<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-56723
PROSPECTUS
[LOGO]
AMAZON.COM, INC.
OFFER TO EXCHANGE ITS
10% SENIOR DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
10% SENIOR DISCOUNT NOTES DUE 2008
WHICH WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933
------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON SEPTEMBER 14, 1998, UNLESS EXTENDED.
Amazon.com, Inc., a Delaware corporation ("Amazon.com" or the "Company"),
hereby offers to exchange (the "Exchange Offer"), upon the terms and conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), up to $530,000,000 aggregate principal amount at
maturity of its 10% Senior Discount Notes due 2008 (the "Exchange Notes") for a
like principal amount at maturity of its 10% Senior Discount Notes due 2008 (the
"Original Notes" and, together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount at maturity, rate of accretion, interest rate and
maturity) to the terms of the Original Notes for which they may be exchanged
pursuant to the Exchange Offer, except that the Exchange Notes will generally be
freely transferable by holders thereof (each, a "Holder" and, collectively, the
"Holders") (except as provided herein), and are not subject to any covenant of
the Company regarding registration. The Exchange Notes will be issued under the
indenture governing the Original Notes. For a description of the principal terms
of the Exchange Notes, see "Description of the Exchange Notes."
The Notes will mature on May 1, 2008. The Original Notes were, and the
Exchange Notes will be, issued at a substantial discount from their principal
amount at maturity, and there will not be any payment of interest on the Notes
prior to November 1, 2003. Each Original Note has a principal amount at maturity
of $1,000 and an initial Accreted Value (as defined herein) of $615.07. The
Accreted Value of the Exchange Notes initially will be equal to the Accreted
Value of the Original Notes at the time of the consummation of the Exchange
Offer. The Notes will fully accrete to face value on May 1, 2003. From and after
May 1, 2003, the Notes will bear interest, which will be payable in cash at a
rate of 10% per annum on each May 1 and November 1 (the "Interest Payment
Dates"), commencing November 1, 2003.
The Notes are redeemable, at the option of the Company, in whole or in
part, at any time on or after May 1, 2003, at the redemption prices set forth
herein, plus accrued interest, if any, to the date of redemption. At any time
prior to May 1, 2001, the Company also may redeem up to 35% of the aggregate
principal amount at maturity of the Notes with the proceeds of one or more sales
of Capital Stock (other than Disqualified Stock) (as defined herein) at 110% of
their Accreted Value on the redemption date, plus accrued and unpaid interest,
if any, to the date of redemption; provided that after any such redemption at
least 65% of the aggregate principal amount at maturity of Notes originally
issued remains outstanding. In addition, at any time prior to May 1, 2003, the
Company may redeem all, but not less than all, of the Notes at the redemption
price equal to the sum of (i) the Accreted Value on the redemption date, plus
(ii) accrued and unpaid interest, if any, to the redemption date, plus (iii) the
Applicable Premium (as defined herein). See "Description of the Exchange Notes."
(Continued on next page)
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of the Original Notes on August 14, 1998.
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 11, FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August 13, 1998.
<PAGE> 2
(Continued from previous page)
The Original Notes were issued and sold on May 8, 1998, in a transaction
(the "Offering") not registered under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon the exemptions provided in Section 4(2)
of the Securities Act and Rule 144A under the Securities Act. Accordingly, the
Original Notes may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy certain of the obligations of
the Company under a registration rights agreement relating to the Original
Notes. See "The Exchange Offer -- Purpose of the Exchange Offer." The Company is
making the Exchange Offer in reliance upon an interpretation by the Staff of the
Securities and Exchange Commission (the "Commission") set forth in a series of
no-action letters issued to third parties, although the Company has not sought,
and does not intend to seek, its own no-action letter, and there can be no
assurance that the Staff of the Commission would make a similar determination
with respect to the Exchange Offer. Based upon the Commission's interpretations,
the Company believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Original Notes may be offered for resale, resold and
otherwise transferred by Holders thereof (other than by any Holder that is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired Original
Notes directly from the Company or (iii) a broker-dealer who acquired Original
Notes as a result of market making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holders' business and such Holders are not engaged in, and do not
intend to engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes. Any Holder that cannot
rely upon such interpretations must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. See "The Exchange Offer -- Resales of the Exchange Notes."
Each broker-dealer who receives Exchange Notes pursuant to the Exchange
Offer in exchange for Original Notes acquired for its own account as a result of
market-making activities or other trading activities may be a statutory
underwriter and must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is a part 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.
The Original Notes are designated for trading in the PORTAL Market. The
Exchange Notes constitute a new issue of securities for which there is no
established trading market. Any Original Notes not tendered and accepted in the
Exchange Offer will remain outstanding. To the extent Original Notes are
tendered and accepted in the Exchange Offer, a Holder's ability to sell
untendered, and tendered but unaccepted, Original Notes could be adversely
affected. Following consummation of the Exchange Offer, the Holders of Original
Notes will continue to be subject to the existing restrictions on transfer
thereof, and the Company will have no further obligation to such Holders to
provide for the registration under the Securities Act of the Original Notes.
Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the "Placement Agent")
has advised the Company that it currently intends to make a market in the
Exchange Notes; however, it is not obligated to do so, and any market-making
activity may be discontinued at any time without notice. Therefore, there can be
no assurance that an active trading market will develop or as to the liquidity
of the trading market for either the Original Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange, but is otherwise subject
to customary conditions. The Exchange Offer will expire at 5:00 p.m., New York
City time, on September 14, 1998, unless extended by the Company to such other
date and time as the Company, in its sole discretion, may determine (the
"Expiration Date"). Original Notes tendered pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date; otherwise such tenders
are irrevocable. Upon satisfaction or waiver of all of the conditions of the
Exchange Offer, the Company will accept, promptly after the Expiration Date, all
Original Notes properly tendered (such date of acceptance, the "Exchange Date")
and will issue the Exchange Notes promptly after acceptance of the Original
Notes. There will be no cash proceeds to the Company from the Exchange Offer.
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 Exchange Notes
received for Original Notes where such Original Notes were acquired for its own
account as a result of market-making activities or other trading activities. The
Company will make copies of this Prospectus available to any broker-dealer for
use in connection with any such resale.
2
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549, as well as at the following Commission
Regional Offices: Seven World Trade Center, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies can
be obtained from the Commission by mail at prescribed rates. Requests should be
directed to the Commission's Public Reference Section, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission. The address of such site is http://www.sec.gov.
Whether or not the Company is then required to file reports with the
Commission, so long as any of the Notes are outstanding, the Company is required
by the terms of the Indenture, dated May 8, 1998 (the "Indenture") between the
Company and The Bank of New York, as trustee (the "Trustee"), under which the
Original Notes were issued and under which the Exchange Notes are to be issued,
to furnish to the Trustee and each Holder, or supply to the Trustee for
forwarding to each such Holder without cost to such Holder, such reports and
other information as it has filed with the Commission pursuant to Section 13(a)
or 15(d) under the Exchange Act, or would be required to file by such sections
of the Exchange Act if it were subject thereto. In addition, at all times prior
to the registration of the Original Notes, the Company has agreed to furnish to
any Holder of Notes, and prospective investors upon their request, the
information required to be delivered pursuant to Rule 144A under the Securities
Act.
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered by this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted from this
Prospectus in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are summaries of the material terms thereof and are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference. Items omitted
from this Prospectus but contained in the Registration Statement may be
inspected and copied as described above.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
000-22513) are incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998; and
(3) The Company's Current Reports on Form 8-K filed April 27, 1998, April
28, 1998, May 1, 1998, May 6, 1998 and August 7, 1998.
All documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference
3
<PAGE> 4
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (EXCLUDING EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
THEREIN) ARE AVAILABLE UPON REQUEST WITHOUT CHARGE FROM THE SECRETARY OF THE
COMPANY, 1516 SECOND AVENUE, SEATTLE, WASHINGTON 98101 (TELEPHONE NUMBER (206)
622-2335). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE FIVE DAYS PRIOR TO THE DATE ON WHICH A FINAL INVESTMENT DECISION
IS TO BE MADE.
------------------------
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference contain
forward-looking statements based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by management. All statements, trends, analyses and other
information contained in this Prospectus relative to trends in net sales, gross
margin, anticipated expense levels and liquidity and capital resources, as well
as other statements, including, but not limited to, words such as "anticipate,"
"believe," "plan," "estimate," "expect," "seek" and "intend," and other similar
expressions, constitute forward-looking statements. These forward-looking
statements involve risks and uncertainties, and actual results may differ
materially from those anticipated or expressed in such statements. Potential
risks and uncertainties include, among others, those set forth herein under
"Risk Factors," as well as set forth under "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview," "-- Liquidity and
Capital Resources" and " -- Additional Factors That May Affect Future Results"
in the Company's Quarterly Report on Form 10-Q to be filed for the quarter ended
June 30, 1998 and under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Liquidity and Capital
Resources" and "Business -- Additional Factors That May Affect Future Results"
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997. Particular attention should be paid to the cautionary statements involving
the Company's limited operating history, the unpredictability of its future
revenues, the unpredictable and evolving nature of its business model, the
intensely competitive online commerce and retail book and music industries and
the risks associated with capacity constraints, systems development, management
of growth, acquisitions, any new products and international or domestic business
expansion. Except as required by law, the Company undertakes no obligation to
update any forward-looking statement, whether as a result of new information,
future events or otherwise. Readers, however, should carefully review the
factors set forth in other reports or documents that the Company files from time
to time with the Commission.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following Summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in or incorporated by
reference to this Prospectus. Investors should carefully consider the
information set forth under the caption "Risk Factors."
THE COMPANY
Amazon.com, Inc. ("Amazon.com" or the "Company") is the leading online
retailer of books and music. The Company also sells videotapes, audiotapes and
other products. Since opening for business as "Earth's Biggest Bookstore" in
July 1995, Amazon.com has become one of the most widely known, used and cited
commerce sites on the World Wide Web (the "Web"). Amazon.com strives to offer
its customers compelling value through innovative use of technology, broad
selection, high-quality content, a high level of customer service, competitive
pricing and personalized services. The Company offers a catalog of approximately
3.0 million titles, easy-to-use search and browse features, e-mail services,
personalized shopping services, Web-based credit card payment and direct
shipping to customers. The Company currently offers other information-based
products, such as music, and intends over time to expand its catalog into other
product categories. Amazon.com has virtually unlimited online shelf space and
offers customers a vast selection through an efficient search-and-retrieval
interface.
Operating as an online book retailer, Amazon.com has grown rapidly since
first opening its Web site in July 1995. Through June 30, 1998, the Company had
sales of more than $367 million to approximately 3.1 million customer accounts
in over 150 countries. Repeat customers accounted for over 62% of orders in the
six months ended June 30, 1998. International sales represented 21% of net sales
in the six months ended June 30, 1998.
Amazon.com's objective is to be the leading online retailer of
information-based products and services, with an initial focus on books and,
more recently, music. The Company's key strategies to attain this goal include:
creating customer loyalty by delivering a compelling value proposition; building
strong brand recognition and maintaining market leadership; continuing to expand
revenue opportunities; creating and executing a superior economic model;
maintaining technology focus and expertise; building strong supplier
relationships; and attracting and retaining exceptional employees.
Amazon.com was incorporated in 1994 in the State of Washington and
reincorporated in 1996 in the State of Delaware. The Company's principal
corporate offices are located in Seattle, Washington. The mailing address and
telephone number of the principal executive offices of the Company are 1516
Second Avenue, Seattle, Washington 98101, (206) 622-2335. Amazon.com completed
its initial public offering in May 1997 and its common stock is listed on the
Nasdaq National Market under the symbol "AMZN."
"Amazon.com" and "Earth's Biggest Bookstore" are service marks of
Amazon.com, Inc. All other products, company names and logos are marks of their
respective companies.
Information contained on the Company's Web site will not be deemed to be a
part of this Prospectus. As used herein, "titles" offered by the Company means
the number of items offered in the Company catalog and includes books, CDs,
videotapes, audiotapes and other products.
5
<PAGE> 6
SUMMARY OF THE EXCHANGE OFFER
REGISTRATION RIGHTS
AGREEMENT..................... Holders are entitled to exchange the Original
Notes for Exchange Notes registered under the
Securities Act with substantially identical
terms. The Exchange Offer is intended to
satisfy these rights. After the Exchange Offer
is complete, Holders will no longer be entitled
to any exchange or registration rights with
respect to the Original Notes.
THE EXCHANGE OFFER............ The Company is offering to exchange $1,000
principal amount at maturity of Exchange Notes
that have been registered under the Securities
Act for each $1,000 principal amount at
maturity of the Original Notes. In order to be
exchanged, an outstanding Original Note must be
properly tendered and accepted. All outstanding
Original Notes that are validly tendered and
not validly withdrawn will be exchanged for
Exchange Notes.
As of this date, there are $530,000,000
aggregate principal amount at maturity of the
Original Notes outstanding.
The Company will issue registered Exchange
Notes promptly after the expiration of the
Exchange Offer.
RESALES....................... Except as indicated herein, the Company
believes that the Exchange Notes may be offered
for resale, resold and otherwise transferred by
Holders without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that:
(i) the Exchange Notes are being acquired in
the ordinary course of a Holder's business;
(ii) a Holder is not participating, does not
intend to participate, and has no arrangement
or understanding with any person to
participate, in the distribution of the
Exchange Notes; and
(iii) a Holder is not an Affiliate of the
Company.
If the Company's belief is inaccurate and a
Holder transfers any Exchange Note without
delivering a prospectus meeting the
requirements of the Securities Act or without
an exemption from such requirements, such
Holder may incur liability under the Securities
Act. The Company does not assume or indemnify
Holders against such liability.
Each broker-dealer that is issued Exchange
Notes for its own account in exchange for
Original Notes which were acquired by such
broker-dealer as a result of market-making or
other trading activities must acknowledge that
it will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of the Notes issued
in the Exchange Offer. A broker-dealer may use
this Prospectus for an offer to resell, resale
or other retransfer of the Exchange Notes. See
"The Exchange Offer -- Resales of the Exchange
Notes."
EXPIRATION DATE............... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on September 14, 1998,
unless the Company decides to extend the
Expiration Date.
6
<PAGE> 7
CONDITIONS OF THE EXCHANGE
OFFER......................... The Exchange Offer is not subject to any
condition other than that the Exchange Offer
not violate applicable law or any applicable
interpretation of the Staff of the Commission.
See "The Exchange Offer -- Conditions of the
Exchange Offer."
PROCEDURES FOR TENDERING
ORIGINAL NOTES................ Each Holder of Original Notes wishing to
participate in the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Original Notes
and any other required documentation to The
Bank of New York, as exchange agent for the
Notes (the "Exchange Agent"), at the address
set forth herein. By executing the Letter of
Transmittal, each Holder will represent to the
Company (on its own behalf and on behalf of any
beneficial owner of any Original Note subject
to the Letter of Transmittal) that, among other
things, (i) the Exchange Notes acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of business of
the person receiving such Exchange Notes, (ii)
neither the Holder nor any such other person is
participating in or intends to participate in a
distribution of such Exchange Notes, (iii)
neither the Holder nor any other person has an
arrangement or understanding with any person to
participate in the distribution of such
Exchange Notes and (iv) neither the Holder nor
any such other person is an Affiliate of the
Company. See "The Exchange Offer -- Procedures
for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Original Notes in
the Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such
owner must, prior to completing and executing
the Letter of Transmittal and delivering its
Original Notes, either make appropriate
arrangements to register ownership of the
Original Notes in such owner's name or obtain a
properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may
not be able to be completed prior to the
Expiration Date. See "The Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES.................... If Holders wish to tender their Original Notes
and time will not permit the required documents
to reach the Exchange Agent by the Expiration
Date, or the procedure for book-entry transfer
cannot be completed on time or certificates for
registered Original Notes cannot be delivered
on time, such Holders may tender their Original
Notes pursuant to the procedures described in
this Prospectus in "The Exchange
Offer-- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS............. Holders may withdraw the tender of their Notes
at any time prior to 5:00 p.m. New York City
time on September 14, 1998.
7
<PAGE> 8
CERTAIN U.S. FEDERAL INCOME
TAX CONSEQUENCES.............. The exchange of Original Notes for the Exchange
Notes will not be a taxable exchange for U.S.
federal income tax purposes. Therefore, Holders
will not recognize any taxable gain or loss or
other income as a result of such exchange. The
tax treatment of the Exchange Notes will be the
same as for the Original Notes. See "Certain
Federal Income Tax Consequences."
USE OF PROCEEDS............... The Company will not receive any proceeds from
the issuance of the Exchange Notes pursuant to
the Exchange Offer. The Company will pay all
expenses incident to the Exchange Offer. See
"Use of Proceeds."
EXCHANGE AGENT................ The Bank of New York is serving as Exchange
Agent in connection with the Exchange Offer.
8
<PAGE> 9
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that the Exchange Notes will be registered under
the Securities Act and, therefore, will not bear legends restricting their
transfer and generally will not be entitled to registration under the Securities
Act. The Exchange Notes will evidence the same debt as the Original Notes and
both the Original Notes and the Exchange Notes are and will be governed by the
same Indenture.
SECURITIES OFFERED............ $530,000,000 aggregate principal amount at
maturity ($325,987,100 aggregate initial
Accreted Value) of 10% Senior Discount Notes
due 2008.
MATURITY...................... May 1, 2008.
YIELD AND INTEREST............ The Original Notes were, and the Exchange Notes
will be, sold at a substantial discount from
their principal amount at maturity, and there
will not be any payment of interest on the
Notes prior to November 1, 2003. The Notes will
fully accrete to face value on May 1, 2003.
From and after May 1, 2003, the Notes will bear
interest, which will be payable in cash, at a
rate of 10% per annum on each May 1 and
November 1, commencing November 1, 2003.
OPTIONAL REDEMPTION........... The Notes are redeemable, at the option of the
Company, in whole or in part, at any time on or
after May 1, 2003, at the redemption prices set
forth herein, plus accrued interest, if any, to
the date of redemption. At any time prior to
May 1, 2001, the Company also may redeem up to
35% of the aggregate principal amount at
maturity of the Notes with the proceeds of one
or more sales of Capital Stock (other than
Disqualified Stock), at 110% of their Accreted
Value on the redemption date, plus accrued and
unpaid interest, if any, to the date of
redemption; provided that after any such
redemption at least 65% of the aggregate
principal amount at maturity of Notes
originally issued remains outstanding. In
addition, at any time prior to May 1, 2003, the
Company may redeem all, but not less than all,
of the Notes at a redemption price equal to the
sum of (i) the Accreted Value on the redemption
date, plus (ii) accrued and unpaid interest, if
any, to the redemption date, plus (iii) the
Applicable Premium. See "Description of the
Exchange Notes -- Optional Redemption."
CHANGE OF CONTROL............. Upon a Change of Control (as defined herein),
the Company will be required to make an Offer
to Purchase (as defined herein) the Notes at a
purchase price equal to 101% of their Accreted
Value on the date of purchase, plus accrued
interest, if any. There can be no assurance
that the Company will have sufficient funds
available at the time of any Change of Control
to make any required debt repayment (including
repurchases of the Notes). See "Description of
the Exchange Notes -- Repurchase of Notes Upon
a Change of Control."
RANKING....................... The Original Notes are, and the Exchange Notes
will be, senior unsecured indebtedness of the
Company ranking pari passu with the Company's
existing and future unsubordinated, unsecured
indebtedness and senior in right of payment to
all subordinated indebtedness of the Company.
The Notes will be effectively subordinated to
all secured indebtedness and to all existing
and future
9
<PAGE> 10
liabilities of the Company's subsidiaries,
including trade payables. As of June 30, 1998,
as adjusted for the offering of the Original
Notes and application of the net proceeds
therefrom, the Company would have had
approximately $2.4 million of indebtedness
outstanding (other than the Notes), all of
which would have been secured indebtedness. See
"Risk Factors -- Substantial Indebtedness;
Ability to Service Debt."
CERTAIN COVENANTS............. The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined herein) to incur indebtedness, pay
dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments,
create liens, engage in transactions with
stockholders and affiliates, sell assets and
engage in mergers and consolidations. However,
these limitations are subject to a number of
important qualifications and exceptions. See
"Description of the Exchange Notes --
Covenants."
ORIGINAL ISSUE DISCOUNT....... The Exchange Notes will be treated as a
continuation of the Original Notes for U.S.
federal income tax purposes. The Original Notes
were issued with original issue discount. For
U.S. federal income tax purposes, Holders of
the Notes are required to include the amount of
original issue discount in income in advance of
receipt of cash to which the income is
attributable. See "Certain Federal Income Tax
Consequences."
10
<PAGE> 11
RISK FACTORS
An investment in the Exchange Notes offered hereby involves a high degree
of risk. The following risk factors, together with the other information set
forth in this Prospectus, should be considered carefully before purchasing the
Exchange Notes offered hereby. The term "Note" or "Notes" includes the Original
Notes and the Exchange Notes.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES
The Company was incorporated in July 1994 and commenced offering products
for sale on its Web site in July 1995. Accordingly, the Company has a limited
operating history on which to base an evaluation of its business and prospects.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
online commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model and the management of growth. To
address these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and marketing
strategy and its expansion into new product and geographic markets, effectively
integrate acquisitions and other business combinations, continue to develop and
upgrade its technology and transaction-processing systems, improve its Web site,
provide superior customer service and order fulfillment, respond to competitive
developments and attract, retain and motivate qualified personnel. There can be
no assurance that the Company will be successful in addressing such risks, and
the failure to do so could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Since inception, the Company has incurred significant losses, and as of
June 30, 1998 had an accumulated deficit of $64.1 million. The Company believes
that its success will depend in large part on its ability to (i) extend its
brand position, (ii) provide its customers with outstanding value and a superior
shopping experience and (iii) achieve sufficient sales volume to realize
economies of scale. Accordingly, the Company intends to continue to invest
heavily in marketing and promotion, product development and technology and
operating infrastructure development. The Company also offers attractive pricing
programs, which have resulted in relatively low product gross margins. As a
result, achieving profitability given planned investment levels depends on the
Company's ability to generate and sustain substantially increased revenue
levels. In addition, amounts associated with the Company's recent acquisitions,
including amortization of goodwill and other purchased intangibles and ongoing
operating expenses of those companies, as well as interest expense related to
the Original Notes will further affect the Company's operating results. As a
result of the foregoing factors, the Company believes that it will continue to
incur substantial operating losses for the foreseeable future and that the rate
at which such losses will be incurred will increase significantly from current
levels. Although the Company has experienced significant revenue growth in
recent periods, such growth rates are not sustainable and will decrease in the
future. In view of the rapidly evolving nature of the Company's business and its
limited operating history, the Company believes that period-to-period
comparisons of its operating results, including the Company's gross profit and
operating expenses as a percentage of net sales, are not necessarily meaningful
and should not be relied on as an indication of future performance.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or acquisition decisions that could have a material
adverse effect on its business, prospects, financial condition
11
<PAGE> 12
and results of operations. For example, the Company has recently announced
acquisitions which will result in the Company's incurring significant charges,
including amortization of goodwill and other purchased intangibles and ongoing
operating expenses of the acquired companies.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include, among others, (i) the Company's ability to
retain existing customers, attract new customers at a steady rate and maintain
customer satisfaction, (ii) the Company's ability to acquire product, to
maintain appropriate inventory levels and to manage fulfillment operations,
(iii) the Company's ability to maintain gross margins in its existing business
and in future product lines and markets, (iv) the development, announcement or
introduction of new sites, services and products by the Company and its
competitors, (v) price competition or higher wholesale prices in the industry,
(vi) the level of use of the Internet and online services and increasing
consumer acceptance of the Internet and other online services for the purchase
of products such as those offered by the Company, (vii) the Company's ability to
upgrade and develop its systems and infrastructure, (viii) the Company's ability
to attract new personnel in a timely and effective manner, (ix) the level of
traffic on the Company's Web site, (x) the Company's ability to manage
effectively its development of new business segments and markets, (xi) the
Company's ability to successfully manage the integration of operations and
technology of acquisitions or other business combinations, (xii) technical
difficulties, system downtime or Internet brownouts, (xiii) the amount and
timing of operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure, (xiv) the number of popular
books, music and other products introduced during the period, (xv) the level of
merchandise returns experienced by the Company, (xvi) governmental regulation
and taxation policies, (xvii) disruptions in service by common carriers due to
strikes or otherwise, and (xviii) general economic conditions and economic
conditions specific to the Internet, online commerce and the book and music
industries.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book and music industries are generally significantly higher
in the fourth calendar quarter of each year.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts or
investors. In such event, the trading price of the Company's securities will
likely be materially adversely affected.
COMPETITION
The online commerce market, particularly over the Web, is new, rapidly
evolving and intensely competitive. In addition, the retail book and music
industries are intensely competitive. The Company's current or potential
competitors include (i) various online booksellers and vendors of other products
such as CDs and videotapes, including entrants into narrow specialty niches,
(ii) a number of indirect competitors that specialize in online commerce or
derive a substantial portion of their revenues from online commerce, through
which retailers other than the Company may offer products, and (iii) publishers,
distributors and retail vendors of books, music and other products, including
Barnes & Noble, Inc., Bertelsmann AG and other large specialty booksellers and
integrated media corporations, many of which possess significant brand
awareness, sales volume and customer bases. The Company believes that the
principal competitive factors in its market are brand recognition, selection,
personalized services, convenience, price, accessibility, customer service,
quality of search tools, quality of editorial and other site content and
reliability and speed of fulfillment. Many of the Company's competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
Certain of the Company's competitors may be able to secure merchandise from
vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and systems
development than the Company. Increased competition may result in reduced
operating margins, loss of market share and a
12
<PAGE> 13
diminished brand franchise. There can be no assurance that the Company will be
able to compete successfully against current and future competitors.
The Company expects that competition in the Internet and online commerce
markets will intensify in the future. For example, as various Internet market
segments obtain large, loyal customer bases, participants in those segments may
seek to leverage their market power to the detriment of participants in other
market segments. In addition, new technologies and the expansion of existing
technologies may increase the competitive pressures on online retailers,
including the Company. For example, "shopping agent" technologies will permit
customers to quickly compare the Company's prices with those of its competitors.
Competitive pressures created by any one of the Company's competitors, or by the
Company's competitors collectively, could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
SYSTEM DEVELOPMENT AND OPERATION RISKS
The Company's revenues depend on the number of visitors who shop on its Web
site and the volume of orders it fulfills. Any system interruptions resulting in
the unavailability of the Company's Web site or in reduced order fulfillment
performance reduce the volume of goods sold and the attractiveness of the
Company's product and service offerings. The Company has experienced periodic
system interruptions, which it believes will continue to occur from time to
time. The Company uses an internally developed system for its Web site, search
engine and substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory management
and shipping. The Company will be required to add additional software and
hardware and further develop and upgrade its existing technology,
transaction-processing systems and network infrastructure to accommodate
increased traffic on its Web site and increased sales volume through its
transaction-processing systems. Any inability to do so may cause unanticipated
system disruptions, slower response times, degradation in levels of customer
service, impaired quality and speed of order fulfillment, or delays in reporting
accurate financial information. There can be no assurance that the Company will
be able to accurately project the rate or timing of increases, if any, in the
use of its Web site or in a timely manner to effectively upgrade and expand its
transaction-processing systems or to smoothly integrate any newly developed or
purchased modules with its existing systems. Any inability to do so could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Substantially all the Company's computer and communications hardware is
located at a single leased facility in Seattle, Washington. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. The Company does not currently have redundant systems or a formal
disaster recovery plan and does not have sufficient business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of critical data or the
inability to accept and fulfill customer orders. The occurrence of any of the
foregoing events could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH
The Company has rapidly and significantly expanded its operations and
anticipates that further expansion will be required to address potential growth
in its customer base, to expand its product and service offerings and its
international operations, and to pursue other market opportunities. The
Company's employee base has similarly expanded, growing from 158 employees as of
December 31, 1996 to 1,170 employees as of June 30, 1998. The expansion of the
Company's operations and employee base has placed, and is expected to continue
to place, a significant strain on the Company's management, operational and
financial resources. To manage the expected growth of its operations and
personnel, the Company will be required to improve existing and implement new
transaction-processing, operational and financial systems, procedures and
controls, as well as to expand, train and manage its growing employee base.
There can be no assurance that the Company's current and planned personnel,
systems, procedures and controls will be adequate to support the Company's
future operations, that management will be able to hire, train, retain, motivate
and manage required personnel
13
<PAGE> 14
or that Company management will be able to successfully identify, manage and
exploit existing and potential market opportunities. If the Company is unable to
manage growth effectively, such inability could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
RISKS OF NEW BUSINESS AREAS
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings and introduced its music store in June 1998.
Expansion of the Company's operations in this manner will require significant
additional expenses and development, operations and editorial resources and
could strain the Company's management, financial and operational resources.
Furthermore, the Company may not benefit from the first-mover advantage that it
experienced in the online book market, and gross margins attributable to new
business areas may be lower than those associated with the Company's existing
business activities. There can be no assurance that the Company will be able to
expand its operations in a cost-effective or timely manner. Furthermore, any new
business launched by the Company that is not favorably received by consumers
could damage the Company's reputation or the Amazon.com brand. The lack of
market acceptance of such efforts or the Company's inability to generate
satisfactory revenues from such expanded services or products to offset their
cost could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. Gross margins attributable to new
business areas may be lower than those associated with the Company's existing
business activities. In particular, the Company has announced plans to offer
music to customers, and anticipates that music product gross margin, which is
expected to be lower than book gross margin, will affect overall gross margin
proportionately to its impact on product mix.
RISKS OF INTERNATIONAL EXPANSION
The Company expects to expand its presence in foreign markets and has
recently acquired two international online booksellers to accelerate this
expansion. To date, the Company has only limited experience in sourcing,
marketing and distributing products on an international basis and in developing
localized versions of its Web site and other systems. The Company expects to
incur significant costs in establishing international facilities and operations,
in promoting its brand internationally, in developing localized versions of its
Web site and other systems and in sourcing, marketing and distributing products
in foreign markets. There can be no assurance that the Company's international
efforts will be successful. If the revenues resulting from international
activities are inadequate to offset the expense of establishing and maintaining
foreign operations, such inadequacy could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. In
addition, there are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, export and import
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, political instability,
fluctuations in currency exchange rates, seasonal reductions in business
activity in other parts of the world and potentially adverse tax consequences,
any of which could adversely affect the success of the Company's international
operations. Furthermore, it is possible that governments in certain foreign
jurisdictions may have or enact legislation with respect to the Internet or
other online services in such areas as content, network security, encryption or
distribution that may affect the Company's ability to conduct business abroad.
There can be no assurance that one or more of such factors would not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, prospects, financial condition and
results of operations.
RISKS OF BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES
The Company may choose to expand its operations or market presence by
entering into business combinations, investments, joint ventures or other
strategic alliances with third parties such as the Company's April acquisitions
of three international Internet companies and pending acquisitions of Junglee
Corporation and Sage Enterprises, Inc. (PlanetAll). Any such transaction will be
accompanied by risks commonly encountered in such transactions, which include,
among others, the difficulty of assimilating the operations, technology and
personnel of the combined companies, the potential disruption of the Company's
ongoing business, the possible inability to retain key technical and managerial
personnel, the potential inability of
14
<PAGE> 15
management to maximize the financial and strategic position of the Company
through the successful integration of acquired businesses, additional expenses
associated with amortization of goodwill and purchased intangible assets,
additional operating losses and expenses associated with the activities and
expansion of acquired businesses, the maintenance of uniform standards, controls
and policies and the possible impairment of relationships with existing
employees and customers. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such business combinations, investments, joint ventures or other
strategic alliances, or that such transactions will not have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the Amazon.com online store. The
Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new products and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of a Web site and other proprietary technology entails
significant technical, financial and business risks. There can be no assurance
that the Company will successfully implement new technologies or adapt its Web
site, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, such inability
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel, particularly Jeffrey P. Bezos, its President, Chief Executive Officer
and Chairman of the Board. The Company does not have long-term employment
agreements with any of its key personnel and maintains no "key person" life
insurance policies. The loss of the services of its executive officers or other
key employees could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
RELIANCE ON CERTAIN SUPPLIERS
The Company purchases a substantial majority of its products from two major
vendors, Ingram Book Group ("Ingram") and Baker & Taylor, Inc. Ingram is the
Company's single largest supplier and accounted for 58% and 59% of the Company's
inventory purchases in 1997 and 1996, respectively. The Company has no long-term
contracts or arrangements with any of its vendors that guarantee the
availability of merchandise, the continuation of particular payment terms or the
extension of credit limits. There can be no assurance that the Company's current
vendors will continue to sell merchandise to the Company on current terms or
that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If the Company were unable to develop
and maintain relationships with vendors that allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, such inability could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
15
<PAGE> 16
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
As of June 30, 1998, as adjusted for the offering of the Original Notes and
application of the net proceeds therefrom, the Company would have had
approximately $2.4 million of indebtedness outstanding (other than the Notes),
consisting of capitalized lease obligations and other equipment financing. The
accretion of original issue discount on the Notes will cause an increase in
indebtedness of approximately $204.0 million by May 1, 2003. The Indenture
permits the incurrence of substantial amounts of additional indebtedness by the
Company and its subsidiaries. The Company may incur substantial additional
indebtedness in the future. The level of the Company's indebtedness could have
important consequences to Holders of the Notes, including the following: (i) the
debt service requirements of any additional indebtedness could make it more
difficult for the Company to make payments on the Notes; (ii) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) in the future, the Company may be required to dedicate a
substantial portion of its cash flow from operations to the payment of principal
and interest on its indebtedness and other obligations; (iv) the Company's level
of indebtedness could in the future limit its flexibility in planning for, or
reacting to changes in, its business; and (v) the Company's level of
indebtedness in the future could make it more vulnerable in the event of a
downturn in its business. The Company has experienced earnings before interest,
taxes, depreciation and amortization ("EBITDA") losses since inception. For the
year ended December 31, 1997, and the six months ended June 30, 1998, as
adjusted for the offering of the Original Notes and application of the net
proceeds therefrom, the Company's earnings before fixed charges would have been
insufficient to cover fixed charges by $27.6 million and $30.5 million,
respectively. There can be no assurance that the Company will be able to improve
its earnings before fixed charges or that the Company will be able to meet its
debt service obligations, including its obligations under the Notes. In the
event the Company's cash flow is inadequate to meet its obligations, the Company
could face substantial liquidity problems. If the Company is unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if the Company otherwise fails to comply with the various covenants
in its indebtedness, it would be in default under the terms thereof, which would
permit the holders of such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness of the Company.
Such defaults could result in a default on the Notes and could delay or preclude
payment of principal of, or interest on, the Notes. The ability of the Company
to meet its obligations will be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business and
other factors beyond the control of the Company.
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDER OF NOTES
The Original Notes were, and the Exchange Notes will be, sold at a
substantial discount from their principal amount at maturity. Although cash
interest will not accrue on the Notes prior to May 1, 2003, and there will be no
periodic payments of cash interest on the Notes prior to November 1, 2003,
original issue discount (the difference between the stated redemption price at
maturity and the issue price of the Notes) will accrue from the issue date of
the Original Notes. Original issue discount will be includible as interest
income periodically in a U.S. holder's gross income for U.S. federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. See "Certain Federal Income Tax Consequences." Prospective
investors should consult their tax advisors about the application of U.S.
federal income tax law, as well as any applicable state, local or foreign tax
laws. If a bankruptcy case were commenced by or against the Company under the
U.S. Bankruptcy Code after the issuance of the Notes, the claim of a holder of a
Note with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial Accreted Value and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest'
for purposes of the U.S. Bankruptcy Code. Any original issue discount that was
not amortized as of any such bankruptcy filing would constitute "unmatured
interest."
POTENTIAL DEPENDENCE OF COMPANY ON SUBSIDIARIES FOR REPAYMENT OF NOTES
The Original Notes are, and the Exchange Notes will be, obligations of the
Company exclusively. The Company anticipates that in the future an increasing
portion of its operations will be conducted through direct
16
<PAGE> 17
and indirect subsidiaries. The Company's cash flow and, consequently, its
ability to service its indebtedness, including the Notes, will therefore depend
to some extent upon the cash flow of its subsidiaries and the payment of funds
by those subsidiaries to the Company in the form of loans, dividends or
otherwise. The subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether in the form of loans,
dividends or otherwise. In addition, the Company's subsidiaries are likely to
become parties to financing arrangements, including secured financing
arrangements, and such financing arrangements may contain limitations on the
ability of such subsidiaries to pay dividends or to make loans or advances to
the Company. Because the Company's subsidiaries will not guarantee the payment
of the principal or interest on the Notes, any right of the Company to receive
assets of any of its subsidiaries upon liquidation or reorganization (and the
consequent right of holders of the Notes to participate in the distribution or
realize proceeds from those assets) will be effectively subordinated to the
claims of the creditors of any such subsidiary (including trade creditors and
holders of indebtedness, including subordinated indebtedness, of such
subsidiary), except if and to the extent the Company is itself a creditor of
such subsidiary, in which case the claims of the Company would nonetheless be
effectively subordinated to any security interests in the assets of the general
unsecured obligations of such subsidiary.
The Notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness of the Company with respect to the assets securing such
indebtedness. The Indenture permits the Company and its subsidiaries to incur
indebtedness to finance, among other things, the acquisition of inventory,
equipment and real property and to finance working capital and capital
expenditures for its business and to secure such indebtedness. In the event of
bankruptcy, liquidation, dissolution, reorganization or similar proceedings with
respect to the Company, the holders of secured indebtedness will be entitled to
proceed against the collateral that secures such indebtedness, and to receive
proceeds from the sale and other distributions in respect of such collateral,
and such collateral will not be available for satisfaction of any amounts owed
under the Notes. In addition, to the extent such assets do not satisfy in full
the secured indebtedness, the holders of such indebtedness would have a claim
for any shortfall that would be pari passu (or effectively senior if such
indebtedness were issued by a subsidiary) with the Notes. Accordingly, there may
only be limited assets remaining to satisfy any claims of the holders of the
Notes upon an acceleration of the Notes.
FINANCIAL AND OPERATING RESTRICTIONS
Certain covenants contained in the Indenture impose operating and financial
restrictions on the Company and its Restricted Subsidiaries. Such restrictions
affect, and in certain cases significantly limit, among other things, the
ability of the Company or its Restricted Subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, make
investments, create liens, engage in transactions with stockholders and
affiliates, sell assets and engage in mergers or consolidations. A default under
such indebtedness could result in an acceleration of the Notes, in which case
the holders of the Notes may not be paid in full.
RISKS ASSOCIATED WITH DOMAIN NAMES
The Company currently holds various Web domain names relating to its brand,
including the "Amazon.com" domain name. The acquisition and maintenance of
domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the ".com,"
".net" and ".org" generic top-level domains. The regulation of domain names in
the United States and in foreign countries is subject to change. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, there can be no assurance that the Company will be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. The
Company, therefore, may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the
17
<PAGE> 18
value of its trademarks and other proprietary rights. Any such inability could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet and
other online services, it is possible that a number of laws and regulations may
be adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The adoption of any additional laws or
regulations may decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for the Company's products and
services and increase the Company's cost of doing business, or otherwise have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Moreover, the applicability to the Internet
and other online services of existing laws in various jurisdictions governing
issues such as property ownership, sales and other taxes, libel and personal
privacy is uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
CONSEQUENCES OF FAILURE TO EXCHANGE
The issuance of the Exchange Notes in exchange for the Original Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Company of such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of Original
Notes desiring to tender such Original Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to the
tenders of Original Notes for exchange.
Original Notes that are not validly tendered will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof, and the Company will have no further
obligation to provide for the registration under the Securities Act of such
Original Notes. In addition, any holder of Original Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent that Original Notes are tendered in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Original Notes could be
adversely affected. Each broker or dealer that receives Exchange Notes for its
own account in exchange for Original Notes where such Exchange Notes were
acquired by such broker or 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 Exchange Notes. See "The Exchange
Offer -- Consequences of Failure to Exchange" and "Plan of Distribution."
LACK OF PUBLIC MARKET
The Exchange Notes are a new issue of securities for which there is
currently no active trading market. The Company does not intend to list the
Exchange Notes on any national securities exchange or to seek approval for
quotation through any automated quotation system. Morgan Stanley has advised the
Company that it currently intends to make a market in the Exchange Notes;
however, it is not obligated to do so and any market-making activity may be
discontinued at any time without notice. Therefore, there can be no assurance
that an active trading market for the Exchange Notes will develop or as to the
liquidity of or the trading market for the Exchange Notes. If a trading market
does not develop, Holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the
18
<PAGE> 19
Exchange Notes develops, any such market could cease to continue at any time. If
a trading market develops for the Exchange Notes, they may trade at a discount
from their initial offering price, depending upon prevailing interest rates, the
market for similar securities and other factors, including general economic
conditions and the Company's financial condition, performance and prospects.
USE OF PROCEEDS
The Exchange Offer is being effected to satisfy the Company's obligations
under the Original Notes, the Indenture and the Registration Rights Agreement
(as defined herein). The Company will not receive any cash proceeds from the
Exchange Offer. In consideration of issuing the Exchange Notes in the Exchange
Offer, the Company will receive an equal principal amount of Original Notes.
Original Notes that are properly tendered in the Exchange Offer and not validly
withdrawn will be accepted, canceled and retired and cannot be reissued.
The net proceeds from the sale of the Original Notes was approximately
$315.7 million after deducting selling commissions and transaction expenses. The
Company used approximately $75.0 million of such proceeds to retire the Senior
Loan (as defined herein) and expects to use the remaining net proceeds for
general corporate purposes, including working capital to fund anticipated
operating losses, the expansion of the Company's core business, investments in
new business segments and markets, including the Company's planned sales of
music products and international expansion, and capital expenditures. The
Company expects, if the opportunity arises, to use an unspecified portion of the
net proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, the Company
has and will continue to evaluate potential acquisitions of and investments in
such businesses, products or technologies.
On December 23, 1997, the Company borrowed $75.0 million pursuant to a
three-year senior secured term loan (the "Senior Loan"). The Senior Loan was
secured by a first priority lien on substantially all of the Company's assets.
The Company had the option to choose from the following interest rate options:
(i) a variable rate adjusted every one, two, three or six months at the
Company's option and based on the London Interbank Offered Rate plus 3.50% per
annum for the first six months of the Senior Loan and 4.00% thereafter or (ii) a
variable rate of interest based on the lender's Base Rate plus 1.50% per annum
for the first six months of the Senior Loan and 2.00% thereafter (10.00% at
December 31, 1997). As of March 31, 1998, $75.0 million aggregate principal
amount was outstanding with respect to the Senior Loan. The Company repaid the
Senior Loan in full with a portion of the net proceeds from the Offering on May
8, 1998.
RATIO OF EARNINGS TO FIXED CHARGES
The Company has incurred significant losses since inception, and as of June
30, 1998 had an accumulated deficit of $64.1 million. To date, the Company has
not generated earnings sufficient to cover total fixed charges in any of its
fiscal years. For the year ended December 31, 1997, and the six months ended
June 30, 1998, as adjusted for the offering of the Original Notes and
application of the net proceeds therefrom, the Company's earnings before fixed
charges would have been insufficient to cover fixed charges by $27.6 million and
$30.5 million, respectively. See "Risk Factors -- Limited Operating History;
Accumulated Deficit; Anticipated Losses" and " -- Unpredictability of Future
Revenues; Potential Fluctuations in Quarterly Operating Results; Seasonality"
and "Selected Financial Data."
19
<PAGE> 20
CAPITALIZATION
The following table sets forth the cash and marketable securities and
capitalization of the Company as of June 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------
(in thousands,
except share and
per share data)
<S> <C>
Cash........................................................ $ 2,523
Marketable securities....................................... 337,396
========
Long-term debt:
Senior Discount Notes due 2008............................ $330,704
Other long-term debt, net of current portion(1)........... 1,702
Stockholders' equity:
Preferred stock, $0.01 par value per share; 10,000,000
shares authorized; no shares issued and outstanding.......
Common stock, $0.01 par value per share; 300,000,000 shares
authorized; 49,669,601 shares issued and outstanding...... 497
Additional paid-in capital.................................. 104,368
Deferred compensation....................................... (1,301)
Other losses................................................ (35)
Accumulated deficit......................................... (64,100)
--------
Total stockholders' equity........................ 39,429
--------
Total capitalization........................................ $371,835
========
</TABLE>
- ---------------
(1) Represents $1,521 under fixed asset financing agreements and $181 of capital
lease obligations.
20
<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" to be included in the
Company's Quarterly Report on Form 10-Q for the six months ended June 30, 1998
and the Company's Annual Report on Form 10-K for the year ended December 31,
1997, which are incorporated by reference herein. See "Incorporation of
Documents by Reference." The statement of operations data for the six months
ended June 30, 1998 and the balance sheet data at June 30, 1998, with the
exception of the other operating data, are derived from financial statements of
the Company, which are included in the Company's Quarterly Report on Form 10-Q
for the six months ended June 30, 1998, which is incorporated by reference
herein. See "Incorporation of Documents by Reference." The statement of
operations data for each of the years in the three-year period ended December
31, 1997 and the balance sheet data at December 31, 1997 and 1996, with the
exception of the other operating data, are derived from financial statements of
the Company, which have been audited by Ernst & Young LLP, independent auditors,
and are included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated by reference herein. See "Incorporation
of Documents by Reference." The statement of operations data for the period from
July 5, 1994 (inception) to December 31, 1994 and the balance sheet data at
December 31, 1995 and 1994, with the exception of the other operating data, are
derived from the financial statements of the Company which were also audited by
Ernst & Young LLP, and which are included in the Company's Registration
Statement on Form S-1 (Registration No. 333-23795), dated May 15, 1997. The
historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FOR THE PERIOD
SIX FROM
MONTHS JULY 5, 1994
ENDED YEAR ENDED DECEMBER 31, (INCEPTION)
JUNE 30, --------------------------- TO DECEMBER 31,
1998 1997 1996 1995 1994
----------- -------- ------- ------ ---------------
(unaudited) (in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $203,352 $147,758 $15,746 $ 511 $ --
Cost of sales.............................. 157,840 118,945 12,287 409 --
-------- -------- ------- ------ ------
Gross profit............................... 45,512 28,813 3,459 102 --
Operating expenses:
Marketing and sales...................... 45,955 38,964 6,090 200 --
Product development...................... 14,789 12,485 2,313 171 38
General and administrative............... 5,225 6,573 1,035 35 14
Amortization of goodwill and other
purchased intangibles................. 5,413 -- -- -- --
-------- -------- ------- ------ ------
Total operating expenses......... 71,382 58,022 9,438 406 52
-------- -------- ------- ------ ------
Loss from operations....................... (25,870) (29,209) (5,979) (304) (52)
Interest income............................ 4,974 1,898 202 1 --
Interest expense........................... (9,589) (279) -- -- --
-------- -------- ------- ------ ------
Net interest income (expense).............. (4,615) 1,619 202 1 --
-------- -------- ------- ------ ------
Net loss................................... $(30,485) $(27,590) $(5,777) $ (303) $ (52)
======== ======== ======= ====== ======
Basic and diluted loss per share(1)........ $ (0.64) $ (0.64) $ (0.16) $(0.01) $(0.00)
======== ======== ======= ====== ======
Shares used in computation of basic and
diluted loss per share(1)................ 47,299 43,302 37,088 28,788 35,460
======== ======== ======= ====== ======
OTHER OPERATING DATA:
Net cash provided by (used in) operating
activities............................... $ (4,420) $ 3,522 $(1,735) $ (232) $ (24)
Capital expenditures(2).................... 7,714 11,604 1,214 52 28
EBITDA(3).................................. (11,494) (22,633) (5,491) (284) (47)
Deficiency of earnings available to cover
fixed charges(4)......................... (30,485) (27,590) (5,777) (303) (52)
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
FOR THE PERIOD
SIX FROM
MONTHS JULY 5, 1994
ENDED YEAR ENDED DECEMBER 31, (INCEPTION)
JUNE 30, --------------------------- TO DECEMBER 31,
1998 1997 1996 1995 1994
----------- -------- ------- ------ ---------------
(unaudited) (in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ 2,523 $ 1,567 $ 823 $ 804 $ 52
Marketable securities...................... 337,396 123,499 5,425 192 --
Working capital (deficiency)............... 297,517 93,517 2,270 920 (16)
Total assets............................... 443,759 149,006 8,271 1,084 76
Total debt................................. 333,090 78,202 -- -- --
Stockholders' equity....................... 39,429 28,486 3,401 977 8
</TABLE>
- ---------------
(1) As adjusted for the Company's 2-for-1 stock split payable June 1, 1998.
(2) Capital expenditures include assets acquired under capital leases.
(3) EBITDA is provided because it is a commonly accepted financial indicator
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance. EBITDA is presented to enhance the
understanding of the Company's operating results and is not intended to
represent cash flows or results of operations in accordance with generally
accepted accounting principles ("GAAP") for the periods indicated. EBITDA is
not a measurement under GAAP and is not necessarily comparable with
similarly titled measures of other companies. Net cash flows from operating
activities as determined using GAAP are also presented in Other Operating
Data.
(4) Earnings consist of income (loss) before provision for income taxes plus
fixed charges. Fixed charges consist of interest charges and amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense the Company
believes to be representative of interest.
22
<PAGE> 23
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were initially issued and sold by the Company on May 8,
1998 (the "Closing Date") to Morgan Stanley, the Placement Agent thereof,
pursuant to a Placement Agreement, dated May 5, 1998 (the "Placement
Agreement"). The Placement Agent subsequently resold the Original Notes to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act and to other institutional "accredited investors" within the meaning of Rule
501(a)(1), (2), (3), or (7) under the Securities Act. Pursuant to the Placement
Agreement, the Company and the Placement Agent entered into a Registration
Rights Agreement on May 8, 1998 (the "Registration Rights Agreement"). Pursuant
to the Registration Rights Agreement, the Company agreed to use commercially
reasonable efforts to consummate the Exchange Offer on or prior to November 8,
1998. A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part, and the
description of the terms of the Registration Rights Agreement is qualified in
its entirety by reference thereto. The Registration Statement of which this
Prospectus is a part is intended to satisfy the Company's obligations with
respect to the registration of the Original Notes in accordance with the terms
of the Registration Rights Agreement and the Indenture. Following the
consummation of the Exchange Offer, holders of Original Notes not validly
tendered in the Exchange Offer and holders of Exchange Notes will not have any
further registration rights (other than certain registration rights granted to
Morgan Stanley, as hereinafter indicated). In addition, holders of Original
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for Original Notes could be adversely
affected. See "Risk Factors -- Consequences of Failure to Exchange."
TERMS OF THE EXCHANGE OFFER
The Company intends the following terms to provide for the conduct of the
Exchange Offer in accordance with the provisions of the Registration Rights
Agreement, the Indenture, the applicable requirements of the Securities Act and
the Exchange Act and the rules and regulations of the Commission thereunder.
Upon the terms and subject to the conditions set forth in this Prospectus and in
the accompanying Letter of Transmittal, the Company will accept any and all
Original Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on September 14, 1998, or such later time and date to which the
Exchange Offer is extended by the Company in its sole discretion, which time and
date, as indicated herein or as extended, is referred to herein as the
"Expiration Date." The Company will issue $1,000 principal amount at maturity of
Exchange Notes in exchange for each $1,000 principal amount at maturity of
Original Notes accepted in the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and thus will not bear restrictive legends
restricting their transfer pursuant to the Securities Act and (ii) the Exchange
Notes will not be subject to any covenant regarding registration under the
Securities Act, including any such rights under the Registration Rights
Agreement or the Indenture, which rights, in any event, will terminate with
respect to the Original Notes upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture, which also authorized the issuance of the Original Notes, such that
both the Exchange Notes and the Original Notes will be treated as a single class
of debt securities under the Indenture.
Holders of Original Notes that are accepted for exchange will not receive
accrued interest thereon at the time of the consummation of the Exchange Offer.
The Accreted Value of the Exchange Notes initially will be equal to the Accreted
Value of the Original Notes at the time of the consummation of the Exchange
Offer. From and after May 1, 2003, the Exchange Notes will bear interest, which
will be payable in cash, at a rate of 10% per annum on each May 1 and November
1, commencing November 1, 2003.
23
<PAGE> 24
As of the date of this Prospectus, $530,000,000 aggregate principal amount
at maturity of Original Notes was outstanding. There will be no fixed record
date for determining holders of the Original Notes entitled to participate in
the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof (oral
notice being promptly confirmed in writing) to The Bank of New York, as Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of the
Original Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders of Original Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer.
Holders of Notes who tender Original 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
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXTENSION; AMENDMENTS
In order to extend the Exchange Offer, the Company must notify the Exchange
Agent of any extension by oral or written notice (oral notice being promptly
confirmed in writing) and will make public announcement thereof, 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, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Expiration Date, (iii) if any
of the conditions set forth below under "-- Conditions of the Exchange Offer
shall not have been satisfied, to terminate the Exchange Offer, or (iv) to amend
the terms of the Exchange Offer in any manner, by giving oral or written notice
(oral notice being promptly confirmed in writing) of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company promptly
will disclose such amendments by means of a prospectus supplement that will be
distributed to The Depository Trust Company ("DTC") 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 the registered
holders, if the Exchange Offer would otherwise expire during such
five-to-ten-business-day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall not have an obligation to publish, advertise
or otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to the Expiration Date. In addition, (i) certificates for such Original Notes
must be received by the Exchange Agent along with the Letter of Transmittal,
(ii) a timely confirmation of book-entry transfer (a "Book-Entry Confirmation")
of such Original Notes, if such procedure is available, into the Exchange
Agent's account at DTC (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 Holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under "-- Exchange
Agent" prior to the Expiration Date.
24
<PAGE> 25
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such owner's name or obtain a properly
completed assignment from the registered Holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States unless the Original Notes tendered pursuant thereto are tendered
(i) by a registered Holder or (ii) for the account of an Eligible Institution
(as defined below).
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Original Notes listed therein, such Original Notes must
be endorsed or accompanied by a properly completed bond power signed by such
registered Holder as such registered Holder's name appears on such Original
Notes.
If the Letter of Transmittal or any Original Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Original Notes and withdrawal of tendered
Original Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Original Notes not properly tendered or any Original Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Original Notes, none of the
Company, the Exchange Agent, or any other person shall be under any duty to give
such notification or incur any liability for failure to give such notification.
Tenders of Original Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Original Notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
25
<PAGE> 26
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "-- Conditions of
the Exchange Offer," to terminate the Exchange Offer and, to the extent
permitted by applicable law, purchase Original Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the Exchange Offer.
By tendering, each Holder will represent to the Company (on its own behalf
and on behalf of any beneficial owner of any Original Note subject to the Letter
of Transmittal) that, among other things, (i) the Exchange Notes acquired
pursuant to the Exchange Offer are being obtained in the ordinary course of
business of the person receiving such Exchange Notes, (ii) neither the Holder
nor any such other person is participating in or intends to participate in a
distribution of such Exchange Notes, (iii) neither the Holder nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, and (iv) neither the Holder nor any such
other person is an Affiliate of the Company.
In all cases, issuance of Exchange 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 Original Notes or a timely Book-Entry
Confirmation of such Original Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed duly executed Letter of
Transmittal and all other required documents. If any tendered Original Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Original Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or nonexchanged Original
Notes will be returned without expense to the tendering Holder thereof (or, in
the case of Original 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 nonexchanged Original Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Original Notes by causing the
Book-Entry Transfer Facility to transfer such Original Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if
(a) the tender is made through an a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible Guarantor Institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Original Notes and the principal amount of Original Notes tendered
stating that the tender is being made
26
<PAGE> 27
thereby and guaranteeing that, within five New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Original Notes
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Original Notes in proper form for transfer and other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn (including the
certificate number), (iii) be signed by the Holder in the same manner as the
original signature on the Letter of Transmittal by which such Original Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Original Notes register the transfer of such Original Notes in the name of the
person withdrawing the tender, and (iv) specify the name in which any such
Original Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Original Notes so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Original
Notes so withdrawn are validly retendered. Any Original Notes which have been
tendered but which are not accepted for payment will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Original Notes may be retendered by following one of the procedures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Original Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Original Notes. See "-- Conditions of the Exchange Offer." For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Original Notes for exchange when, as and if the Company has given oral
or written notice thereof (oral notice being promptly confirmed in writing) to
the Exchange Agent.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Original
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Original Notes if, in the sole judgment of the Company, the
Exchange Offer would violate any law, statute, rule or regulation or an
interpretation thereof of the Staff of the Commission. If the Company determines
in its sole discretion that this condition is not satisfied, the Company may (i)
refuse to accept any Original Notes and return all tendered Original Notes to
the tendering Holders, (ii) extend the Exchange Offer and retain all Original
Notes tendered prior to the Expiration Date, subject, however, to the rights of
Holders to withdraw such Original Notes (see "-- Withdrawal of Tenders") or
27
<PAGE> 28
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all validly tendered Original Notes which have not been withdrawn. 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 the registered Holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during such
five-to-ten-business-day period.
EXCHANGE AGENT
The Bank of New York 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 and requests of or Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, NY 10286
Attention: Santino Ginocchietti
or
BY FACSIMILE:
The Bank of New York
Attention: Santino Ginocchietti
Facsimile Number: (212) 815-6339
In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (e.g., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, 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 acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to the tendering Holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Original Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Original Notes may be resold only (i)
to the Company or any subsidiary thereof, (ii) so long as the Original Notes are
eligible
28
<PAGE> 29
for resale pursuant to Rule 144A, to a person whom the seller reasonably
believes is a "qualified institutional buyer" within the meaning of Rule 144A
under the Securities Act, purchasing for its own account or for the account of a
"qualified institutional buyer" to whom notice is given that the resale, pledge
or other transfer is being made in reliance on Rule 144A, (iii) outside the
United States to non-U.S. persons in an offshore transaction in compliance with
Rule 904 under the Securities Act, (iv) pursuant to an exemption from
registration in accordance with Rule 144 (if available), (v) to an institutional
"accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) of
the Securities Act) that, prior to such transfer, furnishes to the Trustee a
signed letter containing certain representations and agreements relating to the
registration of transfer of the Original Notes and, if such transfer is in
respect of a principal amount of Original Notes at the time of transfer of less
than $100,000, an opinion of counsel acceptable to the Company that such
transfer is in compliance with the Securities Act, and (vi) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United States
and subject to certain requirements of the Trustee being met. The liquidity of
the Original Notes could be adversely affected by the Exchange Offer. See "Risk
Factors -- Consequences of Failure to Exchange." Following the consummation of
the Exchange Offer, holders of the Original Notes will have no further
registration rights under the Registration Rights Agreement (other than certain
registration rights granted to Morgan Stanley).
RESALES OF THE EXCHANGE NOTES
Based on an interpretation by the Staff of the Commission set forth in
certain no-action letters issued to third parties, the Company believes that the
Exchange Notes or interests therein issued pursuant to the Exchange Offer in
exchange for Original Notes or interests therein may be offered for resale,
resold and otherwise transferred by a Holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an Affiliate of the Company) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that the Holder is acquiring the Exchange Notes in the
ordinary course of its business and not participating, and had no arrangement or
understanding with any person to participate, in the distribution of Exchange
Notes. Each broker-dealer that receives the Exchange Notes for its own account
in exchange for the Original Notes must represent that the Original Notes
tendered in the Exchange Offer were acquired by such broker-dealer as a result
of market-making activities or other trading activities and must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. 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 or time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
intends to make this Prospectus (as it may be amended or supplemented) available
to any broker-dealer for use in connection with any such resale for a period of
180 days after the last Exchange Date. See "Plan of Distribution."
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The Exchange Notes will be recorded at the same
carrying value as the Original Notes, as reflected in the Company's accounting
records on the date of the exchange. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes are to be issued under the Indenture. A copy of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein, and those
29
<PAGE> 30
terms made a part thereof by reference to the Trust Indenture Act of 1939, as
amended. Whenever particular defined terms of the Indenture not otherwise
defined herein are referred to, such defined terms are incorporated herein by
reference. For definitions of certain capitalized terms used in the following
summary, see "-- Certain Definitions."
GENERAL
The Notes are senior unsecured obligations of the Company, limited to
$530.0 million aggregate principal amount at maturity, and will mature on May 1,
2008. Although for federal income tax purposes a significant amount of original
issue discount, taxable as ordinary income, will be recognized by a Holder as
such discount accrues from the issue date of the Notes, no interest will be
payable on the Notes prior to November 1, 2003. Interest on the Notes will
accrue at the rate shown on the front cover of this Prospectus beginning May 1,
2003 or from the most recent Interest Payment Date to which interest has been
paid or provided for, payable semiannually (to Holders of record at the close of
business on the April 15 or October 15 immediately preceding the Interest
Payment Date) on May 1 and November 1 of each year, commencing November 1, 2003.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, New York,
New York 10286); provided that, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses as they
appear in the Security Register.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after May 1, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice mailed by first-class
mail to each Holder's last address as it appears in the Security Register, at
the Redemption Prices (expressed in percentages of principal amount at maturity)
set forth below, plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is prior to the Redemption Date to receive interest due on an Interest
Payment Date), if redeemed during the 12-month period commencing May 1 of the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003................................................. 105.000%
2004................................................. 103.333
2005................................................. 101.667
2006 and thereafter.................................. 100.000
</TABLE>
In addition, at any time prior to May 1, 2001, the Company may redeem up to
35% of the aggregate principal amount at maturity of the Notes with the Net Cash
Proceeds of one or more sales of Capital Stock of the Company (other than
Disqualified Stock), at any time as a whole or from time to time in part, at a
Redemption Price (expressed as a percentage of Accreted Value on the Redemption
Date) of 110%; provided that at least 65% of the aggregate principal amount at
maturity of the Notes originally issued on the Closing Date remains outstanding
after each such redemption and notice of any such redemption is mailed within 60
days after the related sale of Capital Stock.
At any time prior to May 1, 2003, the Company may redeem all, but not less
than all, of the Notes at a Redemption Price equal to the sum of (i) the
Accreted Value on the Redemption Date, plus (ii) accrued and unpaid interest, if
any, to the Redemption Date (subject to the right of Holders of record on the
relevant Regular Record Date that is prior to the Redemption Date to receive
interest due on an Interest Payment Date), plus (iii) the Applicable Premium.
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the Accreted Value of such Note on such Redemption
Date and (ii) the excess of (A) the present value at such Redemption Date of the
redemption price of such Note on May 1, 2003 (such redemption price being
30
<PAGE> 31
that described in the first paragraph of this "Optional Redemption" section),
computed using a discount rate equal to the Treasury Rate plus 50 basis points,
over (B) the Accreted Value of such Note on such Redemption Date. Calculation of
the Applicable Premium will be made by the Company or on behalf of the Company
by such Person as the Company shall designate; provided that such calculation
shall not be a duty or obligation of the Trustee.
"Treasury Rate" means the yield to maturity at the time of computation of
U.S. Treasury securities with a constant maturity (as compiled and published in
the most recent Federal Reserve Statistical Release H.15(519) that has become
publicly available at least two Business Days prior to the Redemption Date (or,
if such Statistical Release is no longer published, any publicly available
source or similar market data)) most nearly equal to the period from the
Redemption Date to May 1, 2003; provided, however, that if the period from the
Redemption Date to May 1, 2003 is not equal to the constant maturity of the U.S.
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of U.S. securities for which such
yields are given, except that if the period from the Redemption Date to May 1,
2003 is less than one year, the weekly average yield on actually traded U.S.
Treasury securities adjusted to a constant maturity of one year shall be used.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount at
maturity 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 to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the Original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
REGISTRATION RIGHTS
There will be no registration rights with respect to the Exchange Notes,
except that the Company has granted certain registration rights to Morgan
Stanley and that certain brokers or dealers registered under the Exchange Act
who may be deemed to be "underwriters" with respect to the Exchange Notes may be
entitled to continuing registration rights which the Company granted with
respect to the Exchange Notes. See "Plan of Distribution."
RANKING
The Notes are senior unsecured indebtedness of the Company ranking pari
passu with the Company's existing and future unsubordinated, unsecured
indebtedness and senior in right of payment to all subordinated indebtedness of
the Company. The Notes will be effectively subordinated to all secured
indebtedness and to all existing and future liabilities of the Company's
subsidiaries, including trade payables. As of June 30, 1998, as adjusted for the
offering of the Original Notes and application of the net proceeds therefrom,
the Company would have had approximately $2.4 million of indebtedness
outstanding (other than the Notes), all of which would have been secured
indebtedness. In addition, the Notes will be effectively subordinated to all
existing and future liabilities (including trade payables) of the Company's
subsidiaries.
31
<PAGE> 32
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semiannual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRUAL DATE ACCRETED VALUE
----------------------- --------------
<S> <C>
November 1, 1998....................................... $ 644.60
May 1, 1999............................................ $ 676.83
November 1, 1999....................................... $ 710.68
May 1, 2000............................................ $ 746.21
November 1, 2000....................................... $ 783.52
May 1, 2001............................................ $ 822.70
November 1, 2001....................................... $ 863.83
May 1, 2002............................................ $ 907.02
November 1, 2002....................................... $ 952.38
May 1, 2003............................................ $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semiannual Accrual
Date, the Accreted Value will equal the sum of (a) $615.07 and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semiannual Accrual Date less $615.07 multiplied by (2) a fraction, the
numerator of which is the number of days from the Closing Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the Closing Date to the
first Semiannual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semiannual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semiannual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semiannual Accrual Date less the Accreted Value for
the immediately preceding Semiannual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semiannual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semiannual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition and not Incurred in connection with, or in anticipation of,
such Person becoming a Restricted Subsidiary or such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Subsidiaries for such period determined
in conformity with GAAP; provided that the following items shall be excluded in
computing Adjusted Consolidated Net Income (without duplication): (i) the net
income (or loss) of any Person that is not a Restricted Subsidiary, except to
the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries by such Person during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and, in such case,
except to the extent includible pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all
32
<PAGE> 33
of the property and assets of such Person are acquired by the Company or any of
its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary
to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; provided that, for the purpose of
determining whether a Restricted Subsidiary may Incur Indebtedness under the
first paragraph of section (a) under the "Limitation on Indebtedness" covenant
only, the total net income of such Restricted Subsidiary will be included; (iv)
any gains or losses (on an after-tax basis) attributable to Asset Sales; (v)
except for purposes of calculating the amount of Restricted Payments that may be
made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below, any amount paid or accrued as
dividends on Preferred Stock of the Company or any Restricted Subsidiary owned
by Persons other than the Company and any of its Restricted Subsidiaries; (vi)
all extraordinary gains and extraordinary losses; and (vii) any compensation
expense paid or payable solely with Capital Stock (other than Disqualified
Stock) of the Company or any options, warrants or other rights to acquire
Capital Stock (other than Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person or the acquisition of Capital Stock
of any other Person, in each case pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged into or consolidated with the Company
or any of its Restricted Subsidiaries; provided that such Person's business or
the business or assets acquired are related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted
33
<PAGE> 34
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of all or
substantially all of the assets of the Company; provided that "Asset Sale" shall
not include (a) sales or other dispositions of inventory, receivables and other
current assets, (b) sales, transfers or other dispositions of assets
constituting a Restricted Payment permitted to be made under the "Limitation on
Restricted Payments" covenant, (c) sales, transfers or other dispositions of
assets with a fair market value (as certified in an Officers' Certificate) not
in excess of $10 million in any transaction or series of related transactions,
(d) sales, transfers or other dispositions of obsolete or damaged assets, (e)
sales of Capital Stock of a New Business Subsidiary if the proceeds therefrom
are used in the business of such New Business Subsidiary or (f) sales or other
dispositions of assets for consideration at least equal to the fair market value
of the assets sold or disposed of, to the extent that the consideration received
consists of (x) property or assets (other than current assets) of a nature or
type or that are used in a business (or Capital Stock or Indebtedness of a
company having property or assets of a nature or type or used in a business)
similar or related to the nature or type of the property and assets of, or
business of, the Company and its Restricted Subsidiaries existing on the date of
such sale or other disposition or (y) Capital Stock or Indebtedness of the
Person to whom such assets are sold or disposed.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Section 13(d) or 14(d)(2) under the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted basis,
than is beneficially owned by the Existing Stockholders on such date; or (ii)
individuals who on the Closing Date constitute the Board of Directors (together
with any new directors whose election by the Board of Directors or whose
nomination by the Board of Directors for election by the Company's stockholders
was approved by a vote of at least a majority of the members of the Board of
Directors then in office who either were members of the Board of Directors on
the Closing Date or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of the
Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) of such Person's equity, other than Preferred Stock of such
Person, whether outstanding on the Closing Date or issued thereafter, including,
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and nonrecurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other noncash items reducing Adjusted Consolidated Net Income
34
<PAGE> 35
(other than items that will require cash payments and for which an accrual or
reserve is, or is required by GAAP to be, made), less all noncash items
increasing Adjusted Consolidated Net Income, all as determined on a consolidated
basis for the Company and its Restricted Subsidiaries in conformity with GAAP;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by the Company or
any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; and the net costs associated with Interest Rate Agreements),
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries and all but the principal component of rentals in
respect of Capitalized Lease Obligations, in each case paid, accrued or
scheduled to be paid or to be accrued by the Company and its Restricted
Subsidiaries during such period; excluding, however, (i) any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof (but only in the same
proportion as the net income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof); and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission (such four-fiscal-quarter-period being the "Four-Quarter
Period"); provided that, in making the foregoing calculation, (A) pro forma
effect shall be given to any Indebtedness that is to be Incurred or repaid on
the Transaction Date; (B) pro forma effect shall be given to Asset Dispositions
and Asset Acquisitions (including giving pro forma effect to the application of
proceeds of any Asset Disposition) that occur during the period beginning on the
first day of the Four-Quarter Period and ending on the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; and (C) pro forma effect shall be
given to asset dispositions and asset acquisitions (including giving pro forma
effect to the application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted Subsidiary as
if such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions that occurred on the first day of such Reference Period;
provided that to the extent that clause (B) or (C) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date and for which financial information
is available of the Person, or division or line of business of the Person, that
is acquired or disposed of.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the
35
<PAGE> 36
Notes or (iii) convertible into or exchangeable for Capital Stock referred to in
clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to
the Stated Maturity of the Notes; provided 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 no more favorable to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of Notes Upon a Change
of Control" covenants described below and such Capital Stock, or the agreements
or instruments governing the redemption rights thereof, specifically provides
that such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Notes as are required to be
repurchased pursuant to the "Limitation on Asset Sales" covenant and
"-- Repurchase of Notes Upon a Change of Control" described below.
"Existing Stockholders" means Jeffrey P. Bezos, members of his immediate
family and their transferees by will or intestacy, trusts for the benefit of any
of them or any of their lineal descendants and any of their estates; L. John
Doerr; Kleiner Perkins Caulfield & Byers; and any Affiliate of any of the
foregoing.
"Fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that, for purposes of clause (vii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds (i) $10.0 million, the
fair market value of such property shall be determined by the directors of the
Company who are not officers or employees of the Company, whose determination
shall be conclusive and evidenced by a Board Resolution, and (ii) $100.0
million, the fair market value of such property shall be determined by a
nationally recognized accounting or investment banking firm and set forth in
their written opinion, which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
as in effect as of the Closing Date, including, without limitation, those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, 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 other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
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 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.
36
<PAGE> 37
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a person becoming a
Restricted Subsidiary; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds, Notes,
notes or other similar instruments, (iii) all obligations of such Person in
respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. 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, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP, (B) that money borrowed and set
aside at the time of the Incurrence of any Indebtedness in order to prefund the
payment of the interest on such Indebtedness shall not be deemed to be
"Indebtedness" so long as such money is held to secure the payment of such
interest and (C) that Indebtedness shall not include any liability for federal,
state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) 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, bonds, notes, Notes or other similar
instruments issued by, such Person and shall include (i) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market
value of the Capital Stock (or any other Investment), held by the Company or any
of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any of its Restricted Subsidiaries)) of any
37
<PAGE> 38
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale, and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, 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 Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"New Business Subsidiary" means a Restricted Subsidiary of the Company
whose primary business and operations do not include any of the U.S.-based book
sales and distribution business and operations conducted by the Company and its
Restricted Subsidiaries on the Closing Date.
"Offer to Purchase" means an offer by the Company to purchase Notes from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest (or original issue discount) pursuant to its terms; (iv) that, unless
the Company defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest (or
original issue discount) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is withdrawing
its election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered;
38
<PAGE> 39
provided that each Note purchased and each new Note issued shall be in a
principal amount at maturity of $1,000 or an integral multiple thereof. On the
Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes
or portions thereof validly tendered pursuant to an Offer to Purchase; (ii)
deposit with the Paying Agent money sufficient to pay the purchase price of all
Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof accepted
for payment by the Company. The Paying Agent shall promptly mail to the Holders
of Notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Note equal in
principal amount at maturity to any unpurchased portion of the Note surrendered;
provided that each Note purchased and each new Note issued shall be in a
principal amount at maturity of $1,000 or an integral multiple thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business or the
assets to be transferred or conveyed are related, ancillary or complementary to
the businesses of the Company and its Restricted Subsidiaries on the date of
such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel,
relocation and similar advances to cover matters that are expected at the time
of such advances ultimately to be treated as expenses in accordance with GAAP;
(iv) stock, obligations or securities received (x) in satisfaction of judgments
or (y) in connection with the sale or disposition of a Person, assets or
business; (v) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and worker's compensation, performance and other
similar deposits; (vi) Interest Rate Agreements and Currency Agreements designed
solely to protect the Company or its Restricted Subsidiaries against
fluctuations in interest rates or foreign currency exchange rates; (vii)
Strategic Investments; (viii) loans or advances to officers or employees of the
Company or any Restricted Subsidiary (other than loans or advances made pursuant
to clause (ix) below) that do not in the aggregate exceed $10.0 million at any
time outstanding; and (ix) loans or advances to Persons who own Indebtedness or
Capital Stock (other than any Affiliate of the Company or any Restricted
Subsidiary) of any Person if such loans or advances are made as part of, or in
connection with, a transaction pursuant to which such person becomes a
Restricted Subsidiary of the Company or any other Restricted Subsidiary or
substantially all of the assets of such Person are acquired by the Company or
any Restricted Subsidiary, in an aggregate amount not to exceed 20% of the total
consideration paid in connection with such acquisition. Any such loans or
advances made within three months after completion of such transaction shall be
deemed to be part of or in connection with such transaction for purposes of this
definition.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its
39
<PAGE> 40
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; provided that
(a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness" covenant described
below, (1) to finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation or
integration) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost, and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such property
or assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables; (xix) Liens that secure Indebtedness Incurred under
clause (ix) or (x) of the second paragraph of part (a) of the "Limitation on
Indebtedness" covenant; and (xx) Liens that secure Indebtedness with an
aggregate principal amount not in excess of $100.0 million at any time
outstanding.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred stock or preference stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
40
<PAGE> 41
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Investment" means an Investment in any Person (other than an
Unrestricted Subsidiary of the Company) whose primary business is related,
ancillary or complementary to, and such Investment is determined in good faith
by the Board of Directors (or senior officers of the Company to whom the Board
of Directors has duly delegated the authority to make such a determination),
whose determination shall be conclusive and evidenced by a Board Resolution, to
promote or significantly benefit the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance an Asset Acquisition which Indebtedness by its terms, or by
the terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal or premium, or interest on or any
other payment with respect to, such Indebtedness may be made prior to the
payment in full of all of the Company's obligations under the Notes; provided
that such Indebtedness may provide for and be repaid at any time from the
proceeds of a capital contribution or the sale of Capital Stock (other than
Disqualified Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof, (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within one year of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, 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 $50.0 million (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) commercial paper, maturing
not more than two years 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, any state thereof or any foreign country recognized
by the United States 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, (v) securities with maturities of six months or less from the
date of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States, or by any political subdivision
or taxing authority thereof, and rated at least "A" by S&P or Moody's, (vi) with
respect to security or collateral required to be provided by the Company under
the terms of any lease or in connection with any capital expenditure,
Indebtedness issued by any corporation (other than the Company or an Affiliate
of the Company) incorporated and in existence in any state of the United States
or the District of Columbia and having a rating, at the time as of which such
Investment is made, of "AA" (or higher) according to S&P or "Aa1" (or higher)
according to Moody's, and (vii) funds that do not utilize Indebtedness in order
to make investments and that invest solely in any of the Investments described
in clauses (i) through (vi) above.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
41
<PAGE> 42
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"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 Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (i) the Subsidiary to be so designated has total
assets of $1,000 or less or (ii) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such time,
have been permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of the Indenture. Any such designation by the Board of
Directors shall be evidenced 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.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that (x) the Company may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Consolidated Leverage
Ratio would be greater than zero and less than 6:1 and (y) any Restricted
Subsidiary may Incur Indebtedness if, after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds therefrom, the
Consolidated Leverage Ratio would be greater than zero and less than 4:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $300.0 million; (ii) Indebtedness owed (A) to the Company evidenced by a
promissory note or (B) to any of its Restricted Subsidiaries; provided that any
event resulting in any such Restricted Subsidiary's ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than
42
<PAGE> 43
to the Company or another Restricted Subsidiary) shall be deemed, in each case,
to constitute an Incurrence of such Indebtedness not permitted by this clause
(ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (i), (ii), (iv), (vi), (vii), (ix), (x) or
(xii) of this paragraph; it being understood that Indebtedness Incurred pursuant
to any of such clauses may be refinanced or refunded pursuant to such clauses)
and any refinancings thereof in an amount not to exceed the amount so refinanced
or refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes or
Indebtedness that is pari passu with, or subordinated in right of payment to,
the Notes shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part or the Indebtedness to be refinanced is pari passu
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari passu with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes, and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and provided further that in no event
may Indebtedness of the Company be refinanced by means of any Indebtedness of
any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A)
in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (x) are designed solely to protect the Company or
its Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (y) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; or (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change of Control or (B) deposited to defease the Notes as described below
under "-- Defeasance"; (vi) Guarantees of the Notes, Guarantees of Indebtedness
of Restricted Subsidiaries by the Company or by any Restricted Subsidiary if the
Restricted Subsidiary is permitted to Incur such Indebtedness under the
Indenture and Guarantees of Indebtedness of the Company by any Restricted
Subsidiary provided the Guarantee of such Indebtedness is permitted by and made
in accordance with the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness of the Company not to
exceed, at any one time outstanding, two times (A) the Net Cash Proceeds
received by the Company after the Closing Date as a capital contribution or from
the issuance and sale of its Capital Stock (other than Disqualified Stock) to a
Person that is not a Subsidiary of the Company, to the extent (I) such capital
contribution or Net Cash Proceeds have not been used pursuant to clause (C)(2)
of the first paragraph or clause (iii), (iv), (vi) or (vii) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below to
make a Restricted Payment; and (II) if such capital contribution or Net Cash
Proceeds are used to consummate a transaction pursuant to which the Company
Incurs Acquired Indebtedness, the amount of such Net Cash Proceeds exceeds
one-half of the amount of Acquired Indebtedness so Incurred and (B) 80% of the
fair market value of property (other than cash and cash equivalents) received by
the Company after the Closing Date from the sale of its Capital Stock (other
than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to
the extent (I) such capital contribution or sale of Capital Stock has not been
used pursuant to clause (iii), (iv), (vi) or (vii) of the second paragraph of
the "Limitation on Restricted Payments" covenant described below to make a
43
<PAGE> 44
Restricted Payment and (II) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred; provided that such
Indebtedness (other than Indebtedness Incurred under a working capital or
revolving credit facility) does not mature prior to the Stated Maturity of the
Notes and has an Average Life longer than the Notes; (viii) Acquired
Indebtedness; (ix) Indebtedness of the Company Incurred to finance capital
expenditures of the Company or any Restricted Subsidiary in an aggregate
principal amount not to exceed $100.0 million in any fiscal year; provided that
amounts not so Incurred in any fiscal year may be accumulated and Incurred by
the Company in any subsequent fiscal year; (x) Indebtedness of the Company
Incurred to finance seasonal or working capital requirements of the Company and
its Restricted Subsidiaries; (xi) Strategic Subordinated Indebtedness; and (xii)
subordinated Indebtedness of the Company (in addition to Indebtedness permitted
under clauses (i) through (xi) above) in an aggregate principal amount
outstanding at any time not to exceed $300.0 million.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes, or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment, (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant, or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on
44
<PAGE> 45
a cumulative basis during the period (taken as one accounting period) beginning
on the first day of the fiscal quarter immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed with the Commission, plus (2) the
aggregate Net Cash Proceeds received by the Company after the Closing Date from
the issuance and sale permitted by the Indenture of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of the
Company for cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause
(vii) of the second paragraph under the "Limitation on Indebtedness" covenant,
plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes,
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or a
Subsidiary of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
any Person; provided that the aggregate amount of Investments made pursuant to
this clause (vi) does not exceed the sum of (a) $50.0 million, plus (b) the
amount of Net Cash Proceeds received by the Company after the Closing Date from
the sale of its Capital Stock (other than Disqualified Stock) to a Person who is
not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (vii) under the "Limitation on
Indebtedness" covenant or to make Restricted Payments pursuant to clause (C)(2)
of the first paragraph, or clauses (iii) or (iv) of this paragraph, of this
"Limitation on Restricted Payments" covenant, plus (c) the net reduction in
Investments made pursuant to this clause (vi) resulting from distributions on or
repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; (vii) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of the
Company; (viii) the payment of dividends on (x) Preferred Stock issued by a New
Business Subsidiary and
45
<PAGE> 46
(y) Preferred Stock (other than Disqualified Stock) issued by the Company that
is convertible into Common Stock of the Company; (ix) the purchase, redemption
or other acquisition or retirement of Common Stock of the Company or any option
or other right to acquire shares of Common Stock of the Company (i) if such
Common Stock, option or other right was issued pursuant to a plan or arrangement
approved by the Company's Board of Directors, and such purchase, redemption or
other acquisition or retirement (x) occurs in accordance with the terms of such
plan or arrangement, from former employees of the Company and its Subsidiaries
or their estates or (y) is from an employee of the Company (other than Jeffrey
P. Bezos and his Affiliates) and the price paid by the Company to such employee
is equal to the exercise or purchase price paid by such employee and (ii) from
employees of the Company or its Subsidiaries in an amount not to exceed $2.0
million in any fiscal year; provided that in the case of clause (ii) amounts not
paid for any such purchase, redemption or other acquisition or retirement in any
fiscal year may be accumulated and paid in any subsequent fiscal year; and (x)
other Restricted Payments in an aggregate amount not to exceed $30.0 million;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vi), shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant only to
the extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary other
than a New Business Subsidiary to, create or otherwise cause or suffer to exist
or become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary, or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any amendments, extensions,
refinancings, renewals or replacements of such agreements; provided that the
amendments, encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture, or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary
46
<PAGE> 47
and imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary; or (vi) contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was issued if
(A) the encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in such
Indebtedness or agreement, (B) the encumbrance or restriction is not materially
more disadvantageous to the Holders of the Notes than is customary in comparable
financings (as determined by the Company) and (C) the Company determines that
any such encumbrance or restriction will not materially affect the Company's
ability to make principal or interest payments on the Notes. Nothing contained
in this "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant shall prevent the Company or any Restricted
Subsidiary from (1) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock), except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of (x) Common Stock of
a Restricted Subsidiary; provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale (other than any sale of
Common Stock of a New Business Subsidiary) in accordance with clause (A) or (B)
of the "Limitation on Asset Sales" covenant described below and (y) Preferred
Stock of a New Business Subsidiary.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary (x) that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) Indebtedness Incurred under a working capital or revolving
credit facility. If the Guaranteed Indebtedness is (A) pari passu with the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu
with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated
to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
47
<PAGE> 48
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Restricted Subsidiaries or solely
between Restricted Subsidiaries; (iii) the payment of reasonable and customary
regular fees to directors of the Company who are not employees of the Company;
(iv) any payments or other transactions pursuant to any tax-sharing agreement
between the Company and any other Person with which the Company files a
consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; or (v) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant. Notwithstanding the foregoing, any
transaction or series of related transactions covered by the first paragraph of
this "Limitation on Transactions With Stockholders and Affiliates" covenant and
not covered by clauses (ii) through (v) of this paragraph, the aggregate amount
of which exceeds $5.0 million in value, must be approved or determined to be
fair in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such Lien
for so long as such obligation or liability is so secured.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
or (vi) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the
48
<PAGE> 49
Company or a Restricted Subsidiary sells or transfers such assets or properties
and then or thereafter leases such assets or properties or any part thereof or
any other assets or properties which the Company or such Restricted Subsidiary,
as the case may be, intends to use for substantially the same purpose or
purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the Commission), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within 18 months after the
date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or any Restricted
Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a Person
other than the Company or any of its Restricted Subsidiaries or (B) invest an
equal amount, or the amount not so applied pursuant to clause (A) (or enter into
a definitive agreement committing to so invest within 18 months after the date
of such agreement), in property or assets (other than current assets) of a
nature or type or that are used in a business (or in a company having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such investment
(as determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no
later than the end of the 18-month period referred to in clause (i)) such excess
Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided
in the following paragraph of this "Limitation on Asset Sales" covenant. The
amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 18-month period as set forth in clause (i)
of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate Accreted Value of Notes equal to the Excess Proceeds on such date, at
a purchase price equal to 100% of the Accreted Value of the Notes on the
relevant Payment Date, plus, in each case, accrued interest (if any) to the
Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date.
49
<PAGE> 50
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times, whether or not the Company is then required to file reports
with the Commission, the Company shall file with the Commission all such reports
and other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto. The
Company shall supply the Trustee and each Holder or shall supply to the Trustee
for forwarding to each such Holder, without cost to such Holder, copies of such
reports and other information.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
default in the performance or breach of the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the assets of the Company or the failure to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of
Notes Upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in the
Indenture or under the Notes (other than a default specified in clause (a), (b)
or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount at maturity of the Notes; (e) there occurs
with respect to any issue or issues of Indebtedness of the Company or any
Significant Subsidiary having an outstanding principal amount of $10.0 million
or more in the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 60 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 60 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $10.0 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 60 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $10.0 million during which a stay of enforcement of such final judgment
or order, by reason of a pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; or (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the
50
<PAGE> 51
Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary, or (C) effects
any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount at maturity of the Notes, then outstanding, by
written notice to the Company (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
Accreted Value of, premium, if any, and accrued interest on the Notes to be
immediately due and payable. Upon a declaration of acceleration, such Accreted
Value of, premium, if any, and accrued interest shall be immediately due and
payable. In the event of a declaration of acceleration because an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) shall
be remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
Accreted Value of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder. The
Holders of at least a majority in principal amount of the outstanding Notes by
written notice to the Company and to the Trustee, may waive all past defaults
and rescind and annul a declaration of acceleration and its consequences if (i)
all existing Events of Default, other than the nonpayment of the Accreted Value
of, premium, if any, and interest on the Notes that have become due solely by
such declaration of acceleration, have been cured or waived and (ii) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
Accreted Value of, premium, if any, or interest on, such Note or to bring suit
for the enforcement of any such payment, on or after the due date expressed in
the Notes, which right shall not be impaired or affected without the consent of
the Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one
51
<PAGE> 52
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States or any jurisdiction thereof
and shall expressly assume, by a supplemental indenture, executed and delivered
to the Trustee, all of the obligations of the Company on all of the Notes and
under the Indenture; (ii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis the
Company, or any Person becoming the successor obligor of the Notes, as the case
may be, could Incur at least $1.00 of Indebtedness under the first paragraph of
the "Limitation on Indebtedness" covenant; provided that this clause (iii) shall
not apply to a consolidation, merger or sale of all (but not less than all) of
the assets of the Company if all Liens and Indebtedness of the Company or any
Person becoming the successor obligor on the Notes, as the case may be, and its
Restricted Subsidiaries outstanding immediately after such transaction would, if
Incurred at such time, have been permitted to be Incurred (and all such Liens
and Indebtedness, other than Liens and Indebtedness of the Company and its
Restricted Subsidiaries outstanding immediately prior to the transaction, shall
be deemed to have been Incurred) for all purposes of the Indenture; and (iv) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii) above) and
opinion of counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clause (iii) above does not apply
if, in the good faith determination of the Board of Directors of the Company,
whose determination shall be evidenced by a Board Resolution, the principal
purpose of such transaction is to change the state of incorporation of the
Company and any such transaction shall not have as one of its purposes the
evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments or any date on
which the Notes may be redeemed at the option of the Company, in each case in
accordance with the terms of the Indenture and the Notes, (B) the Company has
delivered to the Trustee (i) either (x) 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 the Company's exercise of its option under this "Defeasance"
provision 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, defeasance and discharge had not occurred, which opinion of counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned opinion of counsel and
(ii) an opinion of counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the passage
of 123 days following the deposit, the trust fund will not be subject to the
effect of Section 547 of the United States Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law, (C) immediately after giving effect to such
deposit on a pro forma basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the
52
<PAGE> 53
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound and (D) if at such time the Notes are listed on a
national securities exchange, the Company has delivered to the Trustee an
opinion of counsel to the effect that the Notes will not be delisted as a result
of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clause (iii) under "Consolidation, Merger and Sale
of Assets" and all the covenants described herein under "Covenants," clause (c)
under "Events of Default" with respect to such clause (iii) under
"Consolidation, Merger and Sale of Assets," clause (d) under "Events of Default"
with respect to such other covenants and clauses (e) and (f) under "Events of
Default" shall be deemed not to be Events of Default, upon, among other things,
the deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments or any date on which the Notes may
be redeemed at the option of the Company, in each case in accordance with the
terms of the Indenture and the Notes, the satisfaction of the provisions
described in clauses (B)(ii), (C) and (D) of the preceding paragraph and the
delivery by the Company to the Trustee of an opinion of counsel to the effect
that, among other things, the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance of
certain covenants and Events of Default 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.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
or, if applicable, optional redemption date, but may not be sufficient to pay
amounts due on the Notes at the time of the acceleration resulting from such
Event of Default. However, the Company will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the Accreted Value of, or premium, if any,
or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
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 of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
53
<PAGE> 54
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
BOOK ENTRY; DELIVERY AND FORM
The Exchange Notes will initially be issued in the form of one Global Note
(the "Global Exchange Note") and deposited upon issuance with and registered in
the name of, or on behalf of, DTC or its nominee.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Exchange Notes represented by such
Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owner of an interest in a Global Exchange Note will be able
to transfer that interest except in accordance with DTC's applicable procedures,
in addition to those provided for under the Indenture.
Payments of the principal of, and interest on, a Global Exchange Note will
be made to DTC or its nominee, as the case may be, as the registered owner
thereof. Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Exchange
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Exchange Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Exchange
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear & Cedel Bank will be effected in the ordinary
way in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by
a holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Exchange Note is credited and
only in respect of such portion of the aggregate principal amount of Exchange
Notes as to which such participant or participants has or have given such
direction.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect
54
<PAGE> 55
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Exchange Note among participants
of DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
company nor the Trustee will have any responsibility for the performance by DTC
or its participants or indirect participants of its obligations under the rules
and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Notes and a successor depositary is not appointed by the
Company within 90 days, the Company will issue certificated Exchange Notes
("Certificated Exchange Notes") in exchange for the Global Exchange Notes. In
addition, if there is an Event of Default under the Exchange Notes, DTC may
exchange the Global Exchange Note for Certificated Exchange Notes and distribute
such Certificated Exchange Notes to its participants. Finally, beneficial owners
whose interests are represented by the Global Exchange Note may request a
physical certificate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which was prepared by Perkins Coie LLP, counsel
to the Company, summarizes the material U.S. federal income tax consequences of
the exchange of the Original Notes for the Exchange Notes pursuant to the
Exchange Offer. This discussion is based on provisions of the Internal Revenue
Code of 1986, as amended, its legislative history, judicial authority, current
administrative rulings and practice, and existing and proposed Treasury
Regulations, all as in effect and existing on the date hereof. Legislative,
judicial or administrative changes or interpretations after the date hereof
could alter or modify the validity of this discussion and the conclusions set
forth below. Any such changes or interpretations may be retroactive and could
adversely affect a Holder of the Original Notes or the Exchange Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that might be relevant to particular Holders in light of their
personal investment or tax circumstances or status, nor does it discuss the U.S.
federal income tax consequences to certain types of Holders subject to special
treatment under the U.S. federal income tax laws, such as certain financial
institutions, insurance companies, dealers in securities or foreign currency,
tax-exempt organizations, foreign corporations or nonresident alien individuals,
or persons holding Original Notes or Exchange Notes that are a hedge against, or
that are hedged against, currency risk or that are part of a straddle or
conversion transaction, or persons whose functional currency is not the U.S.
dollar. Moreover, the effect of any state, local or foreign tax laws is not
discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER OF AN
ORIGINAL NOTE THAT IS PARTICIPATING IN THE EXCHANGE OFFER IS STRONGLY URGED TO
CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH HOLDER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE EXCHANGE OF
THE ORIGINAL NOTES FOR THE EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER.
EXCHANGE OFFER
The exchange of the Original Notes by any holder for the Exchange Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes should not be considered
to differ materially in kind or extent from the Original Notes. Rather, the
Exchange Notes received by any Holder should be treated as a continuation of the
Original Notes in the hands of such holder. As a result, there should be no
federal income tax consequences to Holders exchanging the Original Notes for the
Exchange Notes pursuant to the Exchange Offer, and the federal income tax
consequences of holding and disposing of the Exchange Notes should be the same
as the federal income tax consequences of
55
<PAGE> 56
holding and disposing of the Original Notes. Accordingly, Holders of the
Exchange Notes will be required to include in income for federal income tax
purposes in advance of the receipt of cash payment to which the income is
attributable original issue discount (which is the excess of the stated
redemption value of the Notes over their issue price) to the same extent as
required for the Original Notes. As in the case of the Original Notes, U.S.
withholding tax may apply to original issue discount on the Exchange Notes for
certain non-U.S. Holders. Also, a holder's adjusted tax basis in the Exchange
Notes will be the same as its adjusted tax basis in the Original Notes exchanged
therefor and its holding period for the Original Notes will be included in its
holding period for the Exchange Notes. Thus, the determination of gain on a sale
or other disposition of the Exchange Notes will be the same as for the Original
Notes.
PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offer" above for a description of the
Exchange Offer, including the purpose of the Exchange Offer, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus with any resale of Exchange 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 Exchange Notes received in exchange for Original
Notes where such Original Notes were acquired as a result of market-making
activities or other trading activities. The Company will, during the period
ending 180 days after the last Exchange Date, make this Prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale.
Neither the Company nor any of its affiliates has entered into any
arrangement or understanding with any broker-dealer to distribute the Exchange
Notes and will not receive any proceeds from any sale of Exchange Notes by any
broker-dealers or any other persons. Exchange 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 Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of the 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 or dealer and/or the purchaser of any such
Exchange Notes. Any broker or dealer that resells the Exchange 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 Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriter compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
Morgan Stanley has advised the Company that it intends to make a market in
the Exchange Notes; however, it is not obligated to do so and any such
market-making may be discontinued at any time without notice, in the sole
discretion of Morgan Stanley. To the extent Morgan Stanley is considered an
Affiliate of the Company, the Company has advised Morgan Stanley that it must
comply with the registration and prospectus delivery requirements of the
Securities Act applicable to affiliates in connection with such secondary resale
transactions. See "Risk Factors -- Lack of Public Market." To the extent that
Morgan Stanley is an Affiliate of the Company, the Company is required to file a
shelf registration statement and keep such shelf registration statement
effective in order to provide Morgan Stanley with the ability to resell Exchange
Notes that it acquires from time to time in connection with any market-making
activities.
The Company has agreed in the Registration Rights Agreement to pay all
expenses incident to the Exchange Offer other than commissions or concessions of
any brokers or dealers and expenses of counsel for the underwriters or holders
of the Exchange Notes.
56
<PAGE> 57
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes being offered
hereby will be passed upon for the Company by Perkins Coie LLP, Seattle,
Washington.
EXPERTS
The financial statements of Amazon.com, Inc. appearing in Amazon.com,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
57
<PAGE> 58
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THAT CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE EXCHANGE
OFFER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
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 ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. 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 DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Documents by
Reference........................... 3
Forward-Looking Statements............ 4
Prospectus Summary.................... 5
Risk Factors.......................... 11
Use of Proceeds....................... 19
Ratio of Earnings to Fixed Charges.... 19
Capitalization........................ 20
Selected Financial Data............... 21
The Exchange Offer.................... 23
Description of the Exchange Notes..... 29
Certain Federal Income Tax
Consequences........................ 55
Plan of Distribution.................. 56
Legal Matters......................... 57
Experts............................... 57
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[LOGO]
AMAZON.COM, INC.
OFFER TO EXCHANGE ITS
10% SENIOR DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 FOR ANY AND ALL
OF ITS OUTSTANDING 10% SENIOR DISCOUNT
NOTES DUE 2008 WHICH WERE
ISSUED AND SOLD IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933
------------------------
PROSPECTUS
------------------------
AUGUST 13, 1998
- ------------------------------------------------------
- ------------------------------------------------------
