,883 $ 92,850 -- $ (137,600) $ 978,249 Transactions between regions.......... 26,919 70,895 39,786 -- (137,600) -- Revenues from customers............... 728,197 196,988 53,064 -- -- 978,249 Net revenue........................... 157,160 46,051 15,989 -- -- 219,200 Income (loss) from operations......... (13,145) 1,032 1,992 (5,810) -- (15,931) Long-lived assets..................... 14,538 33,349 6,407 5,525 -- 59,819 PERIOD ENDED DECEMBER 31, 1996 Total revenue......................... $ 225,793 -- -- -- -- $ 225,793 Transactions between regions.......... -- -- -- -- -- -- Revenues from customers............... 225,793 -- -- -- -- 225,793 Net revenue........................... 44,585 -- -- -- -- 44,585 Income (loss) from operations......... (8,423) -- -- $ (856) -- (9,279) Long-lived assets..................... 25,963 -- -- 26 -- 25,989
Revenue from transfers between regions represents approximate amounts that would be charged if the service were provided by an unaffiliated company. Total regional revenue is reconciled with total consolidated revenue by eliminating inter-regional revenue. 12. RELATED PARTY TRANSACTIONS The Company has entered into agreements with its two largest shareholders WESS and OCM to provide the Company with management and financial advisory services relating to the restructuring of the Company's debt and various acquisitions made by the Company, during the past two years. In conjunction with these activities, the Company paid WESS and OCM $1.7 million and $1.0 million in 1996, respectively, and $1.6 million and $1.3 million in 1997, respectively. F-28 LEP INTERNATIONAL WORLDWIDE LIMITED STATEMENT OF DIRECTORS' RESPONSIBILITIES As described in the basis of preparation (Note 1 on page F-35), the combined and consolidated financial statements do not constitute the statutory accounts of LEP International Worldwide Limited (the "Company") prepared in accordance with the Companies Act 1985. Nevertheless, the Directors acknowledge their responsibility for the preparation of the combined and consolidated financial statements and for ensuring that they present fairly the state of affairs of the Company and its subsidiaries as at the end of each financial year and of the loss of that group of companies for each financial year. The Directors consider that in preparing the combined and consolidated financial statements on pages F-30 to F-57 the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all the accounting standards which they consider to be applicable have been followed. F-29 ACCOUNTANTS' REPORT TO THE DIRECTORS OF LEP INTERNATIONAL WORLDWIDE LIMITED To the Board of Directors and Shareholders of LEP International Worldwide Limited: We have audited the accompanying consolidated balance sheet of LEP International Worldwide Limited and its subsidiaries (the Company or LIW) as of 31 December, 1996 and the combined balance sheet of its predecessor company and subsidiaries (LIW Predecessor) as of 31 December 1995 and the related combined and consolidated statements of profit and loss accounts and of cash flows for the periods 24 January 1996 to 31 December 1996, 1 January 1996 to 23 January 1996 and the years ended 31 December 1995 and 1994. The basis of preparation of these financial statements is set out in note 1. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom which do not differ in any material respect from auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined and consolidated financial statements audited by us present fairly, in all material respects, the financial position of the Company and LIW Predecessor at 31 December 1996 and 1995, and the results of their operations and their cash flows for the periods ended 31 December 1996, 23 January 1996, 31 December 1995 and 1994 in conformity with generally accepted accounting principles in the United Kingdom consistently applied. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of combined and consolidated net income, expressed in pounds sterling, for each of the periods ended 31 December 1996, 23 January 1996, 31 December 1995 and 1994 and the determination of the combined and consolidated financial position expressed in pounds sterling at 31 December 1996 and 1995 to the extent summarised in notes 24 and 25 to the combined and consolidated financial statements. Price Waterhouse Chartered Accountants London, England 3 October 1997 F-30 LEP INTERNATIONAL WORLDWIDE LIMITED COMBINED AND CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER:
LIW PREDECESSOR LIW ------------------- -------------------- 1995 1996 ---------- -------------------- NOTE L'000 L'000 US$'000 ------- ---------- ---------- -------- FIXED ASSETS Tangible assets --property................................. 9 25,865 18,718 32,051 --other.................................... 10 7,715 3,588 6,144 Investments --associated undertakings.................. 11 9,013 2,086 3,572 --other.................................... 12 378 283 485 ---------- ---------- -------- 42,971 24,675 42,252 ---------- ---------- -------- CURRENT ASSETS Debtors........................................ 13 164,012 112,913 193,341 Cash and short term deposits................... 17,877 14,618 25,030 ---------- ---------- -------- 181,889 127,531 218,371 Creditors: amounts falling due within one year......................................... 14 & 16 (186,304) (122,376) (209,544) ---------- ---------- -------- Net current (liabilities)/assets............... (4,415) 5,155 8,827 ---------- ---------- -------- Total assets less current liabilities.......... 38,556 29,830 51,079 Creditors: amounts falling due after more than one year..................................... 15 & 16 (21,679) (17,160) (29,383) Provisions for liabilities and charges......... 18 (387) (101) (173) ---------- ---------- -------- 16,490 12,569 21,523 ---------- ---------- -------- ---------- ---------- -------- CAPITAL AND RESERVES Shareholders' funds............................ 20 15,035 11,122 19,044 Equity minority interests...................... 1,455 1,447 2,479 ---------- ---------- -------- 16,490 12,569 21,523 ---------- ---------- -------- ---------- ---------- --------
The combined and consolidated financial statements were approved by the Board of Directors on 3 October 1997 and are signed on its behalf by J Wasp M C Alexander Director DIRECTOR DIRECTOR
The notes on pages F-35 to F-56 form part of these combined and consolidated financial statements. F-31 LEP INTERNATIONAL WORLDWIDE LIMITED COMBINED AND CONSOLIDATED STATEMENTS OF PROFIT AND LOSS ACCOUNTS
LIW LIW PREDECESSOR --------------------- --------------------------------------- PERIOD PERIOD 24 JAN - YEAR END YEAR END 01 JAN - 31 DEC 1996 31 DEC 1994 31 DEC 1995 23 JAN 1996 --------------------- NOTE L'000 L'000 L'000 L'000 US$'000 ---- ----------- ----------- ----------- ---------- --------- TURNOVER Continuing operations............................. 735,078 736,942 45,503 678,596 1,059,085 Discontinued operations........................... 361,299 369,281 22,859 280,268 437,414 ----------- ----------- ----------- ---------- --------- 3 1,096,377 1,106,223 68,362 958,864 1,496,499 ----------- ----------- ----------- ---------- --------- GROSS PROFIT Continuing operations............................. 134,393 140,337 8,946 133,406 208,207 Discontinued operations........................... 61,284 59,143 3,798 46,561 72,667 ----------- ----------- ----------- ---------- --------- 195,677 199,480 12,744 179,967 280,874 ----------- ----------- ----------- ---------- --------- OPERATING PROFIT/(LOSS) 4 Continuing operations............................. 1,574 (9,547) 539 (2,477) (3,866) Discontinued operations........................... 1,257 (47) 13 (1,019) (1,590) ----------- ----------- ----------- ---------- --------- 3 2,831 (9,594) 552 (3,496) (5,456) SHARE OF LOSSES OF ASSOCIATED UNDERTAKINGS........ 14 (1,021) (86) (1,283) (2,002) TOTAL OPERATING PROFIT/(LOSS)..................... 2,845 (10,615) 466 (4,779) (7,458) EXCEPTIONAL ITEMS................................. 21 (a) -- -- -- 5,800 9,052 ----------- ----------- ----------- ---------- --------- PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE INTEREST........................................ 2,845 (10,615) 466 1,021 1,594 Interest receivable and similar income............ 686 699 54 809 1,263 Interest payable and similar charges.............. 5 (2,671) (3,440) (152) (2,036) (3,178) ----------- ----------- ----------- ---------- --------- PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION........................................ 860 (13,356) 368 (206) (321) Taxation.......................................... 6 (1,780) (5,987) (168) (2,420) (3,777) ----------- ----------- ----------- ---------- --------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION........................................ (920) (19,343) 200 (2,626) (4,098) Equity minority interests......................... (353) (397) (26) (386) (603) ----------- ----------- ----------- ---------- --------- RETAINED (LOSS)/PROFIT............................ (1,273) (19,740) 174 (3,012) (4,701) ----------- ----------- ----------- ---------- --------- ----------- ----------- ----------- ---------- ---------
The notes on pages F-35 to F-56 form part of these combined and consolidated financial statements. F-32 LEP INTERNATIONAL WORLDWIDE LIMITED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOW
LIW ---------------------- LIW PREDECESSOR ----------------------------------- PERIOD YEAR END PERIOD 24 JAN - YEAR END 31 DEC 01 JAN - 31 DEC 1996 31 DEC 1994 1995 23 JAN ---------------------- NOTE L'000 L'000 1996 L'000 L'000 US$'000 ----- ----------- --------- ----------- --------- ----------- NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES...................................... 19 (a) 5,274 (9,508) 108 1,292 2,016 ----------- --------- ----- --------- ----------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received................................. 659 699 54 809 1,263 Interest paid..................................... (2,541) (3,440) (152) (2,547) (3,975) Dividends paid to minority shareholders........... (234) (235) -- (283) (442) Dividends from associated undertakings............ 295 232 -- 57 89 ----------- --------- ----- --------- ----------- (1,821) (2,744) (98) (1,964) (3,065) ----------- --------- ----- --------- ----------- TAXATION Net UK tax (paid)/received........................ -- (985) -- 187 292 Overseas tax paid................................. (1,301) (2,044) (246) (2,380) (3,714) ----------- --------- ----- --------- ----------- (1,301) (3,029) (246) (2,193) (3,422) ----------- --------- ----- --------- ----------- INVESTING ACTIVITIES Purchase of fixed assets.......................... (1,935) (2,981) -- (1,758) (2,744) Net disposals of trade investments................ (8) 716 -- -- -- Loans (made)/repaid by associates................. (278) 438 -- -- -- Proceeds on disposal of fixed assets.............. 878 1,288 1,720 931 1,452 Net proceeds on sale of North American operations...................................... 21 (a) -- -- -- 6,038 9,424 Sale of interest in Cronat Transport Holding AG... 21 (b) -- -- 5,404 -- -- Purchase of subsidiary............................ (199) -- -- -- -- Proceeds of sale of business...................... 183 -- -- -- -- ----------- --------- ----- --------- ----------- (1,359) (539) 7,124 5,211 8,132 ----------- --------- ----- --------- ----------- Net cash inflow/(outflow) before financing........ 793 (15,820) 6,888 2,346 3,661 ----------- --------- ----- --------- ----------- FINANCING Additional loans (including finance leases)....... -- 6,255 50 741 1,156 Repayment of loans (including finance leases)..... (6,801) (2,351) (394) (6,268) (9,782) Net capital contribution (to)/from LEP Group plc............................................. (2,903) 5,210 (148) -- -- ----------- --------- ----- --------- ----------- Net cash (outflow)/inflow from financing.......... (9,704) 9,114 (492) (5,527) (8,626) ----------- --------- ----- --------- ----------- (Decrease)/increase in cash and cash equivalents..................................... 19 (b) (8,911) (6,706) 6,396 (3,181) (4,965) ----------- --------- ----- --------- ----------- ----------- --------- ----- --------- -----------
The notes on pages F-35 to F-56 form part of these combined and consolidated financial statements. F-33 LEP INTERNATIONAL WORLDWIDE LIMITED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
PERIOD PERIOD 01 JAN - 24 JAN - YEAR END YEAR END 23 JAN 31 DEC 31 DEC 1994 31 DEC 1995 1996 1996 L'000 L'000 L'000 L'000 ------------- ----------- ------------- ----------- (Loss)/profit for the period................................... (1,273) (19,740) 174 (3,012) Currency translation differences on foreign currency net investment................................................... 1,068 (7) (5) (922) Unrealised surplus on revaluation of property.................. -- 266 -- -- ------ ----------- --- ----------- Total recognised (loss)/profit for the period.................. (205) (19,481) 169 (3,934) ------ ----------- --- ----------- ------ ----------- --- -----------
NOTE OF HISTORICAL COST PROFITS AND LOSSES
PERIOD PERIOD YEAR END YEAR END 01 JAN 1996 - 24 JAN 1996 - 31 DEC 1994 31 DEC 1995 23 JAN 1996 31 DEC 1996 L'000 L'000 L'000 L'000 ------------- ------------- ----------------- ------------- Reported profit/(loss) on ordinary activities before taxation............................................. 860 (13,356) 368 (206) Difference between historical cost depreciation charge and the actual depreciation charge for the year calculated on the revalued amount.................... 247 266 16 -- ------ ------------- --- ------ Historical cost profit/(loss) on ordinary activities before taxation...................................... 1,107 (13,090) 384 (206) ------ ------------- --- ------ ------ ------------- --- ------ Historical cost (loss)/profit transferred (from)/to reserves............................................. (1,026) (19,474) 190 (3,012) ------ ------------- --- ------ ------ ------------- --- ------
The notes on pages F-35 to F-56 form part of these combined and consolidated financial statements. F-34 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PREPARATION During 1994 and 1995 the operating companies comprising the freight forwarding interests of Wayrol plc (formerly LEP Group plc) were reorganised so as to separate these companies from the other interests of Wayrol plc and to better reflect the management and operating structure of the freight forwarding business. LEP International (Worldwide) Limited was formed in 1995 to be the new ultimate holding company for the freight forwarding companies, and, on 10 November 1995, acquired the freight forwarding companies and certain of their holding companies. LEP International (Worldwide) Limited and its subsidiaries (LIW Predecessor) thus comprised the freight forwarding interests under Wayrol plc, with the exception of Intercontinentale Ostereiche Gesellschaft Fur Transport und Verkehrswesen GmbH and LEP International A/S which were not acquired. On 24 January 1996 LEP International (Worldwide) Limited and LEP International A/S were acquired from Wayrol plc by LEP International Worldwide Limited (the Company or "LIW"). These combined and consolidated financial statements have been prepared to show the results of the Company and its subsidiaries from the date of acquisition of LEP International (Worldwide) Limited (the Predecessor Company, hereinafter referred to as "LIW Predecessor") and the results of LIW Predecessor and its subsidiaries (the Predecessor Group) as if the Predecessor Group had existed as a legal group from 1 January 1994. They have been prepared from the audited financial statements of the individual subsidiaries which comprise the freight forwarding business. The financial statements for the years ended 31 December 1994 and 1995 comprise the combined financial statements of the companies forming the freight forwarding interests of Wayrol plc with the exception of Intercontinentale Ostereiche Gesellschaft. The period from 1 January 1996 to 23 January 1996 comprises the consolidated financial statements of LEP International (Worldwide) Limited combined with those of LEP International A/S. The period from 24 January 1996 to 31 December 1996 comprises the consolidated financial statements of LEP International Worldwide Limited. Adjustments have been made to eliminate intercompany investments and other balances as appropriate. These financial statements do not constitute the Company's statutory accounts prepared in accordance with section 227 of the Companies Act 1985. On 31 October 1996 the Group sold its North American interests to GeoLogistics Corporation formerly known as International Logistics Limited (see Note 21a). GeoLogistics Corporation also subscribed for shares in LEP International Worldwide Limited, giving it a 33.3% interest in the Group. GeoLogistics Corporation also held an option to acquire further shares, which was exercised on 30 September 1997, thereby acquiring a controlling interest in the Group. Amounts shown on the Accounts as of 31 December 1996 have been converted at a rate of L1= U.S.$1.7123 based on the closing rate on December 31, 1996 and amounts shown for the period 24 January to 31 December 1996 have been converted into U.S. Dollars at a convenience rate of L1= U.S.$1.5607 based on the average rate for the period 24 January to 31 December 1996. 2. ACCOUNTING POLICIES The combined and consolidated financial statements have been prepared in accordance with applicable accounting standards. F-35 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) All accounting policies have been applied consistently in preparing these combined and consolidated financial statements; a summary of the principal disclosures is set out below. (I) ACCOUNTING CONVENTION The combined and consolidated financial statements are prepared under the historical cost convention modified to include the revaluation of certain fixed assets. (II) BASIS OF CONSOLIDATION The combined and consolidated financial statements include, on the basis described in Note 1 above, the results and net assets of the Company, including its share of the results of associated undertakings accounted for under the equity method of accounting. Increases or reductions in inter-company balances with Wayrol plc and its non-Freight Forwarding Division subsidiaries during the period to 24 January 1996 have been treated as capital increases or reductions. Interest payable and receivable on these intercompany balances has been eliminated from the profit and loss account. Intercompany balances outstanding when the Company acquired the investment in the freight forwarding businesses were capitalised on 24 January 1996, the date of acquisition. Companies in which the Company has an investment not exceeding 50% of the voting capital and over which it exerts significant influence are defined as associated undertakings. The combined and consolidated financial statements include the appropriate share of these companies' results and retained reserves. (III) TURNOVER Turnover represents the total amount earned by the Company for services provided in the ordinary course of business. Turnover includes disbursements, customer VAT and customer duty payable on imports. (IV) DEPRECIATION Tangible assets are written off over their estimated useful lives. The methods and rates are dependent on local conditions in the countries in which the Company operates and are adjusted for consolidation purposes where appropriate. Freehold land is not depreciated and other property, plant and equipment are depreciated over their estimated useful lives on a straight line basis principally as follows: Freehold buildings.................................... 50 years Leasehold land and buildings.......................... Lesser of 50 years and the term of the lease Motor vehicles, plant and equipment................... 3 to 10 years Furniture and fittings................................ 3 to 10 years
(V) PENSIONS The Company operates a number of pension schemes for the benefit of employees. For defined benefit schemes, the expected cost of providing pensions, as calculated periodically by professionally qualified actuaries, is charged to the profit and loss account so as to spread the pension cost over the F-36 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) expected service lives of employees who are in the plan. The basis used to spread the expected pension cost is that it should represent a substantially level percentage of the current and expected future pensionable salaries of the members of the plan. Variations from the expected regular pension cost are spread over the expected remaining service lives of the current employees who are members of the plan. Contributions to defined contribution schemes are charged to the profit and loss account as incurred. (VI) HOLIDAY PAY The accounting policy with regard to the treatment of holiday pay entitlements reflects the matching of income and expenditure by accruing for such liabilities in all countries where holiday pay can be carried forward at the end of the year. (VII) TAXATION Deferred taxation is provided using the liability method on timing differences which are expected to reverse in the foreseeable future, calculated at the rate at which it is estimated that tax will be payable. The United Kingdom tax charge includes amounts payable to Wayrol plc and certain of its non-freight forwarding subsidiaries in respect of group tax relief transferred to the United Kingdom freight forwarding company. No provision is made for any additional taxation which may arise on the distribution of profits and reserves retained by overseas subsidiary and associated undertakings. No account is taken of unrelieved tax losses which are available for set-off against future taxable profits of the companies concerned, except where these offset timing differences in the deferred tax account. (VIII) FOREIGN CURRENCIES The results of overseas subsidiary and associated undertakings have been translated into sterling at average rates of exchange for the year. Assets and liabilities of overseas subsidiary and associated undertakings have been translated into sterling at year end rates of exchange. The difference on translating opening net assets is recorded as a movement on reserves. All other translation differences are taken to the profit and loss account. (IX) GOODWILL Goodwill, being cost less attributable fair value of net assets of subsidiaries at the date of acquisition, is written off directly to reserves in the year in which it arises. On the disposal of a subsidiary undertaking, the attributable goodwill is transferred from reserves and is charged to the profit and loss account. (X) LEASING AND HIRE PURCHASE COMMITMENTS Assets purchased under finance leases and hire purchase contracts are capitalised in the balance sheet and are depreciated over their useful lives. The interest element of the rental obligations is charged to the profit and loss account over the period of the lease. Rentals paid under operating leases are charged to the profit and loss account as incurred. F-37 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ANALYSIS OF RESULTS AND NET OPERATING ASSETS
PERIOD PERIOD 01 JAN 24 JAN YEAR END YEAR END 1996 - 1996 - 31 DEC 31 DEC 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ---------- ---------- ----------- ----------- Turnover by geographic segment: United Kingdom.................................................. 164,622 157,660 10,420 155,397 Other Europe.................................................... 413,350 398,528 23,728 353,864 The Americas.................................................... 361,299 369,281 22,859 280,268 Asia Pacific and other.......................................... 157,106 180,754 11,355 169,335 ---------- ---------- ----------- ----------- 1,096,377 1,106,223 68,362 958,864 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Turnover is shown by geographic origin. Turnover by geographic destination is not materially different from that shown above. Operating profit: Continuing operations Operating profit/(loss) before restructuring costs and provisions.................................................. 3,015 (3,711) 107 1,626 ---------- ---------- ----------- ----------- Restructuring costs and provisions............................ (1,441) (5,836) 432 (4,103) Total continuing operations................................... 1,574 (9,547) 539 (2,477) Discontinued operations....................................... 1,257 (47) 13 (1,019) ---------- ---------- ----------- ----------- 2,831 (9,594) 552 (3,496) ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Operating (loss)/profit by geographic segment: United Kingdom................................................ 1,678 (1,811) 198 (155) Other Europe.................................................. (3,496) (10,884) 151 (6,029) The Americas.................................................. 1,257 (47) 13 (1,019) Asia Pacific and other........................................ 3,392 3,148 190 3,707 ---------- ---------- ----------- ----------- 2,831 (9,594) 552 (3,496) ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Operating assets by geographic segment: United Kingdom................................................ (4,917) (519) (417) (2,825) Other Europe.................................................. 14,681 7,635 2,239 (1,249) The Americas.................................................. 14,226 18,816 18,774 -- Asia Pacific and other........................................ 12,522 12,451 12,428 13,365 ---------- ---------- ----------- ----------- 36,512 38,383 33,024 9,291 ---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
F-38 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. NET OPERATING COSTS
PERIOD PERIOD END END YEAR END YEAR END 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 --------- --------- ----------- --------- Continuing operations Employee costs........................................................ 79,046 86,962 5,327 79,428 Other operating costs................................................. 52,332 57,086 3,512 52,352 --------- --------- ----- --------- 131,378 144,048 8,839 131,780 Restructuring costs and provisions.................................... 1,441 5,836 (432) 4,103 --------- --------- ----- --------- 132,819 149,884 8,407 135,883 --------- --------- ----- --------- --------- --------- ----- --------- Discontinued operations Employee costs........................................................ 37,292 37,755 2,315 28,379 Other operating costs................................................. 22,673 20,772 1,470 18,034 --------- --------- ----- --------- 59,965 58,527 3,785 46,413 Restructuring costs and provisions.................................... 62 663 -- 1,167 --------- --------- ----- --------- 60,027 59,190 3,785 47,580 --------- --------- ----- --------- --------- --------- ----- ---------
Net operating (income)/costs include:
PERIOD PERIOD END END YEAR END YEAR END 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ----------- ----------- ----------- ----------- Investment income --listed investments..................................................... (21) (26) -- -- --unlisted investments................................................... (336) (7) (2) (28) Depreciation --owned assets........................................................... 3,769 3,370 189 2,697 --finance leased & hire purchase assets.................................. 901 864 55 727 Operating lease rentals --plant and machinery.................................................... 7,163 7,561 517 7,251 --other.................................................................. 7,998 9,945 595 8,239 Profit on disposal of fixed assets......................................... (82) (115) (76) --
F-39 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INTEREST PAYABLE AND SIMILAR CHARGES
PERIOD PERIOD END END YEAR END YEAR END 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ----------- ----------- ----------- --------- Interest payable and similar charges: On bank loans, overdrafts and other loans wholly repayable within five years................................................................. (1,931) (3,034) (644) (1,763) On all other loans...................................................... (388) (27) (9) (129) Waiver of interest during refinancing and restructuring................. -- -- 511 -- Finance charges: In respect of finance leases and hire purchase contracts terminating within five years..................................................... (337) (366) (10) (144) All other finance charges............................................... (15) (13) -- -- ----------- ----------- --- --------- (2,671) (3,440) (152) (2,036) ----------- ----------- --- --------- ----------- ----------- --- ---------
6. TAXATION
PERIOD PERIOD END END YEAR END YEAR END 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ----------- ----------- ----------- --------- United Kingdom: Current taxation........................................................ (829) (939) -- (5) Deferred taxation....................................................... (25) (108) (3) (41) Prior year.............................................................. 625 (549) 10 142 Overseas: Current taxation........................................................ (1,207) (1,844) (163) (2,341) Deferred taxation....................................................... (256) 72 3 49 Prior year.............................................................. (88) (2,619) (15) (224) ----------- ----------- --- --------- (1,780) (5,987) (168) (2,420) ----------- ----------- --- --------- ----------- ----------- --- ---------
The tax charge is disproportionate to the Company's loss before tax primarily as a result of surplus losses in many countries which are not recognised for deferred tax purposes. The United Kingdom tax charge in 1995 represents group relief payable to Wayrol plc and certain of its non-freight forwarding subsidiaries in respect of tax losses transferred to the United Kingdom freight forwarding company. Surplus advance corporation tax of approximately L595,000 (1995, L595,000) is available for offset against future United Kingdom corporation tax liabilities of the United Kingdom freight forwarding company. F-40 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. EMPLOYEES
YEAR END YEAR END 31 DEC 31 DEC PERIOD END PERIOD END 1994 1995 23 JAN 1996 31 DEC 1996 NUMBER NUMBER NUMBER NUMBER ----------- ----------- ------------- ------------- The average number of employees during the year was: United Kingdom................................................. 908 956 954 899 Other Europe................................................... 1,959 1,735 1,563 1,536 The Americas................................................... 1,335 1,227 1,232 1,249 Asia Pacific................................................... 1,273 1,493 1,504 1,520 ----- ----- ----- ----- 5,475 5,411 5,253 5,204 ----- ----- ----- ----- ----- ----- ----- -----
L'000 L'000 L'000 L'000 --------- --------- ------------- ----------- Payroll costs were: Wages and salaries............................................. 96,974 103,717 6,357 89,681 Social security costs.......................................... 15,752 17,618 1,101 15,390 Pension costs.................................................. 3,495 3,382 184 2,736 --------- --------- ----- ----------- 116,221 124,717 7,642 107,807 --------- --------- ----- ----------- --------- --------- ----- -----------
8. PENSIONS
PERIOD PERIOD 01 JAN 24 JAN YEAR END YEAR END 1996 - 1996 - 31 DEC 31 DEC 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ----------- ----------- --------------- ------------- Pension cost of the Company...................................... 3,495 3,382 184 2,736 ----- ----- --- ----- ----- ----- --- ----- Amount attributable to overseas plans............................ 1,814 1,329 78 1,159 ----- ----- --- ----- ----- ----- --- -----
The Company operates a number of pension plans throughout the world. The major plans are of the defined benefit type. With the exception of the plan in Germany, the assets of the major plans are held in separate trustee administered funds. The plans are funded in accordance with local practice and contributions are assessed in accordance with the advice of local actuaries. The pension cost relating to the United Kingdom plan is assessed in accordance with the advice of a qualified actuary using the projected unit method. The latest actuarial valuation of the main United Kingdom plan was at 31 December 1995. It was assumed that investment returns would be 2.5% higher than the annual increase in pensionable salaries and 4.0% higher than the annual increase in present and future pensions in payment. In aggregate, at the date of the most recent actuarial valuation, the market value of the assets in the main United Kingdom plan was L40,045,000 and the actuarial value of the assets was sufficient to cover the benefits accrued to members on an ongoing basis after allowing for 6.5% p.a. future salary increases. Following the valuation as at 31 December 1995 the Company's contribution to this pension plan was reduced. F-41 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. TANGIBLE ASSETS--PROPERTY
LONG SHORT FREEHOLD LEASEHOLD LEASEHOLD TOTAL L'000 L'000 L'000 L'000 ----------- ----------- ----------- --------- Cost or valuation: At 1 January 1996..................................................... 15,754 2,580 17,482 35,816 Exchange adjustments.................................................. (1,511) (86) (2,493) (4,090) Additions............................................................. 4 -- 1 5 Disposals............................................................. (1,792) -- -- (1,792) Companies sold........................................................ (1,622) -- (1,776) (3,398) ----------- ----- ----------- --------- At 31 December 1996................................................... 10,833 2,494 13,214 26,541 ----------- ----- ----------- --------- ----------- ----- ----------- --------- Depreciation: At 1 January 1996..................................................... (2,637) (193) (7,121) (9,951) Exchange adjustments.................................................. 380 6 960 1,346 Charge for the year................................................... (354) (49) (612) (1,015) Disposals............................................................. 77 -- -- 77 Companies sold........................................................ 204 -- 1,516 1,720 ----------- ----- ----------- --------- At 31 December 1996................................................... (2,330) (236) (5,257) (7,823) ----------- ----- ----------- --------- ----------- ----- ----------- --------- Net book value: At 31 December 1996................................................... 8,503 2,258 7,957 18,718 ----------- ----- ----------- --------- ----------- ----- ----------- --------- At 31 December 1995................................................... 13,117 2,387 10,361 25,865 ----------- ----- ----------- --------- ----------- ----- ----------- ---------
F-42 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. TANGIBLE ASSETS--OTHER
MOTOR VEHICLES FURNITURE PLANT & COMPUTER AND MACHINERY EQUIPMENT FITTINGS TOTAL L'000 L'000 L'000 L'000 --------------- ----------- ----------- ----------- Cost or valuation: At 1 January 1996........................................... 39,041 -- 10,102 49,143 Reclassification............................................ (9,060) 10,445 (1,385) -- Exchange adjustments........................................ (3,032) (413) (707) (4,152) Additions................................................... 827 352 574 1,753 Disposals................................................... (763) (790) (224) (1,777) Companies sold.............................................. (10,719) -- (3,153) (13,872) ------- ----------- ----------- ----------- At 31 December 1996......................................... 16,294 9,594 5,207 31,095 ------- ----------- ----------- ----------- ------- ----------- ----------- ----------- Depreciation: At 1 January 1996........................................... (32,343) -- (9,085) (41,428) Reclassification............................................ 7,779 (9,137) 1,358 -- Exchange adjustments........................................ 2,684 1,079 637 4,400 Charge for the year......................................... (1,629) (615) (409) (2,653) Disposals................................................... 663 65 189 917 Companies sold.............................................. 8,226 -- 3,031 11,257 ------- ----------- ----------- ----------- At 31 December 1996......................................... (14,620) (8,608) (4,279) (27,507) ------- ----------- ----------- ----------- ------- ----------- ----------- ----------- Net book value: At 31 December 1996......................................... 1,674 986 928 3,588 Finance leases included therein............................. 869 23 -- 892 ------- ----------- ----------- ----------- ------- ----------- ----------- ----------- At 31 December 1995......................................... 6,698 -- 1,017 7,715 Finance leases included therein............................. 2,351 -- 29 2,380 ------- ----------- ----------- ----------- ------- ----------- ----------- -----------
Outstanding contracts for capital expenditure at 31 December 1996 not provided in these combined and consolidated financial statements amounted to LNIL (1995--L271,000). Capital expenditure authorised but not contracted for at 31 December 1996 is estimated at LNIL (1995--L78,000). 11. INVESTMENTS--ASSOCIATED UNDERTAKINGS The movement of the investment in associated undertakings is as follows:
1995 1996 L'000 L'000 --------- --------- At 1 January............................................................. 9,974 9,013 Exchange adjustments..................................................... 757 (97) Additions................................................................ 109 -- Share of undistributed results........................................... (1,253) (1,426) Reclassification to subsidiary........................................... (43) -- Decrease in loans........................................................ (438) -- Investments written down................................................. (93) -- Associated undertaking sold (see note 21 (b))............................ -- (5,404) --------- --------- At 31 December........................................................... 9,013 2,086 --------- --------- --------- ---------
F-43 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INVESTMENTS--ASSOCIATED UNDERTAKINGS (CONTINUED) The values at 31 December in each of the years represents the Company's share of the net tangible assets in its associated undertakings.
YEAR END YEAR END PERIOD END PERIOD END 31 DEC 31 DEC 23 JAN 31 DEC 1994 1995 1996 1996 L'000 L'000 L'000 L'000 ------------- ------------- --------------- --------------- Dividends from associated undertakings............................. 109 232 -- 57
The principal associated undertaking is:
NOMINAL AMOUNT OF EACH CLASS OF NUMBER IN PERCENTAGE NATURE OF NAME OF COMPANY SHARE CAPITAL AND ISSUED DEBT ISSUE HELD BUSINESS - --------------------- ------------------------------- ---------- ------------- ------------ LEP Albarelli SpA.... 1000 Lire ordinary shares 9,000,000 50% Freight forwarding
The carrying values of the associated undertakings are as follows:
1995 1996 L'000 L'000 --------- --------- LEP Albarelli SpA............................................................ 3,511 1,994 Cronat Transport Holding AG (see note 21 (b))................................ 5,404 -- Other........................................................................ 98 92 --------- --------- 9,013 2,086 --------- --------- --------- ---------
In 1996, the Company entered negotiations to acquire the remaining 50% interest in LEP Albarelli SpA. 12. INVESTMENTS--OTHER
1995 1996 L'000 L'000 ----- ----- Listed--recognised stock exchanges outside the United Kingdom.................. 29 25 Unlisted....................................................................... 349 258 --- --- 378 283 --- --- --- ---
The market value of investments is not materially different from their carrying value shown in these combined and consolidated financial statements. F-44 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. DEBTORS
1995 1996 L'000 L'000 --------- --------- Trade debtors........................................................... 128,394 92,417 Amount owed by associated undertakings.................................. 2,614 2,122 Other debtors........................................................... 27,266 13,781 Prepayments............................................................. 5,738 4,593 --------- --------- 164,012 112,913 --------- --------- --------- ---------
14. CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR
1995 1996 L'000 L'000 --------- --------- Bank loans and overdrafts --secured............................................................. 33,391 8,722 --unsecured........................................................... 777 81 Other loans --secured............................................................. 532 230 --unsecured........................................................... 53 -- Finance leases --secured............................................................. 820 359 --------- --------- 35,573 9,392 Trade creditors......................................................... 73,568 56,933 Amount owed to associated undertakings.................................. 2,994 910 Taxation and social security............................................ 3,973 5,151 Other creditors......................................................... 40,167 30,799 Accruals and deferred income............................................ 30,029 19,191 --------- --------- 186,304 122,376 --------- --------- --------- ---------
15. CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1995 1996 L'000 L'000 --------- --------- Bank loans and overdrafts --secured................................................................ 1,723 1,370 Other loans --secured................................................................ 384 -- Finance leases --secured................................................................ 1,703 477 --------- --------- 3,810 1,847 Pension liabilities not separately funded.................................. 13,911 11,816 Other long term creditors.................................................. 3,958 3,497 --------- --------- 21,679 17,160 --------- --------- --------- ---------
F-45 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. NET (BORROWINGS)/CASH AT BANK
1995 1996 L'000 L'000 --------- --------- Bank loans, overdrafts, finance leases and other loans: Included in creditors due after one year: Not wholly repayable within five years................................... (384) (897) Wholly repayable within five years....................................... (3,426) (950) --------- --------- (3,810) (1,847) Included in creditors due within one year................................ (35,573) (9,392) --------- --------- Gross borrowings......................................................... (39,383) (11,239) Cash and short term deposits............................................. 17,877 14,618 --------- --------- Net (borrowings)/cash.................................................... (21,506) 3,379 --------- --------- --------- ---------
Details of loans not wholly repayable within five years are as follows: Bank borrowings.......................................................... -- 897 Other borrowings......................................................... 384 -- --------- --------- 384 897 --------- --------- --------- --------- Included in loans not wholly repayable within five years are aggregate installments due after more than five years............................ 154 100 --------- --------- --------- --------- Gross borrowings comprise amounts repayable as: Bank borrowings: On demand or within one year............................................. 34,168 8,803 Between one and two years................................................ 805 578 Between two and five years............................................... 918 692 In five years or more.................................................... -- 100 --------- --------- 35,891 10,173 --------- --------- Finance leases, hire purchase contracts and other borrowings: On demand or within one year............................................. 1,405 589 Between one and two years................................................ 823 363 Between two and five years............................................... 1,110 114 In five years or more.................................................... 154 -- --------- --------- 3,492 1,066 --------- --------- Total borrowings......................................................... 39,383 11,239 --------- --------- --------- ---------
F-46 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. LEASE COMMITMENTS The Company's annual commitments under non-cancellable operating leases are as follows:
1995 1996 ------------------------ ---------------------- LAND AND LAND AND BUILDINGS OTHER BUILDINGS OTHER L'000 L'000 L'000 L'000 ----------- ----------- ----------- --------- Operating leases which expire: Within one year....................................... 1,363 1,481 1,365 1,525 Between two and five years............................ 4,118 4,998 1,983 2,360 In five years or more................................. 4,258 925 3,299 103 ----- ----- ----- --------- 9,739 7,404 6,647 3,988 ----- ----- ----- --------- ----- ----- ----- ---------
18. PROVISIONS FOR LIABILITIES AND CHARGES
1995 1996 L'000 L'000 ----- --------- Deferred tax in respect of timing differences: At 1 January................................................................... 290 387 (Charge)/credit for the year................................................... 79 (8) Net transfers in respect of group relief....................................... -- -- Exchange adjustment............................................................ 18 5 Companies sold................................................................. -- (283) --- --- At 31 December................................................................. 387 101 --- --- --- ---
19. CASH FLOW STATEMENT a) Reconciliation of operating profit to net cash inflow from operating activities:
PERIOD PERIOD YEAR END YEAR END 01 JAN 1996 - 24 JAN 1996 - 31 DEC 1994 31 DEC 1995 23 JAN 1996 31 DEC 1996 L'000 L'000 L'000 L'000 ------------- ------------- --------------- ------------- Operating (loss) profit.................................. 2,831 (9,594) 552 (3,496) Depreciation............................................. 4,670 4,234 244 3,424 Profit on sale of fixed assets........................... 82 (115) (5) (71) Write-down of unlisted investment........................ -- -- -- 33 Increase in debtors...................................... (2,210) (7,262) (503) (7,499) (Decrease) increase in creditors......................... (99) 3,229 (180) 8,901 ------ ------ --- ------ Net cash inflow/(outflow) from operating activities...... 5,274 (9,508) 108 1,292 ------ ------ --- ------ ------ ------ --- ------
F-47 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. CASH FLOW STATEMENT (CONTINUED) (b) Analysis of changes in cash and cash equivalents during the year:
PERIOD END PERIOD END YEAR END YEAR END 23 JAN 1996 31 DEC 1996 1994 L'000 1995 L'000 L'000 L'000 ----------- ----------- --------------- --------------- Opening balance........................................... 6,929 (1,280) (7,986) (1,590) Net cash inflow/(outflow) before adjusting for the effect of foreign exchange rate changes and non cash flow items................................................... (8,911) (6,706) 6,396 (3,181) Bank loans and overdrafts sold as part of the net assets of the North American operation (see note 21a).......... -- -- -- 13,016 Waiver of interest during refinancing and restructuring... -- -- -- 511 Effect of foreign exchange rate changes................... 702 -- -- (958) ----------- ----------- ------ ------ Closing balance........................................... (1,280) (7,986) (1,590) 7,798 ----------- ----------- ------ ------ ----------- ----------- ------ ------
(c) Analysis of the balance of cash and cash equivalents:
YEAR END YEAR END PERIOD PERIOD 31 DEC 31 DEC 01 JAN 1996 - 24 JAN 1996 - 1994 1995 23 JAN 1996 31 DEC 1996 L'000 L'000 L'000 L'000 ----------- ----------- ----------------- ----------------- Cash at bank and in hand............................. 14,274 17,877 17,672 14,618 Bank loans and overdrafts............................ (15,554) (25,863) (19,262) (6,820) ----------- ----------- ------- ------ (1,280) (7,986) (1,590) 7,798 ----------- ----------- ------- ------ ----------- ----------- ------- ------
CHANGE IN PERIOD CHANGE IN PERIOD 01 JAN 1996 - 24 JAN 1996 - CHANGE IN CHANGE IN 23 JAN 1996 31 DEC 1996 1994 L'000 1995 L'000 L'000 L'000 ----------- ----------- ----------------- ---------------- Cash at bank and in hand.............................. 2,014 3,603 (205) (3,054) Bank loans plus overdrafts............................ (10,223) (10,309) 6,601 12,442 ----------- ----------- ----- ------- (8,209) (6,706) 6,396 9,388 ----------- ----------- ----- ------- ----------- ----------- ----- -------
Amounts receivable after more than three months from the date of deposit included in cash at bank:
1994 1995 1996 L'000 L'000 L'000 ----- ----- ----- 445 63 -- -- -- -- -- --- ---
F-48 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. SHAREHOLDERS' FUNDS Up to 23 January 1996 shareholders' funds represented the net assets of the constituent companies:
23 JAN 1994 1995 1996 L'000 L'000 L'000 --------- --------- --------- Brought forward................................................. 35,944 29,306 15,035 Prior period adjustment re holiday pay.......................... (3,493) -- -- Profit/(loss) written off for the period........................ (1,165) (19,740) 174 Revaluations/goodwill write-off................................. (145) 266 -- Exchange adjustment............................................. 1,068 (7) -- Net capital (reduction)/contribution............................ (2,903) 5,210 -- --------- --------- --------- At end of period................................................ 29,306 15,035 15,209 --------- --------- --------- --------- --------- ---------
Since 23 January 1996 the company's capital and reserves have been:
SHARE TOTAL SHARE PREMIUM MERGER REVENUE SHAREHOLDERS' CAPITAL ACCOUNT RESERVE RESERVE FUNDS L'000 L'000 L'000 L'000 L'000 ------- ------- ------- ------- ------------- At 8 December 1995 and as at 23 January 1996................. -- -- -- -- -- Share capital subsequently subscribed................... 1 4,974 -- -- 4,975 Loss for the period............ -- -- -- (3,012) (3,012) Exchange adjustments........... -- -- -- (922) (922) Negative goodwill.............. -- -- 10,081 -- 10,081 -- ------- ------- ------- ------ At 31 December 1996............ 1 4,974 10,081 (3,934) 11,122 -- -- ------- ------- ------- ------ ------- ------- ------- ------
At incorporation the authorised share capital was 1000 L1 ordinary shares, of which two were issued. Since 24 January 1996 the authorised share capital has been:
1,200,000 L0.01 Ordinary shares 50,000 L0.01 Preference shares 1 L1.00 Special share
The issued share capital is: 300 L0.01 Ordinary shares 50,000 L0.01 Preference shares 1 L1.00 Special share
In respect of unissued shares: (a) options are outstanding in respect of: i) 539,800 ordinary shares at a subscription price of L0.83 per share exercisable on or before 31 December 1999. F-49 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. SHAREHOLDERS' FUNDS (CONTINUED) ii) 419,900 ordinary shares at a subscription price of L0.01 per share exercisable on or before 31 October 2003. (b) 240,000 ordinary shares are reserved to provide sufficient unissued share capital to satisfy the conversion rights attached to the Special Share which converts on or before 31 December 2001. In respect of the Preference Shares: (a) The holders of the Preference Shares are entitled in priority to any payment of dividend on any other class of shares to a fixed preferential dividend at the rate of 5.5% on L5m. However no preference dividend is payable in respect of the period from 24 January 1996 to 31 December 1996. (b) i) The Preference Shares can be redeemed at any time at the Company's option but unless redeemed previously must be redeemed on 24 January 2001 subject only to the company being able to comply with the provisions of the Companies Legislation then in force relating to such redemption. ii) On redemption of the Preference Shares a premium is payable of L99.99 per share. (c) On winding-up the Preference Shares rank ahead of the other share capital for any arrears of preference dividends, return of paid-up capital and a premium of L99.99 per share. (d) The Preference Share holders have no voting rights. The Special Share is a L1 non participating share, convertible automatically into fully paid ordinary shares in the event of one of certain events taking place, or on the fifth anniversary of the issue of the special share. On 24 January 1996, the Company issued 50,000 preference shares and the special share to LEP Group plc in consideration for the investments and inter-company debts acquired by the Company on that date. In accounting for the share capital subscribed the Company has availed itself of the merger relief provided by section 131 of the Companies Act 1985. Of the loss attributable to shareholders, a profit of L44,000 was dealt with through the profit and loss account of the Company. The results of the subsidiaries, acquired in 1996, for the period up to their acquisition by the Company, was a profit of L174,000 after tax and minority interest. Their result for the year ended 31 December 1995 was a loss of L19,740,000. Revenue reserves include the Group's share of the post acquisition reserves of associated undertakings, which at 31 December 1996 amounted to (L1,340,000). Exchange adjustments include gains and losses arising on the Group's equity investment in foreign subsidiary undertakings offset by losses arising on foreign currency borrowings. F-50 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. SHAREHOLDERS' FUNDS (CONTINUED) The merger reserve is made up as follows:
L'000 --------- Fair value of consideration for investments purchased 24 January 1996 (note 1)....... (5,000) Fair value of net assets acquired.................................................... 15,081 --------- 10,081 --------- ---------
No fair value adjustments were made to the book values of the assets and liabilities acquired. 21. SALE OF SUBSIDIARIES AND ASSOCIATED UNDERTAKINGS (a) Sale of North American Operations LEP International Inc. in Canada and LEP Profit International Inc. in the USA comprised the North American operations, which were sold as at 31 October 1996. The impact on the accounts of this transaction can be summarised as follows:
1996 L'000 --------- Net assets sold Fixed assets...................................................................... (4,293) Investments....................................................................... (9) Debtors........................................................................... (45,312) Cash and cash equivalents......................................................... 13,016 Creditors......................................................................... 34,637 Long term loans................................................................... 1,440 Deferred tax...................................................................... 283 --------- (238) Net proceeds........................................................................ 6,038 --------- Profit on sale...................................................................... 5,800 --------- ---------
Within the terms of the Sale Contract of the North American operations, there are provisions which entitle GeoLogistics Corporation to require repayment of part of the proceeds if the net asset value of the North American operations is below a set threshold. GeoLogistics Corporation has made no such demand for repayment. F-51 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. SALE OF SUBSIDIARIES AND ASSOCIATED UNDERTAKINGS (CONTINUED) (b) Sale of interest in Cronat Transport Holding AG The Company sold its 34% interest in Cronat Transport Holding AG as at 12 January 1996. The transaction can be summarised as follows:
L'000 --------- Carrying value at the date of sale................................................... 5,404 Net proceeds......................................................................... (5,404) --------- Profit on sale....................................................................... NIL --------- ---------
22. RELATED PARTY TRANSACTIONS (a) The following companies are considered to be related parties: i) LEP Albarelli SpA, in which the Company hold a 50% interest (see note 11) ii) LEP International Inc. in Canada, which for the two months since its sale by the Company, has been owned by GeoLogistics Corporation. iii) LEP Profit International Inc. in the USA, for the same reason as explained in ii) above. Revenues, all of which were generated from freight forwarding activities on an "arms length" basis, for the year (two months only, with regard to ii) and iii) above), and balances with these companies, at 31 December 1996, were as follows:
DEBTOR CREDITOR SALES PURCHASES BALANCES BALANCES --------- ----------- ----------- ----------- L'000 L'000 L'000 L'000 LEP Albarelli SpA......................... 4,037 3,974 841 828 LEP International Inc..................... 1,291 845 1,517 993 LEP Profit Inc............................ 3,565 3,919 5,238 5,759
(b) The LEP UK pension plan The Company makes payments to this plan as per Note 8. The amount payable in the year to 31 December 1996 was L1,557,000 (1995--L2,053,000). The amounts due to the scheme at 31 December 1996 were L13,000 (1995--L63,000). 23. CONTINGENT LIABILITIES (a) As part of the management buy-out, the Company, together with those subsidiaries identified on page F-57 and certain inactive UK subsidiaries have granted a contingent charge to the financing group over their assets capped at L25 million. The charge can only crystalise on the Company or any of the above subsidiaries in the event of one of them becoming insolvent. The contingent charge will be released on the redemption of the L5 million preference shares which were issued by the Company on 24 January 1996 as consideration for the acquisition. F-52 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. CONTINGENT LIABILITIES (CONTINUED) (b) In Holland and Denmark, the Company has received claims for undischarged Transit Forms from the respective customs authorities. These claims are rejected by the Company and, based upon legal advice, the Board is of the opinion that no provision needs to be made. (c) There are contingent liabilities of the Company in respect of guarantees entered into in the normal course of trade. (d) LIW has a number of outstanding tax disputes but the directors believe they have made sufficient provision for the eventual outcome of these disputes. 24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) The combined and consolidated financial statements have been prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. A description of the relevant accounting principles which differ materially is given below: GOODWILL AND OTHER ACQUISITION ACCOUNTING ADJUSTMENTS Under UK GAAP the Group has written off purchased goodwill (as well as negative goodwill arising on purchases of businesses) against reserves. US GAAP requires that any remaining goodwill after the allocation of purchase price to separately identifiable intangible assets and the fair value of net tangible assets acquired and liabilities assumed be capitalised as an intangible asset and amortised over a period not in excess of 40 years. Furthermore, US GAAP requires that any negative goodwill arising from a purchase transaction be allocated to the assigned fair values of identifiable tangible and intangible assets until these are reduced to a carrying amount of zero with the remainder recorded as a deferred credit and amortised to income over a period not in excess of 40 years. PENSION COSTS UK GAAP and US GAAP are conceptually similar in respect of accounting for pension costs. However, US GAAP is more specific in its requirements as to the selection of discount rates which must reflect current market conditions at each balance sheet date. In addition, the amortisation of unrecognised gains and losses arising from changes in assumptions and actuarial experience, under US GAAP is affected through a corridor approach. TAXES ON INCOME Under UK GAAP, deferred taxes are accounted for to the extent that it is considered probable that a liability or asset will crystalise in the foreseeable future. Under US GAAP, deferred taxes are accounted for on all timing differences and a valuation allowance is established in respect of those deferred tax assets where it is more likely than not that some portion will remain unrealised. Deferred tax also arises in relation to the tax effect of the other US GAAP adjustments. REVALUATION OF PROPERTY AND PROPERTY DEPRECIATION Under UK GAAP property is carried either at original cost or at subsequent valuation less related depreciation, calculated on the revalued amount where applicable. Revaluation surpluses are taken F-53 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) (CONTINUED) directly to shareholders' funds, while deficits below cost, less any related depreciation, are included in attributable profit. Under US GAAP revaluations of properties are not permitted in the accounts. As a result, when a property is disposed of, a greater profit or lower loss is generally recorded under US GAAP than under UK GAAP. Depreciation is based on the historical cost. DIVIDENDS Under UK GAAP, dividends are provided for in the year in respect of which they are declared or proposed. Under US GAAP, dividends and the related advance corporation tax are given effect only in the period in which dividends are formally declared. The effects of these differing accounting principles are shown in note 25. CASH FLOW STATEMENTS The Company's consolidated statements of cash flow set out on page F-33 are prepared in accordance with UK Financial Reporting Standard No 1 (FRS 1) and present substantially the same information as that required under US GAAP. However, there are certain differences in classification of items within the cash flow statement and with regard to the definition of cash and cash equivalents between UK and US GAAP. Cash flows from (i) operating activities; (ii) returns on investments and servicing of finance; (iii) taxation; (iv) investing activities; and (v) financing activities are presented separately under UK GAAP. However, US GAAP cash flows are classified into only three categories of activities; (i) operating, (ii) investing and (iii) financing. Cash flows from returns on investments and servicing of finance are, with the exception of dividends paid and interest paid but capitalised, included as operating activities under US GAAP. The payment of dividends is included under financing activities and capitalised interest is included under investing activities for US GAAP purposes. Cash flows from taxation are included as operating activities under US GAAP. Cash for purposes of the cash flow statement under UK GAAP, includes bank overdrafts and liquid resources. Under UK GAAP bank overdrafts are considered loans and the movements thereon are included in financing activities; liquid resources, to the extent that they have original maturities at date of F-54 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) (CONTINUED) acquisition of three months or less, are considered cash equivalents and the movements thereon are included in the overall cash movement.
YEAR TO 31 1 - 23 JAN 24 JAN TO DEC 1996 31 DEC 1995 ----------- 1996 ------------- L'000 --------- L'000 L'000 Net cash flow from operating activities.......................... (15,281) (236) (2,865) Net cash provided by (used in) investing activities.............. (539) 7,124 18,227 Net cash provided by (used in) financing activities.............. 19,423 (7,093) (17,458) ------------- ----------- --------- Net increase/(decrease) in cash and cash equivalents under US GAAP........................................................... 3,603 (205) (2,096) ------------- ----------- --------- Cash and cash equivalents under US GAAP at beginning of period... 14,274 17,877 17,672 Effect of exchange rates on cash and cash equivalents............ -- -- (958) ------------- ----------- --------- Cash and cash equivalents under US GAAP at end of year........................................................ 17,877 17,672 14,618 Bank loans and overdrafts........................................ (25,863) (19,262) (6,820) ------------- ----------- --------- Cash and cash equivalents under US GAAP at end of year........................................................ (7,986) (1,590) 7,798 ------------- ----------- --------- ------------- ----------- ---------
F-55 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 25. NOTES ON SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
YEAR END PERIOD END PERIOD END 31 DEC 1995 23 JAN 1996 31 DEC 1996 L'000 L'000 L'000 ----------- --------------- ----------- Adjustments to net income (Loss)/Profit attributable to shareholders in accordance with UK GAAP.......................................................... (19,740) 174 (3,012) US GAAP adjustments: Fixed asset revaluations excess depreciation.................... 351 22 -- Depreciation adjustments........................................ -- -- 1,129 Profit on sale of fixed assets.................................. -- -- 482 Disposal of North American operations........................... -- -- 2,904 Pension scheme charges.......................................... 351 55 518 Taxation effect on the above items.............................. (116) (18) (1,129) Deferred taxation............................................... -- -- (22) ----------- --- ----------- Approximate net income in accordance with US GAAP............... (19,154) 233 870 ----------- --- ----------- ----------- --- -----------
31 DEC 1995 31 DEC 1996 L'000 L'000 ----------- ----------- Adjustments to shareholders' equity Capital employed before minority interests in accordance with UK GAAP........ 15,035 11,122 US GAAP adjustments: Reclassification of mandatorily redeemable preference shares................. -- (4,975) Elimination of fixed asset revaluations...................................... (14,196) -- Pension scheme liabilities................................................... (483) 518 Acquisition of predecessor companies......................................... -- (10,081) Depreciation................................................................. -- 1,129 Sale of fixed assets......................................................... -- 482 Disposal of North American operations........................................ -- 2,904 Taxation effect on above items............................................... -- (1,129) Deferred taxation............................................................ 279 (22) ----------- ----------- Approximate shareholders' equity in accordance with US GAAP.................. 635 (52) ----------- ----------- ----------- -----------
F-56 LEP INTERNATIONAL WORLDWIDE LIMITED PRINCIPAL SUBSIDIARY AND ASSOCIATED UNDERTAKINGS The undertakings listed below comprise the principal subsidiary and associated undertakings which have been included in these combined and consolidated financial statements as of December 31, 1996, as detailed in Note 1 to the financial statements. The percentage shareholding (in all cases in ordinary shares) is given for each undertaking. Each of the companies listed below operates in freight forwarding, and operates principally in their country of incorporation.
PERCENTAGE PRINCIPAL SUBSIDIARY AND ASSOCIATED UNDERTAKINGS COUNTRY OF INCORPORATION OWNED - -------------------------------------------------------- ------------------------ ----------- EUROPE +*LEP International Limited............................. England 100% +*LEP International Management Limited.................. England 100% LEP International Limited............................... Republic of Ireland 100% LEP International NV.................................... Belgium 100% LEP-Transportgruppen AS................................. Denmark 100% LEP International (France) SA........................... France 100% LEP International GmbH.................................. Germany 100% LEP-Albarelli SpA....................................... Italy 50% LEP International BV.................................... Netherlands 100% Lassen Transport Ltda................................... Portugal 100% LEP International SA.................................... Spain 100% Olson and Wright AB..................................... Sweden 100% PACIFIC BASIN LEP International (Pty) Limited......................... Australia 100% LEP International (China) Limited....................... Hong Kong 100% LEP International (Far East) Limited.................... Hong Kong 100% LEP International (Singapore) Pte Limited............... Singapore 100% LEP International (Japan) Limited....................... Japan 100% LEP International (Korea) Limited....................... Korea 49% LEP International (Malaysia) Sdn Bhd.................... Malaysia 30% LEP Freightways International Limited................... New Zealand 25% LEP International Philippines Inc....................... Philippines 30% LEP International Limited............................... Taiwan 33% LEP International (Thailand) Co Limited................. Thailand 49% HOLDING COMPANIES +LEP International (Asia /Pacific) Limited.............. British Virgin Islands 100% +*LEP European Holdings BV.............................. The Netherlands 100% Telmidas AMS BV......................................... The Netherlands 100% +*LEP Holdings (Bermuda) Limited........................ Bermuda 100% +*LEP Holdings (North America) Limited.................. England 100% LEP Holdings GmbH....................................... Germany 100%
- ------------------------ * Owned directly by the company after the reorganisation (see Note 1) + Companies referred to in Note 23 (a). F-57 LEP INTERNATIONAL WORLDWIDE LIMITED UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET
30 SEPTEMBER 1997 30 SEPTEMBER 1997 ----------------- ----------------- L'000 US $'000 FIXED ASSETS Tangible assets............................................................ 20,488 33,160 Investments --Associated undertakings................................................ 3,457 5,595 --Other.................................................................. 279 451 ----------------- ----------------- 24,224 39,206 ----------------- ----------------- CURRENT ASSETS Debtors.................................................................... 109,030 176,465 Cash and short term deposits............................................... 13,709 22,188 ----------------- ----------------- 122,739 198,653 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR............................. (121,839) (197,196) ----------------- ----------------- NET CURRENT (LIABILITIES)/ASSETS........................................... 900 1,457 ----------------- ----------------- TOTAL ASSETS LESS CURRENT LIABILITIES...................................... 25,124 40,663 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR.................... (16,399) (26,542) PROVISIONS FOR LIABILITIES AND CHARGES..................................... -- -- ----------------- ----------------- 8,725 14,121 ----------------- ----------------- ----------------- ----------------- CAPITAL AND RESERVES Shareholders' funds........................................................ 7,240 11,718 Equity minority interests.................................................. 1,485 2,403 ----------------- ----------------- 8,725 14,121 ----------------- ----------------- ----------------- -----------------
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-58 LEP INTERNATIONAL WORLDWIDE LIMITED UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF PROFIT AND LOSS ACCOUNTS
UNREVIEWED -------------------------------------- 24 JAN - COMBINED 1 - 23 JAN 30 SEPT NINE MONTHS TO NINE MONTHS TO 1996 1996 30 SEPT 1996 30 SEPTEMBER 1997 ----------- --------- -------------- -------------------- L'000 L'000 L'000 L'000 US $'000 TURNOVER Continuing operations............................... 45,503 496,806 542,309 505,026 823,445 Discontinued operations............................. 22,859 252,094 274,953 -- -- ----------- --------- ------- --------- --------- 68,362 748,900 817,262 505,026 823,445 ----------- --------- ------- --------- --------- GROSS PROFIT Continuing operations............................... 8,946 93,791 102,737 96,590 157,490 Discontinued operations............................. 3,798 41,703 45,501 -- -- ----------- --------- ------- --------- --------- 12,744 135,494 148,238 96,590 157,490 ----------- --------- ------- --------- --------- OPERATING (LOSS/PROFIT) Continuing operations............................... 539 (2,631) (2,092) 36 59 Discontinued operations............................. 13 (846) (833) -- -- ----------- --------- ------- --------- --------- 552 (3,477) (2,925) 36 59 SHARE OF LOSSES OF ASSOCIATED UNDERTAKINGS.......... (86) (612) (698) (565) (922) ----------- --------- ------- --------- --------- TOTAL OPERATING PROFIT/(LOSS)....................... 466 (4,089) (3,623) (529) (863) EXCEPTIONAL ITEMS................................... -- -- -- (275) (448) ----------- --------- ------- --------- --------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST.......................................... 466 (4,089) (3,623) (804) (1,311) Interest receivable and similar income.............. 54 517 571 346 564 Interest payable and similar charges................ (152) (1,563) (1,715) (852) (1,389) ----------- --------- ------- --------- --------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.......................................... 368 (5,135) (4,767) (1,310) (2,136) Taxation............................................ (168) (1,431) (1,599) (1,246) (2,032) ----------- --------- ------- --------- --------- LOSS ON ORDINARY ACTIVITIES AFTER TAXATION.......... 200 (6,566) (6,366) (2,556) (4,168) Equity minority interests........................... (26) (461) (487) (223) (363) ----------- --------- ------- --------- --------- RETAINED LOSS....................................... 174 (7,027) (6,853) (2,779) (4,531) ----------- --------- ------- --------- --------- ----------- --------- ------- --------- ---------
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-59 LEP INTERNATIONAL WORLDWIDE LIMITED UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
UNREVIEWED ----------------------------------------------- PERIOD 24 JAN - COMBINED NINE NINE MONTHS TO 30 PERIOD 30 SEPTEMBER MONTHS TO SEPTEMBER 1997 1 - 23 JAN 1996 30 SEPTEMBER 1996 ---------------------- 1996 L'000 L'000 L'000 L'000 US $000 ----------- ------------- ------------------- --------- ----------- NET CASH INFLOW FROM OPERATING ACTIVITIES Result for the period........................... 552 (3,477) (2,925) 36 59 Depreciation and profit on sales of fixed assets........................................ 239 2,494 2,733 1,545 2,519 Working capital movement........................ (683) (1,109) (1,792) 2,311 3,768 ----------- ------------- ------ --------- ----------- 108 (2,092) (1,984) 3,892 6,346 ----------- ------------- ------ --------- ----------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received............................... 54 517 571 346 564 Interest paid................................... (152) (2,074) (2,226) (852) (1,389) ----------- ------------- ------ --------- ----------- (98) (1,557) (1,655) (506) (825) ----------- ------------- ------ --------- ----------- TAXATION Net UK tax received............................. -- 4 4 -- -- Overseas tax paid............................... (246) (1,109) (1,355) (820) (1,337) ----------- ------------- ------ --------- ----------- (246) (1,105) (1,351) (820) (1,337) ----------- ------------- ------ --------- ----------- INVESTING ACTIVITIES Purchase of fixed assets........................ -- (1,249) (1,249) (955) (1,557) Loans to associates............................. -- -- -- (954) (1,555) Proceeds on disposal of fixed assets............ 1,720 345 2,065 61 99 Dividends paid to minority shareholders......... (88) (88) (40) (65) Dividends from associated undertakings.......... 58 58 -- -- Proceeds on sale of businesses.................. 5,404 -- 5,404 -- -- Costs of disposal of North American operations.................................... -- -- -- (275) (449) ----------- ------------- ------ --------- ----------- 7,124 (934) 6,190 (2,163) (3,527) ----------- ------------- ------ --------- ----------- NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING...... 6,888 (5,688) 1,200 403 657 FINANCING Additional loans (including finance leases)..... 50 440 490 211 345 Repayment of loans (including finance leases)... (394) (6,795) (7,189) (2,188) (3,568) Net capital contribution of Wayrol plc.......... (148) -- (148) -- -- ----------- ------------- ------ --------- ----------- NET CASH (OUTFLOW)/INFLOW FROM FINANCING........ (492) (6,355) (6,847) (1,977) (3,223) ----------- ------------- ------ --------- ----------- Increase/(decrease) in cash and cash equivalents................................... 6,396 (12,043) (5,647) (1,574) (2,566) ----------- ------------- ------ --------- ----------- ----------- ------------- ------ --------- -----------
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-60 LEP INTERNATIONAL WORLDWIDE LIMITED UNAUDITED INTERIM STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
NINE MONTHS TO 30 SEPTEMBER 1997 L'000 ----------------- Loss for the period........................................................ (2,779) Currency translation differences on foreign currency net investment........ (1,103) ------- Total recognised loss for the period....................................... (3,882) ------- -------
UNAUDITED INTERIM RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
L'000 --------- At 1 January 1997................................................................... 11,122 Loss for the period................................................................. (2,779) Revaluations........................................................................ -- Exchange adjustment................................................................. (1,103) Net capital (reduction)/contribution................................................ -- --------- At 30 September 1997................................................................ 7,240 --------- ---------
F-61 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND--BUSINESS OPERATION AND LEGAL RESOURCING During 1994 and 1995 the operating companies comprising the freight forwarding interests of Wayrol plc (formerly LEP Group plc) were reorganised so as to separate these companies from the other interests of Wayrol plc and to better reflect the management and operating structure of the freight forwarding business. LEP International (Worldwide) Limited was formed in 1995 to be the new ultimate holding company for the freight forwarding companies, and, on 10 November 1995, acquired the freight forwarding companies and certain of their holding companies. LEP International (Worldwide) Ltd. and its subsidiaries thus comprised the freight forwarding interests under Wayrol plc, with the exception of Intercontinentale Ostereiche Gesellschaft Fur Transport and Verkenhrswesen GmbH and LEP International A/S which were not acquired. On 24 January 1996 LEP International (Worldwide) Ltd. and LEP International A/S were acquired from Wayrol plc by LEP International Worldwide Ltd. These combined and consolidated financial statements have been prepared to show the results of the Company and its subsidiaries from the date of acquisition of LEP International (Worldwide) Ltd. (the predecessor company, hereinafter referred to as "LIW Predecessor"), and the results of LIW Predecessor and its subsidiaries (the "Predecessor Group") as if the Predecessor Group had existed as a legal group from 1 January 1996. They have been prepared from the audited financial statements of the individual subsidiaries which comprise the freight forwarding business. The period from 1 January 1996 to 23 January 1996 comprises the consolidated financial statements of LEP International Worldwide Ltd. combined with those of LEP International A/S. The period from 24 January 1996 to 31 December 1996 comprises the consolidated financial statements of LEP International Worldwide Ltd. Adjustments have been made to eliminate intercompany investments and other balances as appropriate. On 31 October 1996 the Predecessor Group sold its North American interests to GeoLogistics Corporation who also subscribed for shares in LEP International Worldwide Ltd., giving it a 33% interest in the Group. GeoLogistics Corporation subsequently acquired options to purchase and subscribe further shares, which were exercised on 30 September 1997, thereby giving them a controlling interest in the Predecessor Group. Amounts shown in the Accounts at 30 September 1997 have been converted at a rate of L1 = US$ 1.6185, based on the closing rate at September 30, 1997 and amounts shown for the nine months ended 30 September 1997 have been converted at an average rate for the period of L1 = US$ 1.6305. 2. BASIS OF PREPARATION Unaudited Interim Financial Statements--In the opinion of management, the unaudited interim financial statements for the nine months to 30 September 1997 have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations as of such date and for such period. With respect to the period ended 30 September 1996, LIW did not produce financial statements in accordance with its normal year end financial reporting procedures. The financial statements of LIW for this period have, therefore, been derived from management reports. Management have made such F-62 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. BASIS OF PREPARATION (CONTINUED) adjustments to these reports as they believe are necessary for a fair presentation of the results of operations as of 30 September 1996. 3. DEBTORS
30 SEPTEMBER 1997 L'000 ----------------- Trade debtors.................................................................................. 79,505 Amount owed by related parties................................................................. 8,507 Other debtors and prepayments.................................................................. 21,545 ------- 109,557 ------- -------
4. CREDITORS--AMOUNTS FALLING DUE WITHIN ONE YEAR
30 SEPTEMBER 1997 L'000 ----------------- Bank loans and overdrafts...................................................................... 8,018 Other loans.................................................................................... 140 Finance leases................................................................................. 343 ------- 8,501 Trade creditors................................................................................ 52,220 Amount owed to related parties................................................................. 7,193 Corporation taxation........................................................................... 2,178 Other creditors, accruals and deferred income.................................................. 51,747 ------- 121,839 ------- -------
5. INVESTMENTS--ASSOCIATED UNDERTAKINGS The movement of the investment in associated undertakings is as follows:
L'000 ------------------- At 1 January 1997.............................................................................. 2,086 Exchange and other adjustments................................................................. (154) Share of undistributed results................................................................. (565) Reclassification to subsidiary................................................................. -- Increase in loans.............................................................................. 1,563 Investments written down....................................................................... -- Associated undertaking sold.................................................................... -- Prepayments for future acquisitions............................................................ 527 ----- At 30 September 1997........................................................................... 3,457 ----- -----
F-63 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. CREDITORS--AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
30 SEPTEMBER 1997 L'000 ----------------- Bank loans and overdrafts--secured............................................................. 921 Finance leases--secured........................................................................ 268 ------ 1,189 Pension liabilities not separately funded...................................................... 11,466 Other long term creditors...................................................................... 3,744 ------ 16,399 ------ ------
7. CONTINGENT LIABILITIES (a) As part of the management buy-out, the Company, together with its subsidiaries granted a contingent charge to the financing group over their assets capped at L25 million. The charge can only crystalise on the Company or any of the above subsidiaries in the event that one of them becomes insolvent. The contingent charge will be released on the redemption of the L5 million preference shares which were issued by the Company on 24 January 1996 as consideration for the acquisition. (b) In Holland and Denmark, the Group has received claims for undischarged Transit Forms from the respective customs authorities. These claims are rejected by the Company and, based upon legal advice, the Board is of the opinion that no provision needs to be made. (c) There are contingent liabilities of the Company in respect of guarantees entered into in the normal course of trade. (d) LIW has a number of outstanding tax disputes but the directors believe they have made sufficient provision for the eventual outcome of these disputes. (e) The Company has signed a contract to purchase the 50% of the share of LEP Albarelli SpA, not already owned by the Company, for L1,014,000 plus certain amounts based on the proceeds of specified properties. Under this contract, payments amounting to L527,000 have already been made which have been included as part of the investment in the associated undertakings which will be completed by July 31, 1999. F-64 LEP INTERNATIONAL WORLDWIDE LIMITED NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. NOTES ON SUMMARY OF DIFFERENCES BETWEEN UK AND US GAAP
UNREVIEWED ------------------------------------------- PERIOD COMBINED PERIOD 24 JAN - PERIOD TO PERIOD TO 30 1- 23 JAN 30 SEPTEMBER 30 SEPTEMBER SEPTEMBER 1996 1996 1996 1997 L'000 L'000 L'000 L'000 ------------- ------------- ------------- ------------------- Adjustment to net income: (Loss)/profit attributable to shareholders in accordance with UK GAAP............................ 174 (7,027) (6,853) (2,779) US GAAP adjustments: Fixed asset revaluations excess depreciation......... 22 (22) -- -- Depreciation adjustments............................. -- 1,081 1,081 1,179 Profit on sale of fixed assets....................... -- 209 209 29 Pension scheme changes............................... 55 325 380 415 Taxation effect on the above items................... (18) (581) (599) (536) Deferred taxation.................................... -- (16) (16) (16) --- ------ ------ ------ Approximate net income in accordance with US GAAP.... 233 (6,031) (5,798) (1,708) --- ------ ------ ------ --- ------ ------ ------
30 SEPTEMBER 1997 L'000 ----------------- Adjustments to shareholders' equity: Capital employed before minority interests in accordance with UK GAAP................................................................................. 7,240 US GAAP adjustments: Reclassification of mandatorily redeemable preference shares................................... Elimination of fixed asset revaluations........................................................ -- Pension scheme liabilities..................................................................... 933 Acquisition of predecessor companies........................................................... (10,081) Depreciation................................................................................... 2,308 Sale of fixed assets........................................................................... 3,415 Taxation effect on the above items............................................................. (2,197) Deferred taxation.............................................................................. (38) ------- Approximate shareholders' equity in accordance with US GAAP.................................... 1,580 ------- -------
F-65 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. -------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 12 Use of Proceeds........................................................... 22 Consolidated Capitalization............................................... 24 Unaudited Pro Forma Condensed Combined Statement of Operations............ 25 Selected Consolidated Financial Data of the Company....................... 30 Selected Consolidated Financial Data of LIW............................... 33 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 37 Company Historical.................................................... 39 Company Predecessor................................................... 44 LIW................................................................... 49 Business.................................................................. 56 Management................................................................ 72 Principal Stockholders.................................................... 80 Certain Relationships and Related Transactions............................ 82 Recent Acquisitions....................................................... 83 New Credit Facility....................................................... 86 The Exchange Offer........................................................ 89 Description of the New Notes.............................................. 98 Certain U.S. Federal Income Tax Considerations Relating to the Exchange Offer................................................................... 126 Plan of Distribution...................................................... 126 Legal Matters............................................................. 127 Experts................................................................... 127 Available Information..................................................... 127 Index to Financial Statements............................................. F-1
------------------------ UNTIL JULY 27, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. GEOLOGISTICS CORPORATION FORMERLY KNOWN AS INTERNATIONAL LOGISTICS LIMITED $110,000,000 9 3/4% SENIOR NOTES DUE 2007 --------------------- PROSPECTUS --------------------- APRIL 28, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----