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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1998
REGISTRATION NO. 333-42365
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SMARTALK TELESERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA(1) 4899 95-4502740
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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1640 SOUTH SEPULVEDA BOULEVARD, SUITE 500
LOS ANGELES, CALIFORNIA 90025
(310) 444-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID A. HAMBURGER
1640 SOUTH SEPULVEDA BOULEVARD, SUITE 500
LOS ANGELES, CALIFORNIA 90025
(310) 444-8800
(NAME AND ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
COPY TO:
ROBERT M. SMITH
333 SOUTH HOPE STREET
LOS ANGELES, CALIFORNIA 90071
(213) 626-3399
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITY AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED NOTE(2) PRICE(2) REGISTRATION FEES
- --------------------------------------------------------------------------------------------------------------------
5 3/4% Convertible Subordinated
Notes due 2004.................... $150,000,000 100% $150,000,000 $44,250
Common Stock, no par value per
share............................. (3) (3) (3) NONE
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(1) The Registrant's state of incorporation will change from California to
Delaware if a proposal to effect the reincorporation of SmarTalk
Teleservices, Inc. is approved by the shareholders of the Registrant. In
such event, the Registrant will be a Delaware corporation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Such indeterminate number of shares of SmarTalk TeleServices, Inc. Common
Stock as shall be issuable upon conversion of the SmarTalk TeleServices,
Inc. 5 3/4% Convertible Subordinated Notes Due 2004 being registered
hereunder. No additional consideration will be received for the Common Stock
and therefore no registration fee is required pursuant to Rule 457(i) under
the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 11, 1998
PROSPECTUS
$150,000,000
SMARTALK TELESERVICES, INC.
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2004
This Prospectus relates to the offering by the selling securityholders (the
"Selling Securityholders") of an aggregate of $150,000,000 of 5 3/4% Convertible
Subordinates Notes due 2004 (the "Notes") of SmarTalk TeleServices, Inc., a
California corporation ("SmarTalk" or the "Company"), and up to 5,714,286 shares
of common stock, no par value (the "Common Stock") of SmarTalk, that are
issuable upon conversion of the Notes at the initial conversion price (the
"Conversion Price") of $26.25 per share (equivalent to a conversion rate of
38.0952 shares per $1,000 principal amount of Notes), subject to adjustment in
certain events. The Notes are convertible at the option of the holder into
shares of Common Stock at any time on or after the 90th day following the latest
date of initial issuance of the Notes and prior to the close of business on the
Stated Maturity (as defined) of the Notes, unless previously redeemed or
repurchased. See "Description of Notes -- Conversion Rights." The Notes offered
hereby were originally offered by the Company in an underwritten private
placement.
Interest on the Notes is payable semi-annually on March 15 and September 15
of each year, commencing on March 15, 1998. The Notes are redeemable, in whole
or in part, at the option of the Company, at any time on or after September 15,
2000, at the redemption prices set forth herein, plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption. The Company
will be required to offer to purchase the Notes upon a Change of Control (as
defined) at 100% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of purchase. There can be
no assurance that the Company will have available the financial resources
necessary to repurchase the Notes in such circumstances.
The Notes are unsecured, general obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined)
of the Company, and are structurally subordinated in right of payment to all
liabilities (including trade payables) of the Company's subsidiaries. The
indenture, (the "Indenture") dated as of September 17, 1997 by and between the
Company and Wilmington Trust Company, as trustee (the "Trustee"), does not
restrict the incurrence of Senior Indebtedness or other indebtedness by the
Company and its subsidiaries. At September 30, 1997, the Company had no Senior
Indebtedness outstanding. See "Description of Notes."
The Notes may be sold from time to time pursuant to this Prospectus by the
Selling Securityholders. The Notes may be sold by the Selling Securityholders in
ordinary brokerage transactions, in transactions in which brokers solicit
purchases, in negotiated transactions, or in a combination of such methods of
sale, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. See "Plan of
Distribution." The distribution of the Notes is not subject to any underwriting
agreement. The Company will receive no part of the proceeds of sales from the
offering by the Selling Securityholders. All expenses of registration incurred
in connection with this offering are being borne by the Company, but all selling
and other expenses incurred by the Selling Securityholders will be borne by such
Selling Securityholders. None of the securities offered pursuant to this
Prospectus have been registered prior to the filing of the Registration
Statement on Form S-3 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") of which this Prospectus is a part.
On March 10, 1998, the last reported sale price of the Company's Common
Stock on the Nasdaq Stock Market's ("Nasdaq") National Market (where it trades
under the symbol "SMTK") was $33.0625 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE PROSPECTUS FOR
CERTAIN INFORMATION RELATING TO THE SALE OF THE NOTES.
------------------------
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.
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March 11, 1998
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC" or the "Commission"). Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at 450 West Fifth Street,
NW, Washington, D.C. 20549, at prescribed rates. The reports, proxy statements
and other information may also be obtained from the Web site that the Commission
maintains at http://www.sec.gov. The Company's Common Stock is listed on the
Nasdaq National Market and such material may be inspected at the offices of
Nasdaq, National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act") with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. The description of the Company's Common Stock contained in the Company's
Report on Form 8-A, filed October 11, 1996;
2. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
3. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
4. The Company's Current Reports on Form 8-K dated May 28, 1997 (as amended
on Form 8-K/A), June 1, 1997 (as amended on Form 8-K/A), July 30, 1997,
September 17, 1997, November 6, 1997, November 24, 1997, December 22,
1997 and December 31, 1997; and
5. The Company's Proxy Statement for the 1997 Annual Meeting of the
SmarTalk Shareholders.
All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the filing of a post-effective amendment which indicates that all securities
offered have been sold or which deregisters all securities then remaining
unsold, shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of filing such documents.
Any statement contained in this Prospectus or 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 in this Prospectus or in any other subsequently filed document which
also is or is deemed to be incorporated by reference 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.
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The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all information that
has been incorporated by reference in the Prospectus not including exhibits to
the information that is incorporated by reference (unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to David A. Hamburger, the Company's General Counsel and Assistant
Secretary, at the Company's principal executive offices located at 1640 South
Sepulveda Boulevard, Suite 500, Los Angeles, California 90025. The telephone
number is (310) 444-8800.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein regarding matters that are not
historical facts, are forward-looking statements (within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially,
include, but are not limited to, those discussed under "RISK FACTORS."
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RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Notes and the Common Stock issuable upon
conversion thereof. This Prospectus contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below and elsewhere in this
Prospectus.
Acquisition Strategy. The Company regularly pursues opportunities to expand
through acquisitions. The Company plans to continue to seek acquisitions that
complement its services, broaden its consumer base and improve its operating
efficiencies. Acquisitions may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt and the amortization of
expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the Company. Acquisitions also involve
numerous additional risks, including difficulties in assimilation of the
operations, services, products and personnel of the acquired company, which
could result in charges to earnings or otherwise adversely effect the Company's
operating results. For instance, there can be no assurance that the anticipated
benefits of the SmarTel Communications, Inc., a Delaware corporation ("SmarTel")
and GTI Telecom, Inc., a Florida corporation ("GTI") acquisitions (the "SmarTel
Acquisition" and the "GTI Acquisition", respectively) will be realized or that
the combination of the Company and SmarTel and GTI will be successful. There can
be no assurance that acquisition opportunities will continue to be available,
that the Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
acquired businesses will be profitable.
Ability to Integrate the Operations of SmarTalk, SmarTel and GTI. SmarTalk
recently acquired SmarTel and GTI. Because the markets in which SmarTalk,
SmarTel and GTI operate are highly competitive and because of the inherent
uncertainties associated with merging three companies, there can be no assurance
that SmarTalk will be able to realize fully the operating efficiencies the
Company currently expects to realize as a result of the mergers and the
consolidation of the administrative operations of the Company, SmarTel and GTI
or that such operating efficiencies will be realized in the time frame currently
anticipated.
Uncertainties Regarding Recent Acquisitions. On December 9, 1997, SmarTalk
acquired selected assets of the retail prepaid phone card business of Frontier
Corporation, a New York corporation (the "Frontier Selected Assets"). On
December 31, 1997, SmarTalk acquired ConQuest Telecommunication Services Corp.,
a Delaware corporation ("ConQuest"), and American Express Telecom, Inc., a
Delaware corporation ("Amex"). There can be no assurance that the anticipated
benefits of the acquisitions of ConQuest, Amex and the Frontier Selected Assets
will be realized. In addition, there can be no assurance that the Company will
not experience difficulties in integrating the operations of ConQuest, Amex and
the Frontier Selected Assets with those of the Company.
Limited Operating History; Net Losses; Ability to Utilize Net Operating
Loss Carry-Forwards; Accumulated Deficit. The Company was formed in October 1994
and has had only a limited operating history upon which investors may base an
evaluation of its performance. As a result of operating expenses and development
expenditures, the Company has incurred significant operating and net losses to
date. Net losses for the period ended December 31, 1994, the years ended
December 31, 1995 and 1996, and for the nine months ended September 30, 1997
were approximately $65,000, $1.3 million, $3.1 million, and $500,000,
respectively. In addition, the ability of the Company or the Company's
subsidiaries, as the case may be, to utilize their net operating loss
carry-forwards to offset future taxable income may be subject to certain
limitations contained in the Internal Revenue Code of 1986, as amended (the
"Code"), which may have a material adverse effect on the Company. As of
September 30, 1997, the Company had an accumulated deficit of approximately $7.5
million.
Competition. The telecommunications services industry is highly
competitive, rapidly evolving and subject to constant technological change.
Today, there are numerous companies selling prepaid calling cards, and the
Company expects competition to increase in the future. Other providers currently
offer one or more of each of the services offered by the Company. As a service
provider in the long distance telecommunications
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industry, the Company competes with three dominant providers, AT&T Corp.
("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint"), all of which are substantially larger and have: (i) greater
financial, technical, engineering, personnel and marketing resources; (ii)
longer operating histories; (iii) greater name recognition; and (iv) larger
consumer bases than the Company. These advantages afford the Company's
competitors pricing flexibility. Telecommunications services companies may
compete for consumers based on price, with the dominant providers conducting
extensive advertising campaigns to capture market share. Competitors with
greater financial resources may also be able to provide more attractive
incentive packages to retailers to encourage them to carry products that compete
with the Company's services. In addition, competitors with greater resources
than the Company may be better situated to negotiate favorable contracts with
retailers. The Company believes that existing competitors are likely to continue
to expand their service offerings to appeal to retailers and their consumers.
Moreover, since there are few, if any, substantial barriers to entry, the
Company expects that new competitors are likely to enter the telecommunications
market and attempt to market telecommunications services similar to the
Company's services which would result in greater competition.
The ability of the Company to compete effectively in the telecommunications
services industry will depend upon the Company's continued ability to provide
high quality services at prices generally competitive with, or lower than, those
charged by its competitors. Certain of the Company's competitors dominate the
telecommunications industry and have the financial resources to enable them to
withstand substantial price competition, which is expected to increase
significantly, and there can be no assurance that the Company will be able to
compete successfully in the future. Moreover, there can be no assurance that
certain of the Company's competitors will not be better situated to negotiate
contracts with suppliers of telecommunications services which are more favorable
than contracts negotiated by the Company. In addition, there can be no assurance
that competition from existing or new competitors or a decrease in the rates
charged for telecommunications services by the major long distance carriers or
other competitors would not have a material adverse effect on the Company.
Subordination. The Notes are subordinated in right of payment to all
existing and future Senior Indebtedness and to all liabilities (including trade
payables) of the Company's subsidiaries. As of September 30, 1997, as adjusted
to give effect to the consummation of the pending ConQuest Acquisition, the
Company had no Senior Indebtedness outstanding. The Indenture does not restrict
the incurrence of Senior Indebtedness or other indebtedness by the Company or
its subsidiaries. By reason of such subordination, in the event of the
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of the Company, the assets of the Company will be available to
pay the amounts due on the Notes only after all Senior Indebtedness has been
paid in full and, therefore, there may not be sufficient assets remaining to pay
amounts due on any or all of the Notes then outstanding. See "Description of
Notes -- Subordination."
The Company's ability to meet its cash obligations in the future will be
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The ability of its subsidiaries to make distributions to the Company is
and will continue to be restricted by, among other limitations, applicable
provisions of state law and contractual provisions. The Indenture does not limit
the ability of the Company's subsidiaries to abide by such restrictions in the
future. The right of the Company to participate in the assets of any subsidiary
(and thus the ability of holders of the Notes to benefit indirectly from such
assets) is generally subject to the prior claims of creditors, including trade
creditors, of that subsidiary except to the extent that the Company is
recognized as a creditor of such subsidiary, in which case the Company's claim
would still be subject to any security interest of other creditors of such
subsidiary. The Notes, therefore, are structurally subordinated to creditors,
including trade creditors, of subsidiaries of the Company with respect to the
assets of the subsidiaries against which such creditors have a claim.
Rapid Technological Change; Dependence on New Services. The
telecommunications services industry is characterized by rapid technological
change, new product introduction and evolving industry standards. The Company's
success will depend, in significant part, on its ability to make timely and
cost-effective enhancements and additions to its technology and introduce new
services that meet consumer demands. The Company expects new products and
services, and enhancements to existing products and services, to be developed
and introduced to compete with the Company's services. The proliferation of new
telecommunica-
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tion technology, including personal communication services and voice
communication over the Internet, may reduce demand for long distance services,
including prepaid calling cards. There can be no assurance that the Company will
be successful in developing and marketing new services or enhancements to
services that respond to these or other technological changes or evolving
industry standards. In addition, there can be no assurance that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of its existing services or that its new
services or enhancements thereto will adequately meet the requirements of the
marketplace and achieve market acceptance. Delay in the introduction of new
services or enhancements, the inability of the Company to develop such new
services or enhancements or the failure of such services or enhancements to
achieve market acceptance could have a material adverse effect on the Company.
Volatility of Stock Price. The market price of the Common Stock has been
highly volatile and may continue to be subject to wide fluctuations in response
to quarterly variations in operating results, changes in financial estimates by
securities analysts, or other events or factors. In addition, the U.S. stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many
telecommunications companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Common Stock.
Difficulties of Managing Rapid Growth. Although the Company has experienced
substantial growth in revenue in the last year and intends to continue to grow
rapidly, there can be no assurance that the growth experienced by the Company
will continue or that the Company will be able to achieve the growth
contemplated by its business strategy. The Company's ability to continue to grow
may be affected by various factors, many of which are not within the Company's
control, including competition and federal and state regulation of the
telecommunications industry. This growth has placed, and is expected to continue
to place, significant demands on all aspects of the Company's business,
including its administrative, technical and financial personnel and systems. The
Company's future operating results will substantially depend on the ability of
its officers and key employees to manage such anticipated growth, to attract and
retain additional highly qualified management, technical and financial
personnel, and to implement and/or improve its technical, administrative,
financial control and reporting systems. The Company's financial controls and
reporting systems will require enhancement and substantial investment in the
future to accommodate the Company's anticipated growth. There can be no
assurance that the Company will not encounter difficulties in expanding its
financial controls and reporting systems to meet the Company's future needs. If
the Company is unable to respond to and manage changing business conditions,
then the quality of services, its ability to retain key personnel and its
results of operations could be materially adversely affected. Difficulties in
managing continued growth could have a material adverse effect on the Company.
Dependence on Major Retailers. Currently, the SmarTalk TeleServices Card
(the "SmarTalk Card") is sold at selected retail locations throughout the U.S.,
including locations operated by the following leading retailers: American Stores
(which includes Jewel/Osco Combo Stores, Osco Drug Stores, Sav-On Drug Stores
and Acme Grocery), Bergen Brunswig Drug Company (Good Neighbor Pharmacies), Best
Buy, Bradlees, Builders Square, Dayton's, Dominick's Finer Foods, Eckerd Drug,
Food4Less, Future Shop, The Good Guys, Nix Check Cashing, Office Depot,
OfficeMax, Pamida, Penn Daniels, Ralphs Supermarkets, Service Merchandise,
Staples, Star Market, Stop & Shop, Thrifty Oil, and Venture Stores. The
Company's arrangements with retailers are often pursuant to short-term
arrangements. If the Company is unsuccessful in providing competitive pricing,
meeting the requirements of its retailers, developing new products that are
attractive to such retailers, or complying with the terms of its arrangements
with such retailers, such retailers may fail to market aggressively the
Company's services or may terminate their relationship with the Company, either
of which could have a material adverse effect on the Company. Substantially all
of the Company's revenue to date has been derived from the sale of the SmarTalk
Card to retailers. Certain of those retailers have, from time to time, accounted
for a significant percentage of the Company's revenue. The inability of any such
retailer to pay the Company for cards shipped or the loss of any such retailer
could have a material adverse effect on the Company.
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Dependence on Key Management and Personnel. The Company's success is
largely dependent upon its executive officers, the loss of one or more of whom
could have a material adverse effect on the Company. The Company believes that
its continued success will depend to a significant extent upon the efforts and
abilities of Robert H. Lorsch, Chairman of the Company's Board of Directors (the
"Board"), Erich L. Spangenberg, Vice Chairman of the Board and Chief Executive
Officer, Jeff Lindauer, President and Chief Operating Officer, and Richard M.
Teich, Executive Vice President. Although the Company believes that it would be
able to locate suitable replacements for these executives if their services were
lost, there can be no assurance it would be able to do so. Accordingly, the loss
of services of any of these individuals could have a material adverse effect on
the Company. The Company maintains, and is the sole beneficiary of, "key man"
life insurance on Messrs. Lorsch and Teich in the amounts of $3,000,000 and
$1,000,000, respectively.
Dependence Upon Telecommunications Providers; No Guaranteed Supply. The
Company does not own a transmission network and, accordingly, depends primarily
on MCI, WorldCom, Inc., and, to a lesser extent, on other carriers for
transmission of its long distance calls. Further, the Company is dependent upon
local exchange carriers for call origination and termination. The Company's
ability to maintain and expand its business depends, in part, on its ability to
continue to obtain telecommunications services on favorable terms from long
distance carriers and other such suppliers, as well as the cooperation of both
interexchange and local exchange carriers in originating and terminating service
for its consumers in a timely manner. The Company has not experienced
significant losses in the past because of interruptions of service at any of its
carriers, but no assurance can be made in this regard with respect to the
future. In addition, no assurance can be given that the Company will be able to
obtain long distance services in the future at favorable prices, and a material
increase in the price at which the Company obtains long distance service could
have a material adverse effect on the Company. See "-- Competition."
Dependence on Facilities and Platforms; Damage to Facilities and Platforms;
Failure and Downtime. The Company owns and operates a call processing platform
site located in San Francisco, California, and another platform site acquired in
the GTI Acquisition located in Orlando, Florida. The Company utilizes additional
call processing platform services at a facility located in San Antonio, Texas
which is backed up by a facility in Omaha, Nebraska. The Company's network
service operations are dependent upon its ability to protect the equipment and
data at such facilities against damage that may be caused by fire, power loss,
technical failures, unauthorized intrusion, natural disasters, sabotage and
other similar events. Although the Company has taken precautions to protect
itself and its consumers from events that could interrupt delivery of services,
there can be no assurance that a fire, act of sabotage, technical failure, human
error, natural disaster or a similar event would not cause the failure of a
significant technical component, thereby resulting in an outage. Such an outage
could have a material adverse effect on the Company. The Company believes that
technical failures have not resulted in any material downtime of the SmarTalk
platforms since the Company's inception.
Although the Company maintains business interruption insurance providing
for aggregate coverage of approximately $1.0 million per occurrence, there can
be no assurance that the Company will be able to maintain its business
interruption insurance, that such insurance would continue to be available at
reasonable prices, that such insurance would cover all such losses or that such
insurance would be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its consumers.
Seasonality; Factors Affecting Operating Results; Potential Fluctuations in
Period-to-Period Results. The Company's sales have been, and the Company expects
that its sales will continue to be, somewhat seasonal, due to holiday purchases
of the SmarTalk Card. In addition, the Company's operating results have varied
significantly in the past and may vary significantly in the future. Traditional
operator assisted long distance services produce peak revenues during the summer
months, coincident with domestic travel and vacation patterns. Though less
severe than call center services, prepaid calling cards are also affected by
seasonal demand fluctuations with demand peaking in the spring and summer
months.
Factors that may cause the Company's operating results to vary include: (i)
changes in operating expenses; (ii) the timing of the introduction of services;
(iii) market acceptance of new and enhanced versions
7
<PAGE> 9
of services; (iv) potential acquisitions; (v) changes in legislation and
regulation which affect the competitive environment for services; (vi) general
economic factors; and (vii) the ability to recognize revenue on the unused
portion of expired SmarTalk Cards. Moreover, for many of the Company's
retailers, services represent a new merchandising category, with the attendant
concerns regarding shelf space positioning, sales force education and effective
marketing and, with respect to arrangements with certain retailers requiring
customized services, there may be significant leadtime to provide such services
following receipt of customer orders. As a result of these factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Risk of Loss From Returned Transactions; Fraud; Bad Debt; Theft of
Services. The Company utilizes national credit card clearance systems for
electronic credit card settlement. The Company generally bears the same credit
risks normally assumed by other users of these systems arising from returned
transactions caused by closed accounts, frozen accounts, unauthorized use,
disputes, theft or fraud. The Company's relationships with providers of merchant
card services such as VISA and MasterCard could be adversely affected by
excessive uncollectables or chargebacks, which are generally higher in the
telephone industry than in other industries, particularly with respect to
recharges because the transaction typically is not on a face-to-face basis in
which a cardholder signature is captured. Termination of the Company's ability
to offer recharge through merchant card services would have a material adverse
effect on the Company. To minimize its financial exposure, the Company limits
the amount that consumers can recharge within specified timeframes and generally
charges a higher rate for recharge services than for the initial purchase. From
time to time, persons have obtained services without rendering payment to the
Company by unlawfully utilizing the Company's access numbers and personal
identification numbers ("PINs"). Although to date the Company has not
experienced material losses due to such unauthorized use of access numbers and
customized PINs, no assurance can be given that future losses due to
unauthorized use will not be material. The Company attempts to manage these
credit, theft and fraud risks through its internal controls, monitoring and
blocking systems. The Company also maintains reserves which it deems adequate
for such risks. Past experience in estimating and establishing reserves and the
Company's historical losses are not necessarily accurate indications of the
Company's future losses or the adequacy of the reserves established by the
Company in the future. Although the Company believes that its risk management
and bad debt reserve practices are adequate, there can be no assurance that the
Company's risk management practices or reserves will be sufficient to protect
the Company from unauthorized or returned transactions or thefts of services
which could have a material adverse effect on the Company.
Shares Eligible for Future Sale; Registration Rights. As of March 10, 1998,
the Company had 22,198,099 shares of Common Stock outstanding. Of these shares,
15,127,039 shares of Common Stock are freely tradable without restriction or
further registration under the Securities Act. The remaining 7,071,060 shares of
Common Stock outstanding are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Rule 144").
As of March 10, 1998, options and warrants to purchase an aggregate of
3,297,767 shares of Common Stock were outstanding.
A total of 4,879,931 shares of Common Stock are subject to various
registration rights. Of this total, 2,528,401 shares were issued by the Company
in connection with the GTI Acquisition (the "GTI Registrable Shares"). The
Company is obligated to cause to be filed with the Commission a shelf
registration statement prior to the later to occur of (i) May 30, 1998; or (ii)
10 days after the date the Company first becomes eligible to file a registration
statement on Form S-3. The Company is required to use its best efforts to effect
such registration within 60 days of the filing date, and to keep the shelf
registration statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for resales of GTI Registrable
Shares by such holders. After May 30, 1998, holders of GTI Registrable Shares
will have piggyback registration rights under any proposed sale to the public of
Common Stock (but excluding registrations on Form S-4 or S-8) either for its own
account or the account of a security holder or holders.
8
<PAGE> 10
If the Company proposes to register any of its securities under the
Securities Act, the Company generally must notify SmarTalk Partners, LLC
("SmarTalk Partners"), the holder of 1,600,000 shares of Common Stock (the
"Partners Registrable Shares") of the Company's intent to register such Common
Stock and allow SmarTalk Partners an opportunity to include the Partners
Registrable Shares in the Company's registration. SmarTalk Partners also has the
right to require the Company to prepare and file a registration statement under
the Securities Act pertaining to the Partners Registrable Shares.
Limitation on Repurchase of Notes Upon a Change in Control. Upon the
occurrence of a Change in Control, each holder of Notes may require the Company
to repurchase all or a portion of such holder's Notes. If a Change in Control
were to occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all the Notes tendered by holders thereof. Any future
credit agreements relating to indebtedness (including Senior Indebtedness) to
which the Company becomes a party may contain restrictions on the repurchase of
the Notes. In the event a Change in Control occurs at a time when the Company is
prohibited from repurchasing the Notes, the Company could seek the consent of
its lenders to repurchase the Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company would remain prohibited from repurchasing the
Notes. In such case, the Company's failure to repurchase tendered Notes would
constitute an event of default under the terms of the Notes and the Indenture,
which may, in turn, constitute a default under the terms of other indebtedness
that the Company may enter into from time to time. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
holders of the Notes. See "Description of Notes -- Repurchase of Notes at the
Option of the Holder Upon a Change of Control" and "-- Subordination."
Possible Inability to Recognize a Portion of Deferred Revenue. The sale of
long distance domestic and outbound international telephone service through
prepaid calling cards may be subject to "escheat" laws in various states. These
laws generally provide that payments or deposits received in advance or in
anticipation of the provision of utility (including telephone) services that
remain unclaimed for a specific period of time after the termination of such
services are deemed "abandoned property" and must be submitted to the state.
Although the Company is not aware of any case in which such laws have been
applied to the sale of prepaid calling cards, and does not believe that such
laws are applicable, in the event that such laws are deemed applicable, the
Company may be unable to recognize the portion of its deferred revenue remaining
upon the expiration of the cards with unused calling time. In such event, the
Company may be required to deliver such amounts to certain states in accordance
with these laws, which could have a material adverse effect on the Company.
Government Regulation. The Company is currently subject to federal and
state government regulation of its long distance telephone services. The Company
is regulated at the federal level by the Federal Communications Commission (the
"FCC") and is currently required to maintain both domestic and international
tariffs for its services containing the currently effective rates, terms and
conditions of service. The FCC has proposed, however, to eliminate the tariffing
requirement for domestic interstate non-dominant carriers. In addition, the
Company is required to maintain a certificate, issued by the FCC, in connection
with its international services. The intrastate long distance telecommunications
operations of the Company are also subject to various state laws and
regulations, including prior certification, notification or registration
requirements. The Company generally must obtain and maintain certificates of
public convenience and necessity from regulatory authorities in most states in
which it offers service. In most of these jurisdictions, the Company must file
and obtain prior regulatory approval of tariffs for intrastate services. In
addition, the Company must update or amend the tariffs and, in some cases, the
certificates of public convenience and necessity when rates are adjusted or new
products are added to the long distance services offered by the Company. The FCC
and numerous state agencies also impose prior approval requirements on transfers
of control, including corporate reorganizations, and assignments of certain
regulatory authorizations.
If the federal and state regulations requiring the local exchange carriers
to provide equal access for the origination and termination of calls by long
distance subscribers (such as the Company's consumers) change or if the
regulations governing the fees to be charged for such access services change,
particularly if such
9
<PAGE> 11
regulations are changed to allow variable pricing of such access fees based upon
volume, such changes could have a material adverse effect on the Company.
The Telecommunications Act of 1996 mandated the establishment of Universal
Service for the promotion of nationwide access to telecommunications services in
rural, insular and high cost areas that are reasonably comparable in price and
type to those found in urban areas and the promotion of access to advanced
services for schools, libraries and certain health care providers.
Telecommunications providers of interstate services, including payphone
aggregators and private network operators that offer service to others for a fee
on a non-common carrier basis, must contribute toward the funding of Universal
Service. Certain government and public entities are exempt, as are entities
whose contribution would be less than $100.00 per year. Although the Company's
competition will be similarly situated, the Universal Service Fund annual
assessment may have a material adverse effect on the long term financial
condition of the Company.
The Telecommunications Act of 1996 (Section 276) further mandated that the
FCC promulgate rules to establish a per call compensation plan to insure that
all payphone providers are fairly compensated for each completed intrastate and
interstate payphone initiated call, including calls on which payphone providers
had not heretofore received compensation. Such calls included those placed to
toll free numbers (800/888) such as operator assisted and prepaid calling card
calls, and calls placed through network access codes. In September 1996, the FCC
promulgated rules to implement Section 176 of the Telecommunications Act of 1996
which established a three-phase compensation plan for pay phone providers. Under
the first phase, interexchange carriers with annual toll revenues of more than
$100 million were to pay a total of $45.85 per payphone per month for all toll
free access code calls for the first year, commensurate with their portion of
total interexchange revenues. All switch-based and facilities-based
interexchange carriers were to pay $0.35 per call to each payphone provider
during the second year (although payments could subsequently be recovered from
resellers by the carriers), after which per call compensation rates were to be
left to individual market-driven rates negotiated between payphone providers and
interexchange carriers. On July 1, 1997, the D.C. Circuit Court of Appeals
vacated significant portions of the FCC's rules including the $0.35 per call
rate which was found to be arbitrarily and capricious, and remanded the matter
to the FCC for reconsideration. On remand, the FCC in September 1997,
established a two-year "default" compensation rate of $0.284 per
payphone-originated toll free or access code call. At the end of the two year
interim period, the per call payphone compensation rate will be the deregulated
market-based local coin rate less $0.066. This amount is payable by all
"switch-based" interexchange carriers (but again may be passed through to
nonfacilities-based resellers). The revised FCC rules became effective on
October 7, 1997, but continue to be subject to regulatory and legal challenges.
The Company is unable to predict whether this regulation or other potential
changes in the regulatory environment could have a material adverse effect on
the Company.
Control of the Company. The directors, executive officers and their
respective affiliates beneficially own 4,206,777 shares (approximately 17.5%) of
the outstanding Common Stock, which includes 1,783,240 shares issuable upon the
exercise of stock options exercisable within 60 days of the date of this
Prospectus. Mr. Lorsch beneficially owns 2,710,393 shares (approximately 11.9%)
of the outstanding Common Stock. As a result, these shareholders in general, and
Mr. Lorsch in particular, are able to exercise significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in control of the
Company.
Anti-Takeover Considerations. The Company's Board has authority to issue up
to 10,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of the preferred stock
without further vote or action by the Company's shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The Company's Amended and Restated Articles of Incorporation (the
"Company's Articles of Incorporation") and Amended and Restated Bylaws (the
"Company's Bylaws") require that any action required or permitted to be taken by
shareholders of the Company must be effected at a duly called annual or special
meeting of shareholders of the Company and may not be effected by written
consent. In addition, the Company's charter documents eliminate cumulative
voting, which may make it more difficult for a third party to gain control of
the Company's Board of Directors. Moreover, the Company's Board
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<PAGE> 12
of Directors has the authority, without action by, or consent of, the
shareholders, to fix the rights and preferences of and issue shares of preferred
stock. These and other charter provisions may deter a third party who would
propose to acquire the Company or to engage in a similar transaction affecting
control of the Company in which the shareholders might receive a premium for
their shares over the then current market value. Further, the Company may
consider additional anti-takeover defenses, including the implementation of a
shareholders rights plan.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 28,
1994) TO NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------ ----------------------- -----------------
1994 1995 1996 1996 1997
------------ ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges,
historical(1).................... -- -- -- -- --
</TABLE>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges,
historical, earnings consist of loss before provision for income taxes plus
fixed charges. Fixed charges consist of interest expense, which includes
interest on all debt and amortization of debt discount and deferred
financing costs. Earnings were insufficient to cover fixed charges for the
period from inception (October 28, 1994) to December 31, 1994, for the years
ended December 31, 1995 and 1996 and the nine months ended September 30,
1996 and 1997, by approximately $65,000, $1.3 million, $3.1 million, $3.4
million and $500,000, respectively. As a result, the financial ratios for
such periods are not meaningful and, therefore, are not included.
PLAN OF DISTRIBUTION
The Notes were issued to the Selling Securityholders in connection with an
underwritten private placement and are convertible into Common Stock as
described in "Description of Notes -- Conversion Rights". The Company entered
into the Registration Rights Agreement, dated as of September 12, 1997, (the
"Registration Rights Agreement") with the Initial Purchasers for the benefit of
holders of the Notes to register their Notes and such Common Stock under the
Securities Act under certain circumstances and at certain times. The
Registration Rights Agreement provides for cross-indemnification of the Selling
Securityholders and the Company for losses, claims, damages, liabilities and
expenses arising, under certain circumstances, out of the registration of the
Notes and such Common Stock.
The Notes and such Common Stock may be sold from time to time by the
Selling Securityholders. The Selling Securityholders may from time to time sell
all or a portion of the Notes and such Common Stock in transactions on the
Nasdaq Smallcap Market (if the Notes shall have been approved for listing
thereon) or National Market, as the case may be, in the over-the-counter market,
in negotiated transactions, or a combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The Notes and such Common Stock may be
sold directly or through underwriters or broker-dealers. If the Notes or shares
of Common Stock are sold through underwriters or broker-dealers, the Selling
Securityholders may pay underwriting discounts or brokerage commissions and
charges. The methods by which the Notes and such Common Stock may be sold
include: (i) a block trade in which the broker or dealer so involved will
attempt to sell the securities as agent but may position and resell a portion of
the block as principle to facilitate the transaction; (ii) purchases by a broker
or dealer as principle and resale by such broker or dealer for its own account
pursuant to this Prospectus; (iii) exchange distributions and/or secondary
distributions in accordance with the rules of the Nasdaq Smallcap Market or
National Market, as the case may be; (iv) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (v) privately
negotiated transactions.
11
<PAGE> 13
Pursuant to the provisions of the Registration Rights Agreement, the
Company will pay the costs and expenses incident to its registration and
qualification of the Notes and Common Stock offered hereby, including
registration and filing fees. In addition, the Company has agreed to indemnify
the Selling Securityholders against certain liabilities, including liabilities
arising under the Securities Act.
Any securities covered by this Prospectus that qualify for sale pursuant to
Rule 144 or Rule 144A may be sold under Rule 144 or Rule 144A rather than
pursuant to this Prospectus. There can be no assurance that any Selling
Securityholder will sell any or all of the Notes or Common Stock described
herein, and any Selling Securityholder may transfer, devise or gift such
securities by other means not described herein.
12
<PAGE> 14
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
were issued pursuant to the Indenture. The following summary of the Notes, the
Indenture and the Registration Rights Agreement does not purport to be complete
and is subject to, and is qualified in its entirety by, reference to all of the
provisions of the Indenture and the Registration Rights Agreement, including the
definitions therein of certain terms. Copies of the Indenture and the
Registration Rights Agreement have been filed as exhibits to the Registration
Statement. Capitalized terms used herein without definition have the meanings
ascribed to them in the Indenture or the Registration Rights Agreement, as
appropriate. As used in this section, the "Company" refers to SmarTalk
TeleServices, Inc., exclusive of its subsidiaries. Wherever particular
provisions or defined terms of the Indenture (or the form of Note which is part
thereof) or the Registration Rights Agreement are referred to in this summary,
such provisions or defined terms are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference. Certain definitions of terms used in the following summary are set
forth under "-- Certain Definitions" below.
GENERAL
The Notes are unsecured, subordinated, general obligations of the Company,
limited in aggregate principal amount to $150,000,000. The Notes are
subordinated in right of payment to all Senior Indebtedness of the Company, as
described under "-- Subordination" below. The Notes have been issued only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes mature on September 15, 2004. The Notes bear interest at the rate
per annum stated on the cover page of this Prospectus from September 17, 1997,
or from the most recent interest payment date to which interest has been paid or
provided for, payable semiannually on March 15 and September 15 of each year,
commencing March 15, 1998 (the "Interest Payment Dates"), to the persons in
whose names such Notes are registered at the close of business on the February
28 and August 31 immediately preceding such Interest Payment Date. Principal of,
premium, if any, interest on, and liquidated damages with respect to, the Notes
will be payable, the Notes will be convertible and the Notes may be presented
for registration of transfer or exchange, at the office or agency of the Company
maintained for such purpose, which office or agency shall be maintained in the
Borough of Manhattan, The City of New York (which initially will be the office
of the Trustee). Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
At the option of the Company, payment of interest and liquidated damages
may be made by check mailed to the Holders of the Notes at the addresses set
forth upon the registry books of the Company. No service charge will be made for
any registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
The Indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the repurchase of securities of the Company or the
incurrence of Senior Indebtedness. The Indenture contains no covenants or other
provisions to afford protection to holders of Notes in the event of a highly
leveraged transaction or a change of control of the Company, except to the
limited extent described under "-- Repurchase of Notes at the Option of the
Holder Upon a Change of Control" below.
CONVERSION RIGHTS
Each Holder of Notes has the right at any time on or after the 90th day
following the latest date of initial issuance of the Notes and prior to the
close of business on the Stated Maturity (as defined) of the Notes, unless
previously redeemed or repurchased, at the Holder's option, to convert any
portion of the principal amount thereof that is an integral multiple of $1,000
into shares of Common Stock at any time at the Conversion Price set forth on the
cover page of this Prospectus (subject to adjustment as described below). The
right to convert a Note called for redemption or delivered for repurchase and
not withdrawn will terminate at the close of business on the Business Day,
respectively, immediately prior to the Redemption
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<PAGE> 15
Date or Repurchase Date for such Note, unless the Company subsequently fails to
pay the applicable Redemption Price or Repurchase Price, as the case may be.
In the case of any Note that has been converted after any Record Date (as
defined), but on or before the next Interest Payment Date, interest, the stated
due date of which is on such Interest Payment Date, shall be payable on such
Interest Payment Date notwithstanding such conversion, and such interest shall
be paid to the Holder of such Note who is a Holder on such Record Date. Any Note
converted after any Record Date but before the next Interest Payment Date (other
than Notes called for redemption or subject to a Repurchase Offer) must be
accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of Notes being surrendered for
conversion; provided no such payment shall be required with respect to interest
payable on September 15, 2000. No fractional shares will be issued upon
conversion but, in lieu thereof, an appropriate amount will be paid in cash by
the Company based on the market price of Common Stock (determined in accordance
with the Indenture) at the close of business on the day of conversion. As a
result of the foregoing provisions, Holders that surrender Notes for conversion
on a date that is not an Interest Payment Date will not receive any interest for
the period from the Interest Payment Date next preceding the date of conversion
to the date of conversion or for any later period.
The Conversion Price will be subject to adjustment in certain events,
including: (i) any payment of a dividend (or other distribution) payable in
Common Stock on any class of Capital Stock of the Company; (ii) any issuance to
all or substantially all holders of Common Stock of rights, options or warrants
entitling them to subscribe for or purchase Common Stock at less than the then
current market price of Common Stock (determined in accordance with the
Indenture), provided, however, that if such rights, options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events occur; (iii)
certain subdivisions, combinations or reclassifications of Common Stock; (iv)
any distribution to all or substantially all holders of Common Stock of
evidences of indebtedness, shares of Capital Stock other than Common Stock, cash
or other assets (including securities, but excluding those dividends, rights,
options, warrants and distributions referred to above and excluding dividends
and distributions paid exclusively in cash and in mergers and consolidations to
which the third succeeding paragraph applies); (v) any distribution consisting
exclusively of cash (excluding any cash portion of distributions referred to in
(iv) above, or cash distributed upon a merger or consolidation to which the
third succeeding paragraph applies) to all or substantially all holders of
Common Stock in an aggregate amount that, combined together with: (a) all other
such all-cash distributions made within the then preceding 12 months in respect
of which no adjustment has been made; and (b) any cash and the fair market value
of other consideration paid or payable in respect of any tender or exchange
offer by the Company or any of its subsidiaries for Common Stock concluded
within the preceding 12 months in respect of which no adjustment has been made,
exceeds 15% of the Company's market capitalization (defined as being the product
of the then current market price of the Common Stock times the number of shares
of Common Stock then outstanding) on the record date of such distribution; and
(vi) the completion of a tender or exchange offer made by the Company or any of
its subsidiaries for Common Stock that involves an aggregate consideration that,
together with: (a) any cash and other consideration payable in a tender or
exchange offer by the Company or any of its subsidiaries for Common Stock
expiring within the 12 months preceding the expiration of such tender or
exchange offer in respect of which no adjustment has been made; and (b) the
aggregate amount of any such all-cash distributions referred to in (v) above to
all holders of Common Stock within the 12 months preceding the expiration of
such tender or exchange offer in respect of which no adjustments have been made,
exceeds 15% of the Company's market capitalization on the expiration of such
tender offer. No adjustment of the Conversion Price will be required to be made
until the cumulative adjustments amount to 1% or more of the Conversion Price as
last adjusted.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the Conversion Price, the
Holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend; in
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of Common Stock.
14
<PAGE> 16
The Company, from time to time and to the extent permitted by law, may
reduce the Conversion Price by any amount for any period of at least 20 Business
Days, in which case the Company shall give at least 15 days notice of such
reduction, if the Board of Directors has made a determination that such
reduction would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in the
Conversion Price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for United States federal
income tax purposes. See "Certain United States Federal Income Tax
Considerations."
In case of any reclassification or change of outstanding shares of Common
Stock issuable upon conversion (other than certain changes in par value) or
consolidation or merger of the Company with or into another Person or any merger
of another Person with or into the Company (other than a merger which does not
result in any reclassification, change, conversion, exchange or cancellation of
outstanding shares of Common Stock), or in case of any sale, transfer or
conveyance of all or substantially all of the assets of the Company, each Note
then outstanding will, without the consent of any Holder of Notes, become
convertible only into the kind and amount of securities, cash and other property
receivable upon such reclassification, change, consolidation, merger, sale,
transfer or conveyance by a holder of the number of shares of Common Stock into
which such Note was convertible immediately prior thereto, after giving effect
to any adjustment event; provided, that if the kind or amount of securities,
cash and other property is not the same for each share of Common Stock held
immediately prior to such reclassification, change, consolidation, merger, sale,
transfer or conveyance, any Holder who fails to exercise any right of election
shall receive per share the kind and amount of securities, cash or other
property received per share by a plurality of non-electing shares.
The Company will use its best efforts to cause all registrations to be made
with, and to obtain any approvals by, any governmental authority under any
Federal or state law of the United States that may be required in connection
with the conversion of the Notes into Common Stock. If at any time during the
two-year period following the date of the closing of the sale of the Notes to
the Initial Purchasers (the "Closing Date") a registration statement under the
Securities Act covering the shares of Common Stock issuable upon conversion of
the Notes is not effective or is otherwise unavailable for effecting resales of
such shares, shares of Common Stock issued upon conversion of the Notes
("Restricted Shares") may not be sold or otherwise transferred except in
accordance with or pursuant to an exemption from, or otherwise in a transaction
not subject to, the registration requirements of the Securities Act and, if a
registration statement under the Securities Act is not effective or is otherwise
unavailable for effecting resales of such shares at the time of a conversion,
the Restricted Shares will bear a legend to that effect. The Transfer Agent for
the Common Stock will not be required to accept for registration or transfer any
Restricted Shares, except upon presentation of satisfactory evidence that these
restrictions on transfer have been complied with, all in accordance with such
reasonable regulations as the Company may from time to time agree with the
Transfer Agent. Under certain circumstances, the holders of the Restricted
Shares will be entitled to liquidated damages during such period. See
"-- Registration Rights; Liquidated Damages."
SUBORDINATION
The Notes are general, unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness of the
Company. The Notes are structurally subordinated in right of payment to all
liabilities (including trade payables) of the Company's subsidiaries. As of
September 30, 1997, the Company had no Senior Indebtedness outstanding. The
Indenture does not restrict the incurrence of Senior Indebtedness or other
indebtedness by the Company or its subsidiaries or the ability of the Company to
transfer assets or business operations to its subsidiaries, subject to the
provisions described under "-- Repurchase of Notes at the Option of the Holder
Upon a Change of Control" and "-- Limitation on Merger, Sale or Consolidation"
below.
The Indenture provides that no payment may be made by the Company on
account of the principal of, premium, if any, interest on, or liquidated damages
with respect to, the Notes, or to acquire any of the Notes (including
repurchases of Notes at the option of the Holder) for cash or property (other
than Junior Securities), or on account of the redemption provisions of the
Notes: (i) upon the maturity of any Senior
15
<PAGE> 17
Indebtedness of the Company by lapse of time, acceleration (unless waived) or
otherwise, unless and until all principal of, premium, if any, and interest on
such Senior Indebtedness are first paid in full (or such payment is duly
provided for); or (ii) in the event of default in the payment of any principal
of, premium, if any, or interest on any Senior Indebtedness of the Company when
it becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise (collectively, a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist. The payment of cash, property or securities (other than Junior
Securities) upon conversion of a Note will constitute payment on a Note and
therefore will be subject to the subordination provisions in the Indenture.
Upon: (i) the happening of an event of default (other than a Payment
Default) that permits, or would permit with: (a) the passage of time; (b) the
giving of notice; (c) the making of any payment of the Notes then required to be
made; or (d) any combination thereof (collectively, a "Non-Payment Default"),
the holders of Senior Indebtedness having a principal amount then outstanding in
excess of $3 million (or with respect to which Senior Indebtedness the holders
are obligated to lend in excess of $3 million principal amount) or their
representative immediately to accelerate its maturity; and (ii) written notice
of such Non-Payment Default given to the Company and the Trustee by the holders
of an aggregate of at least $3 million outstanding principal amount (or
commitments to lend up to $3 million in Senior Indebtedness) of such Senior
Indebtedness or their representative (a "Payment Notice"), then, unless and
until such Non-Payment Default has been cured or waived or otherwise has ceased
to exist, no payment (by setoff or otherwise) may be made by or on behalf of the
Company on account of the principal of, premium, if any, interest on, or
liquidated damages with respect to, the Notes, or to acquire or repurchase any
of the Notes for cash or property, or on account of the redemption provisions of
the Notes, in any such case other than payments made with Junior Securities.
Notwithstanding the foregoing, unless: (i) the Senior Indebtedness in respect of
which such Non-Payment Default exists has been declared due and payable in its
entirety within 179 days after the Payment Notice is delivered as set forth
above (the "Payment Blockage Period"); and (ii) such declaration has not been
rescinded or waived, at the end of the Payment Blockage Period, the Company
shall be required to pay all sums not paid to the Holders of the Notes during
the Payment Blockage Period due to the foregoing prohibitions and to resume all
other payments as and when due on the Notes. Not more than one Payment Notice
may be given in any consecutive 365-day period, irrespective of the number of
defaults with respect to Senior Indebtedness during such period. In no event,
however, may the total number of days during which any Payment Blockage Period
or Payment Blockage Periods are in effect exceed 179 days in the aggregate
during any consecutive 365-day period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) shall be
received by the Trustee or the Holders or any Paying Agent (as defined therein)
at a time when such payment or distribution is prohibited by the foregoing
provisions, such payment or distribution shall be held in trust for the benefit
of the holders of Senior Indebtedness of the Company, and shall be paid or
delivered by the Trustee or such Holders or such Paying Agent, as the case may
be, to the holders of the Senior Indebtedness of the Company remaining unpaid or
unprovided for or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any of
such Senior Indebtedness of the Company may have been issued, ratably according
to the aggregate amounts remaining unpaid on account of the Senior Indebtedness
of the Company held or represented by each, for application to the payment of
all Senior Indebtedness of the Company remaining unpaid, to the extent necessary
to pay or to provide for the payment of all such Senior Indebtedness in full
after giving effect to any concurrent payment and distribution, or provision
therefor, to the holders of such Senior Indebtedness.
Upon any distribution of assets of the Company upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors or any
marshaling of assets or liabilities: (i) the holders of all Senior Indebtedness
of the Company will first be entitled to receive payment in full (or have such
payment duly provided for) before the Holders are entitled to receive any
payment on account of the principal of, premium, if any, interest on, and
liquidated damages with respect to, the Notes (other than Junior Securities);
and (ii) any payment or distribution of assets of the Company of
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<PAGE> 18
any kind or character, whether in cash, property or securities (other than
Junior Securities) to which the Holders or the Trustee on behalf of the Holders
would be entitled (by setoff or otherwise), except for the subordination
provisions contained in the Indenture, will be paid by the liquidating trustee
or agent or other person making such a payment or distribution directly to the
holders of Senior Indebtedness of the Company or their representative to the
extent necessary to make payment in full of all such Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution,
or provision therefor, to the holders of such Senior Indebtedness.
No provision contained in the Indenture or the Notes affects the obligation
of the Company, which is absolute and unconditional, to pay, when due, principal
of, premium, if any, interest on, and liquidated damages with respect to, the
Notes. The subordination provisions of the Indenture and the Notes do not
prevent the occurrence of any Default or Event of Default under the Indenture or
limit the rights of the Trustee or any Holder, subject to the preceding
paragraphs, to pursue any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its subsidiaries or a marshaling of assets or liabilities of the Company
and its subsidiaries, Holders of Notes may receive ratably less than other
creditors.
The Company's ability to meet its cash obligations in the future will be
dependent upon the ability of its subsidiaries to make cash distributions to the
Company. The ability of its subsidiaries to make distributions to the Company is
and will continue to be restricted by, among other limitations, applicable
provisions of state law and contractual provisions. The Indenture will not limit
the ability of the Company's subsidiaries to incur such contractual restrictions
in the future. The right of the Company to participate in the assets of any
subsidiary (and thus the ability of holders of the Notes to benefit indirectly
from such assets) is generally subject to the prior claims of creditors,
including trade creditors, of that subsidiary except to the extent that the
Company is recognized as a creditor of such subsidiary, in which case the
Company's claims would still be subject to any security interest of other
creditors of such subsidiary. The Notes, therefore, will be structurally
subordinated to creditors, including trade creditors, of subsidiaries of the
Company with respect to the assets of the subsidiaries against which such
creditors have a claim.
REDEMPTION AT THE COMPANY'S OPTION
The Notes are not subject to redemption prior to September 15, 2000 and are
redeemable thereafter at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days notice to each Holder, at the following
redemption prices (expressed as percentages of the principal amount) if redeemed
during the 12-month period commencing September 15 of the years indicated below,
in each case (subject to the right of Holders of record on a Record Date to
receive interest due on an Interest Payment Date that is on or prior to such
Redemption Date (as defined)) together with accrued and unpaid interest and
liquidated damages, if any, to, but excluding, the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000...................................................... 103.286%
2001...................................................... 102.464
2002...................................................... 101.643
2003...................................................... 100.821
2004...................................................... 100.000
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes do not have the benefit of any sinking fund.
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<PAGE> 19
Notice of any redemption will be sent, by first-class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption, to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. The notice of redemption must state
the Redemption Date, the Redemption Price and the amount of accrued interest and
liquidated damages, if any, to be paid. Any notice that relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the Redemption
Date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion thereof will be issued. On and after the Redemption
Date, interest will cease to accrue on the Notes or portions thereof called for
redemption, unless the Company defaults in its obligations with respect thereto.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an offer by the Company (the "Repurchase Offer"), to require the
Company to repurchase all or any part of such Holder's Notes (provided that the
principal amount of such Notes must be $1,000 or an integral multiple thereof)
on the date (the "Repurchase Date") that is no later than 50 Business Days after
the occurrence of such Change of Control at a cash price (the "Repurchase
Price") equal to 100% of the principal amount thereof, together with accrued and
unpaid interest and liquidated damages, if any, to (but excluding) the
Repurchase Date. The Repurchase Offer shall be made within 25 Business Days
following a Change of Control and shall remain open for 20 Business Days
following its commencement except to the extent that a longer period is required
by applicable law (the "Repurchase Offer Period"). Upon expiration of the
Repurchase Offer Period, the Company shall purchase all Notes tendered in
response to the Repurchase Offer. If required by applicable law, the Repurchase
Date and the Repurchase Offer Period may be extended as so required; however, if
so extended, it shall nevertheless constitute an Event of Default if the
Repurchase Date does not occur within 60 Business Days of the Change of Control.
On or before the Repurchase Date, the Company will: (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer;
(ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price
(together with accrued and unpaid interest and liquidated damages, if any) of
all Notes so tendered; and (iii) deliver to the Trustee the Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Repurchase Price
(together with accrued and unpaid interest and liquidated damages, if any), and
the Trustee will promptly authenticate and mail or deliver to such Holders a new
Note or Notes equal in principal amount to any unpurchased portion of the Notes
surrendered. Any Notes not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Repurchase Offer on or as soon as practicable after the
Repurchase Date.
The phrase "all or substantially all" of the assets of the Company, as
included in the definition of Change of Control, is likely to be interpreted by
reference to applicable state law at the relevant time, and will be dependent on
the facts and circumstances existing at such time. As a result, there may be a
degree of uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The provisions of the Indenture relating to a Change of Control may not
afford the Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger, spin-off or similar transaction that may
adversely affect Holders, if such transaction does not constitute a Change of
Control. Moreover, certain events with respect to the Company which may involve
an actual change of control of the Company may not constitute a Change of
Control for purposes of the Indenture.
The Company may not have sufficient financial resources available to
fulfill its obligation to repurchase the Notes upon a Change of Control or to
repurchase other debt securities of the Company or its subsidiaries
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<PAGE> 20
providing similar rights to the holders thereof. The right to require the
Company to repurchase Notes as a result of the occurrence of a Change of Control
could create an event of default under Senior Indebtedness as a result of which
any repurchase could, absent a waiver, be blocked by the subordination provision
of the Notes. Failure of the Company to repurchase the Notes when required would
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by the subordination provisions. Any such default may,
in turn, cause a default under Senior Indebtedness of the Company. Moreover, the
Change of Control may cause an event of default under Senior Indebtedness of the
Company. As a result, in each case, any repurchase of the Notes could, absent a
waiver, be blocked by the subordination provisions of the Notes. See
"-- Subordination" above.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 or any other tender offer rules, and will file a Schedule 13E-4 or
any other schedule required under such rules, in connection with any offer by
the Company to repurchase Notes at the option of the Holders upon a Change of
Control.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (other than to its wholly-owned
subsidiaries), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons, unless: (i)
either: (a) in the case of a merger or consolidation the Company is the
surviving entity; or (b) the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
and (ii) no Default or Event of Default shall occur immediately after giving
effect to such transaction.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named therein as the
Company, and the Company will be released from its obligations under the
Indenture and the Notes, except as to any obligations that arise from or as a
result of such transaction.
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver or cause to
be delivered to the Trustee, within 15 days after it is or would have been
required to file such with the SEC, annual and quarterly consolidated financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the SEC if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with respect
to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
SEC and, in each case, together with a management's discussion and analysis of
financial condition and results of operations as such would be so required.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as: (i) the failure by the
Company to pay any installment of interest on, or liquidated damages with
respect to, the Notes as and when due and payable and the continuance of any
such failure for 30 days; (ii) the failure by the Company to pay all or any part
of the principal of, or premium, if any on the Notes when and as the same become
due and payable at maturity, redemption, by acceleration or otherwise,
including, without limitation, pursuant to any Repurchase Offer or otherwise;
(iii) the failure of the Company to perform any conversion of Notes required
under the Indenture and the continuance of any such failure for 30 days; (iv)
the failure by the Company to observe or perform any other covenant or agreement
contained in the Notes or the Indenture and subject to certain exceptions, the
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<PAGE> 21
continuance of such failure for a period of 60 days after written notice is
given to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes outstanding;
(v) certain events of bankruptcy, insolvency or reorganization in respect of the
Company or any of its Significant Subsidiaries (as defined); (vi) failure of the
Company or any Significant Subsidiary to make any payment at maturity, including
any applicable grace period, in respect of Indebtedness (other than nonrecourse
obligations) in an amount in excess of $10 million and continuance of such
failure for 30 days after written notice is given to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of Notes outstanding; (vii) default by the Company or any
Significant Subsidiary with respect to any Indebtedness (other than non-recourse
obligations), which default results in the acceleration of Indebtedness in an
amount in excess of $10 million without such Indebtedness having been discharged
or such acceleration having been rescinded or annulled for 30 days after written
notice is given to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of Notes
outstanding; and (viii) final unsatisfied judgments not covered by insurance
aggregating in excess of $10 million, at any one time rendered against the
Company or any of its Significant Subsidiaries and not stayed, bonded or
discharged within 60 days. The Indenture provides that if a default occurs and
is continuing, the Trustee must, within 90 days after the occurrence of such
default, give to the Holders notice of such default, but the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the best interest of the Holders, except in the
case of a default in the payment of the principal of, premium, if any, or
interest on or liquidated damages with respect to, any of the Notes when due or
in the payment of any redemption or repurchase obligation.
The Indenture provides that if an Event of Default occurs and is continuing
(other than an Event of Default specified in clause (v) above with respect to
the Company), then in every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the Holders of
25% in aggregate principal amount of the Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal and accrued interest and
liquidated damages, if any, thereon to be due and payable immediately. If an
Event of Default specified in clause (v) above with respect to the Company
occurs, all principal and accrued interest and liquidated damages, if any, will
be immediately due and payable on all outstanding Notes without any declaration
or other act on the part of the Trustee or the Holders. The Holders of no less
than a majority in aggregate principal amount of Notes generally are authorized
to rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on, and
liquidated damages with respect to, the Notes that have become due solely by
such acceleration, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in principal amount of the Notes at the time outstanding
may waive on behalf of all the Holders any default, except a default in the
payment of principal of or interest on, or liquidated damages with respect to,
any Note not yet cured, or a default with respect to any covenant or provision
that cannot be modified or amended without the consent of the Holder of each
outstanding Note affected. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the Holders, unless such Holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Notes at the time outstanding will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee.
The Indenture provides that no Holder may pursue any remedy under the
Indenture, except for a default in the payment of principal, premium, if any, or
interest or liquidated damages, if any, on the Notes, unless the Holder gives to
the Trustee written notice of a continuing Event of Default, the Holders of at
least 25% in principal amount of the outstanding Notes make a written request to
the Trustee to pursue the remedy, such Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense, the Trustee
does not comply with the request within 60 days after receipt of the request and
the offer of indemnity,
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<PAGE> 22
and the Trustee shall not have received a contrary direction from the Holders of
a majority in principal amount of the outstanding Notes.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; provided, that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity of any Note or reduce the principal amount
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the conversion of
any Note or the enforcement of any such payment on or after the due date thereof
(including, in the case of redemption, on or after the Redemption Date), or
reduce the Repurchase Price, or alter the Repurchase Offer (other than as set
forth herein) or redemption provisions in a manner adverse to the Holders; or
(ii) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture; or (iii) adversely affect the
right of such Holder to convert Notes. A supplemental indenture entered into in
compliance with the "Limitation on Merger, Sale or Consolidation" covenant would
not require the consent of the Note holders.
NO PERSONAL LIABILITY OF SHAREHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES
The Indenture provides that no shareholder, employee, officer, director or
partner, as such, past, present or future of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Indenture or the Notes by reason of his, her or its status
as such shareholder, employee, officer, director or partner.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Company or Trustee may require a Holder, among other things, to
furnish appropriate endorsements, legal opinions and transfer documents, and to
pay any taxes and fees required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Notes selected for
redemption. Also, the Company is not required to transfer or exchange any Notes
for a period of 15 days before the mailing of a notice of an offer to repurchase
as a result of a Change of Control or a selection of Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
BOOK ENTRY, DELIVERY AND FORM
Notes initially held by "qualified institutional buyers," as defined in
Rule 144A under the Securities Act ("QIBs"), and Notes initially held by
institutional "accredited investors" as defined in Rule 501 (a)(1), (2), (3) or
(7) under the Securities Act, were initially evidenced by one or more Global
Note (the "U.S. Global Notes") which were deposited on the Closing Date with, or
on behalf of, Depository Trust Company (the "Depositary") and registered in the
name of Cede & Co. ("Cede") as the Depositary's nominee. Notes held by persons
who acquired such Notes in compliance with Regulation S under the Securities Act
(a "Non-U.S. Person") were initially evidenced by one or more Global Note (the
"Regulation S Global Note"), which were deposited on the Closing Date with, or
on behalf of, the Depositary and registered in the name of Cede as the
Depositary's nominee, for the accounts of the Euroclear System ("Euroclear") and
Cedel, S.A. ("Cedel"). Beneficial interests in the Regulation S Global Note may
only be held through Euroclear or Cedel, and any resale or transfer of such
interests to U.S. persons shall only be permitted as described below. The U.S.
Global Note and the Regulation S Global Note are hereinafter collectively
referred to as the "Global Note". Except
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<PAGE> 23
as set forth below, the Global Note may be transferred, in whole or in part,
only to another nominee of the Depositary or to a successor of the Depositary or
its nominee.
QIBs and institutional "accredited investors" may hold their interests in
the U.S. Global Note directly through the Depositary if such holder is a
participant in the Depositary, or indirectly through organizations which are
participants in the Depositary (the "Participants"). Transfers between
Participants will be effected in the ordinary way in accordance with the
Depositary's rules and will be settled in Federal funds.
Non-U.S. Persons may hold their interest in the Regulation S Global Note
directly through Cedel or Euroclear, or indirectly through organizations that
are participants in Cedel or Euroclear. Cedel and Euroclear will hold interests
in the Regulation S Global Note on behalf of their participants through the
Depositary. Transfers between participants in Cedel and Euroclear will be
effected in the ordinary way in accordance with their respective rules and
operating procedures.
The Depositary has advised the Company that it is a limited-purpose trust
company that was created to hold securities for its participating organizations
and to facilitate the clearance and settlement of transactions in such
securities between Participants through electronic book-entry changes in
accounts of its Participants (including Cedel and Euroclear). The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. QIBs and institutional
"accredited investors" may elect to hold Notes purchased by them through the
Depositary. QIBs and institutional "accredited investors" who are not
Participants may beneficially own securities held by or on behalf of the
Depositary only through Participants or Indirect Participants.
Pursuant to procedures established by the Depositary: (i) upon deposit of
the Global Note, the Depositary credited the accounts of Participants designated
by the Initial Purchasers with an interest in the Global Note; and (ii)
ownership of the Notes evidenced by the Global Note will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depositary (with respect to the interests of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes evidenced by the Global Note will be
limited to such extent.
So long as the Depositary or its nominee is the registered owner of a Note,
the Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Notes, and will not be considered the owners or holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
As a result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge such interest to persons or entities that
do not participate in the Depositary's system, or to otherwise take actions with
respect to such interest, may be affected by the lack of a physical certificate
evidencing such interest.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, interest on,
and liquidated damages with respect to, any Note represented by a Global Note
registered in the name of the Depositary or its nominee on the applicable record
date will be payable by the Trustee to or at the direction of the Depositary or
its nominee in its capacity as the registered Holder of the Global Note
representing such Notes under the Indenture. Under the terms of the Indenture,
the Company and the Trustee may treat the persons in whose names the Notes,
including the Global Note, are registered as the owners thereof for the purpose
of receiving such
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<PAGE> 24
payments and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Notes (including, principal,
premium, if any, interest, or liquidated damages with respect thereto), or to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the Global Note as shown on the records of the
Depositary. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Participants or the
Indirect Participants.
Holders who desire to convert their Notes into Common Stock pursuant to the
terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
If the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days, or the Company at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depositary of
the Global Note, Certificated Notes will be issued to each person that the
Depositary identifies as the beneficial owner of the Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Notes in the form of Certificated Notes. Upon any
such issuance, the Trustee is required to register such Certificated Notes in
the name of such person or persons (or the nominee of any thereof), and cause
the same to be delivered thereto. All such Certificated Notes shall be subject
to the legend requirements described herein under "Notice to Investors."
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the Notes, and the Company and the Trustee may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company will use all
reasonable efforts to cause the Registration Statement to be declared effective
by the SEC as soon as practicable and to keep the Registration Statement
effective until the earlier of such date that is two years after the Closing
Date or until the Registration Statement is no longer required for resales of
the Notes or the Common Stock. For purposes of the foregoing, "Transfer
Restricted Securities" means each Note and share of Common Stock issued upon
conversion thereof until the date on which such Note or share of Common Stock:
(i) has been effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement; (ii) the date on which such Note or
share of Common Stock is distributed to the public pursuant to Rule 144 under
the Securities Act or is salable pursuant to Rule 144(k) under the Securities
Act (or any similar provisions then in force); or (iii) the date on which such
Note ceases to be outstanding.
The Registration Rights Agreement provides that the Company will use all
reasonable efforts to cause the Registration Statement to be declared effective
by the SEC on or prior to 180 days after the Closing Date (the "Effectiveness
Target Date"). If: (i) the Registration Statement has not been declared
effective by the SEC within 180 days after the Closing Date; or (ii) the
Registration Statement is filed and declared effective but shall thereafter
cease to be effective or usable (each such event referred to in clauses (i) and
(ii), a "Registration Default"), the Company will accrue liquidated damages to
each Holder of Transfer Restricted Securities, during the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $0.05 per week per $1,000 principal amount of Notes and, if applicable,
$0.00186 per week per share (subject to adjustment in the event of stock splits,
stock recombinations, stock dividends and the like) of Common Stock constituting
Transfer Restricted Securities held by such Holder. The rate of accrual of the
liquidated damages will increase by an additional $0.05 per week per $1,000
principal amount or, if applicable, by $0.00186 per week per share (subject to
adjustment as
23
<PAGE> 25
set forth above) of Common Stock constituting Transfer Restricted Securities for
each subsequent 90-day period until the Registration Statement is declared
effective, or the Registration Statement again becomes effective, as the case
may be, up to a maximum amount of liquidated damages with respect to any
Registration Default of $0.50 per week per $1,000 principal amount of Notes or,
if applicable, and $0.0186 per week per share (subject to adjustment as set
forth above) of Common Stock constituting Transfer Restricted Securities. All
accrued liquidated damages shall be paid to the Holders of Notes or shares of
Common Stock (as applicable) in the same manner as interest payments on the
Notes on semiannual payment dates which correspond to interest payment dates for
the Notes. Following the cure of a Registration Default, liquidated damages will
cease to accrue with respect to such Registration Default. The use of the
Registration Statement for effecting resales of Transfer Restricted Securities
may be suspended in certain circumstances described in the Registration Rights
Agreement upon notice by the Company to the holders of the Transfer Restricted
Securities, subject to the rights of the holders of Transfer Restricted
Securities to receive liquidated damages if the aggregate number of days of such
suspensions in any 12 months exceeds 60 days.
The Company will provide to each registered holder copies of such
prospectus, notify each registered holder when the Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Transfer Restricted Securities. A holder who sells
Transfer Restricted Securities pursuant to the Registration Statement generally
will be required to be named as a selling shareholder in the related prospectus
and to deliver a prospectus to purchasers and will be bound by the provisions of
the Registration Rights Agreement which are applicable to such holder (including
certain indemnification provisions).
CERTAIN DEFINITIONS
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is a
party that is required to be classified and accounted for as a capital lease
obligation under GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Change of Control" means: (i) an event or series of events as a result of
which any "person" or "group" (as such terms are used in Sections 13(d)(3) and
14(d) of the Exchange Act) (excluding the Company or any wholly-owned subsidiary
thereof) is or becomes, directly or indirectly, the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable) of more than 50% of the combined voting power of the then
outstanding securities entitled to vote generally in elections of directors,
managers or trustees, as applicable, of the Company or any successor entity
("Voting Stock"); (ii) the completion of any consolidation with or merger of the
Company into any other Person, or conveyance, transfer or lease by the Company
of all or substantially all of its assets to any Person, or any merger of any
other Person into the Company in a single transaction or series of related
transactions, and, in the case of any such transaction or series of related
transactions, the outstanding Common Stock of the Company is changed or
exchanged as a result, unless as to any such consolidation, merger, conveyance,
or transfer of lease the shareholders of the Company immediately before such
transaction own, directly or indirectly, immediately following such transaction,
at least a majority of the combined voting power of the outstanding voting
securities of the Person resulting from such transaction in substantially the
same proportion as their ownership of the Voting Stock immediately before such
transaction; or (iii) such time as the Continuing Directors (as defined) do not
constitute a majority of the Board of Directors of the Company (or, if
applicable, a successor corporation to the Company); provided that a Change of
Control shall not be deemed to have occurred if either: (a) the last sale price
of the Common Stock for any five trading days during the 10 trading days
immediately preceding the Change of Control is at least equal to 105% of the
Conversion Price in effect on
24
<PAGE> 26
such day; or (b) with respect to a merger or consolidation otherwise
constituting a Change of Control described in clause (ii) above, at least 90% of
the consideration (excluding cash payment for dissenting and fractional shares)
in such transaction or transactions consists of common stock or securities
convertible into common stock that are, or upon issuance will be, traded on a
United States national securities exchange or approved for quotation on the
Nasdaq National Market.
"Continuing Director" means at any date a member of the Company's Board of
Directors who was a member of such board on the date of initial issuance of the
Notes, or who was nominated or elected by at least a majority of the directors
who were Continuing Directors at the time of such nomination or election or
whose election to the Company's Board of Directors was recommended or endorsed
by at least a majority of the directors who were Continuing Directors at the
time of such nomination or election.
"Disqualified Capital Stock" means, with respect to the Company, Capital
Stock of the Company that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by the Company, in
whole or in part, on or prior to the Stated Maturity of the Notes, provided,
that only the portion of such Capital Stock which is so convertible,
exercisable, exchangeable or redeemable or subject to repurchase prior to such
Stated Maturity shall be deemed to be Disqualified Capital Stock.
"Indebtedness" of any person means, without duplication: (i) all
liabilities and obligations, contingent or otherwise, of any such person: (a) in
respect of borrowed money (whether or not the lender has recourse to all or any
portion of the assets of such person); (b) evidenced by credit or loan
agreements, bonds, notes, debentures or similar instruments (including, without
limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind); (c) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks; (d) for
the payment of money relating to a Capitalized Lease Obligation; or (e)
evidenced by a letter of credit or a reimbursement obligation of such person
with respect to any letter of credit; (ii) all obligations of such person issued
or assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (iii) all net obligations of such person under Interest Swap and
Hedging Obligations (as defined); (iv) all liabilities of others of the kind
described in the preceding clauses (i), (ii) or (iii) that such person has
guaranteed or that is otherwise its legal liability, or which is secured by a
lien on property of such person, and all obligations to purchase, redeem or
acquire any Capital Stock; and (v) any and all deferrals, renewals, extensions,
modifications, replacements, restatements, refinancings and refundings (whether
direct or indirect) of, or any indebtedness or obligation issued in exchange
for, any liability of the kind described in any of the preceding clauses (i),
(ii), (iii) or (iv), or this clause (v), whether or not between or among the
same parties.
"Interest Swap and Hedging Obligations" means the obligations of any Person
under any interest rate protection agreement, interest rate future agreement,
interest rate option agreement, interest rate swap agreement, interest rate cap
agreement or other interest rate hedge agreement, interest rate collar agreement
or other similar agreement or arrangement to which such Person is a party or
beneficiary.
"Junior Securities" means any Qualified Capital Stock (as defined) and any
Indebtedness of the Company that is fully subordinated in right of payment to
the Notes and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the Stated Maturity of the
Notes.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Record Date" means a Record Date specified in the Securities whether or
not such Record Date is a Business Day.
"Redemption Date," when used with respect to any Security to be redeemed,
means the date fixed for such redemption pursuant to Article III of the
Indenture and Paragraph 5 in the form of Security.
25
<PAGE> 27
"Senior Indebtedness" means all obligations of the Company to pay the
principal of, premium, if any, interest (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding, whether
or not a claim for post-petition interest is allowable as a claim in any such
proceeding) and rent payable on or in connection with, and all fees, costs,
expenses and other amounts accrued or due on or in connection with, any
Indebtedness of the Company, whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the
Company, unless the instrument creating or evidencing such Indebtedness provides
that such Indebtedness is not senior or superior in right of payment to the
Notes or which is pari passu with, or subordinated to, the Notes; provided that
in no event shall Senior Indebtedness include (i) Indebtedness of the Company
owed or owing to any Subsidiary of the Company or any officer, director or
employee of the Company or any Subsidiary of the Company; (ii) Indebtedness
representing or with respect to any account payable or other accrued current
liability or obligation incurred in the ordinary course of business in
connection with the obtaining of materials or services; or (iii) any liability
for taxes owed or owing by the Company or any Subsidiary of the Company.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1.02(w) of Regulation S-X
promulgated by the Commission as in effect as of the date of the Indenture.
"Stated Maturity" when used with respect to any Note, means September 15,
2004.
"Subsidiary" with respect to any person, means: (i) a corporation a
majority of whose Capital Stock with voting power normally entitled to vote in
the election of directors is at the time, directly or indirectly, owned by such
person, by such person and one or more Subsidiaries of such person or by one or
more Subsidiaries of such person; (ii) a partnership in which such person or a
Subsidiary of such person is, at the time, a general partner and owns alone or
together with one or more Subsidiaries of such person a majority of the
partnership interests; or (iii) any other person (other than a corporation) in
which such person, one or more Subsidiaries of such person, or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof, has at least a majority ownership interest.
26
<PAGE> 28
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling Securityholder and
relationship, if any, with the Company and: (i) the amount of Notes owned by
each Selling Securityholder as of December 15, 1997; (ii) the maximum amount of
Notes which may be offered for the account of such Selling Securityholder under
this Prospectus; (iii) the amount of Common Stock owned by each Selling
Securityholder as of December 15, 1997; and (iv) the maximum amount of Common
Stock which may be offered for the account of such Selling Securityholder under
this Prospectus.
<TABLE>
<CAPTION>
COMMON
PRINCIPAL STOCK COMMON
PRINCIPAL AMOUNT OF OWNED STOCK
NAME OF SELLING AMOUNT OF NOTES OFFERED PRIOR TO OFFERED
SECURITYHOLDER NOTES OWNED HEREBY OFFERING(1) HEREBY(2)
--------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Allstate Insurance Company............. $ 2,000,000 $ 2,000,000 76,190 76,190
Bankers Trust Trustee For Chrysler
Corp. Emp. #1 Pension Plan dated
4/1/89............................... 2,190,000 2,190,000 83,428 83,428
Baptist Health of So. Florida.......... 114,000 114,000 4,342 4,342
Bond Fund Series-
Oppenheimer Bond Fund for Growth..... 9,000,000 9,000,000 342,857 342,857
Boston Museum of Fine Arts............. 48,000 48,000 1,828 1,828
Chase Manhattan NA Trustee For
IBM Corp. Retirement Plan Trust
dated 12/18/45....................... 3,796,000 3,796,000 144,609 144,609
CM Converts Fund....................... 175,000 175,000 6,666 6,666
Commonwealth Life Insurance Company -
(Camden-Teamsters Non-Enhanced)...... 3,000,000 3,000,000 114,285 114,285
Commonwealth Life Insurance - Stock
Trac (TEAMSTERS I)................... 1,500,000 1,500,000 57,142 57,142
Dean Witter Income Builder Fund........ 2,700,000 2,700,000 102,857 102,857
Dean Witter Variable Income Builder
Fund................................. 300,000 300,000 11,428 11,428
Deeprock & Co.......................... 1,500,000 1,500,000 57,142 57,142
Delaware Group Equity Funds V, Inc.
Retirement Income Fund Series........ 55,000 55,000 2,095 2,095
Delaware Group Global Dividend and
Income Fund, Inc..................... 855,000 855,000 32,571 32,571
Delaware Group Premium Fund, Inc.
Convertible Securities Series........ 90,000 90,000 3,428 3,428
Donaldson, Lufkin & Jenrette Securities
Corporation.......................... 20,780,000 20,780,000 791,619 791,619
Dunham & Associates Fund II............ 34,000 34,000 1,295 1,295
Dunham & Associates Fund III........... 15,000 15,000 571 571
Eaton Vance Total Return Portfolio..... 12,000,000 12,000,000 457,142 457,142
Engineers Joint Pension Fund........... 178,000 178,000 6,780 6,780
Franklin & Marshall College............ 178,000 178,000 6,780 6,780
HBK Finance LP......................... 5,850,000 5,850,000 222,857 222,857
HBK Offshore Fund LTD.................. 1,255,000 1,255,000 47,809 47,809
HBK Securities LTD..................... 6,220,000 6,220,000 236,952 236,952
Lazard Freres & CIE Paris.............. 700,000 700,000 26,666 26,666
Lincoln National Convertible
Securities Fund...................... 1,320,000 1,320,000 50,285 50,285
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
COMMON
PRINCIPAL STOCK COMMON
PRINCIPAL AMOUNT OF OWNED STOCK
NAME OF SELLING AMOUNT OF NOTES OFFERED PRIOR TO OFFERED
SECURITYHOLDER NOTES OWNED HEREBY OFFERING(1) HEREBY(2)
--------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Mainstay VP Convertible Portfolio...... $ 500,000 $ 500,000 19,047 19,047
Massachusetts Mutual Life Insurance
Company.............................. 2,350,000 2,350,000 89,523 89,523
MassMutual Corporate Investors......... 600,000 600,000 22,857 22,857
MassMutual Corporate
Value Partners Limited............... 1,250,000 1,250,000 47,619 47,619
MassMutual High Yield Partners LLC..... 1,500,000 1,500,000 57,142 57,142
MassMutual Participation Investors..... 300,000 300,000 11,428 11,428
Merrill Lynch International Ltd........ 9,550,000 9,550,000 363,809 363,809
MFS Convertible Securities Fund........ 5,000 5,000 190 190
MFS Total Return Fund.................. 1,495,000 1,495,000 56,952 56,952
NAP & Co............................... 785,000 785,000 29,904 29,904
NATWEST Securities Limited............. 11,000,000 11,000,000 419,047 419,047
New York Life Insurance
& Annuity Corporation................ 1,750,000 1,750,000 66,666 66,666
New York Life Insurance Company........ 3,500,000 3,500,000 133,333 133,333
Nicholas-Applegate Income & Growth
Fund................................. 1,638,000 1,638,000 262,000 262,000
The Northwestern Mutual
Life Insurance Company(5)............ 2,500,000 2,500,000 95,238 95,238
Oppenheimer Total Return Fund, Inc..... 6,000,000 6,000,000 228,571 228,571
PaineWebber Series Trust-
Balanced Portfolio................... 75,000 75,000 2,857 2,857
PaineWebber Series Trust-
Growth and Income Portfolio.......... 50,000 50,000 1,904 1,904
PaineWebber Balanced Fund, a series of
PaineWebber Master Series, Inc....... 400,000 400,000 15,238 15,238
PaineWebber Growth & Income Fund, a
series of PaineWebber America Fund... 1,800,000 1,800,000 68,571 68,571
R(2) Investments, LDC.................. 390,000 390,000 14,857 14,857
San Diego City Retirement.............. 479,000 479,000 18,247 18,247
San Diego County....................... 1,473,000 1,473,000 56,114 56,114
St. Albans Partners.................... 1,000,000 1,000,000 38,095 38,095
Security Insurance Company of
Hartford............................. 450,000 450,000 17,142 17,142
Societe Generale Secs. Cp. ............ 2,500,000 2,500,000 95,238 95,238
State Street Bank Custodian For GE
Pension Trust........................ 1,136,000 1,136,000 43,276 43,276
Tennessee Consolidated Retirement
System............................... 2,000,000 2,000,000 76,190 76,190
The Retail Clerks Pension Plan......... 1,000,000 1,000,000 38,095 38,095
The TCW Group, Inc..................... 7,460,000 7,460,000 284,190 284,190
United National Insurance.............. 50,000 50,000 1,904 1,904
Van Kampen American Capital Convertible
Securities Fund...................... 450,000 450,000 17,142 17,142
Van Kampen American Capital Harbor
Fund................................. 3,000,000 3,000,000 114,285 114,285
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
COMMON
PRINCIPAL STOCK COMMON
PRINCIPAL AMOUNT OF OWNED STOCK
NAME OF SELLING AMOUNT OF NOTES OFFERED PRIOR TO OFFERED
SECURITYHOLDER NOTES OWNED HEREBY OFFERING(1) HEREBY(2)
--------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Wake Forest University................. $ 350,000 $ 350,000 13,333 13,333
Walker Art Center...................... 125,000 125,000 4,761 4,761
Weirton Trust.......................... 320,000 320,000 12,190 12,190
Yield Strategies Fund II,
LP ............. 1,600,000 1,600,000 60,952 60,952
------------ ------------ --------- ---------
Subtotal............................... 146,684,000 146,684,000 5,587,961 5,587,961
------------ ------------ --------- ---------
Unnamed holders of Notes or any future
transferees, pledgees, donees or
successors of or from any unnamed
holders(3)........................... 3,316,000 3,316,000 126,323(4) 126,323
------------ ------------ --------- ---------
Total............................. $150,000,000 $150,000,000 5,714,285 5,714,285
============ ============ ========= =========
</TABLE>
- ---------------
(1) Comprises the shares of Common Stock into which the Notes held by such
Selling Securityholders are convertible at the initial conversion rate,
excluding fractional shares. Fractional shares will not be issued upon
conversion of the Notes; rather, cash will be paid in lieu of fractional
shares, if any. The Conversion Rate and the number of shares of Common Stock
issuable upon conversion of the Notes are subject to adjustment under
certain circumstances. See "Description of Notes -- Conversion Rights."
Accordingly, the number of shares of Common Stock issuable upon conversion
of the Notes may increase or decrease form time to time.
(2) Assumes conversion into Common Stock of the full amount of Notes held by the
Selling Securityholders at the initial conversion rate and the offering of
such shares by such Selling Securityholder pursuant to this Prospectus. The
Conversion Rate and the number of shares of Common Stock issuable upon
conversion of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes -- Conversion Rights." Accordingly,
the number of shares of Common Stock issuable upon conversion of the Notes
may increase or decrease from time to time. Fractional shares will not be
issued upon conversion of the Notes; rather, cash will be paid in lieu of
fractional shares, if any.
(3) No such holder may offer Notes pursuant to this Prospectus until such holder
is included as a Selling Securityholder in a supplement to this Prospectus
in accordance with the Registration Rights Agreement.
(4) Assumes that the unnamed holders of Notes or any future transferees,
pledgees, donees or successors of or from any such unnamed holder do not
beneficially own any Common Stock other than the Common Stock issuable upon
conversion of the Notes at the initial conversion rate.
(5) Includes $250,000 in principal amount held in the Northwestern Mutual Life
Insurance Company Group Annuity Separate Account.
Because the Selling Securityholders may, pursuant to this Prospectus, offer
all or some portion of the Notes and Common Stock they presently hold or, with
respect to Common Stock, have the right to acquire upon conversion of such
Notes, no estimate can be given as to the amount of the Notes and Common Stock
that will be held by the Selling Securityholders upon termination of any such
sales. In addition, the Selling Securityholders identified above may have sold,
transferred or otherwise disposed of all or a portion of their Notes and Common
Stock since the date on which they provided the information regarding their
Notes and Common Stock, in transactions exempt from the registration
requirements of the Securities Act. See "Plan of Distribution."
Only Selling Securityholders identified above who beneficially own the
Notes and Common Stock set forth opposite each such Selling Securityholder's
name in the foregoing table on the effective date of the Registration Statement
may sell such Notes and Common Stock pursuant to this Prospectus. The Company
may from time to time, in accordance with the Registration Rights Agreement,
include additional Selling Securityholders in supplements to this Prospectus.
29
<PAGE> 31
The Company will pay the expenses of registering the Notes and Common Stock
being sold hereunder.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Notes and
Common Stock into which the Notes may be converted. Unless otherwise stated,
this discussion is limited to the tax consequences to those persons who are
original beneficial owners of the Notes and who hold such Notes as capital
assets ("Holders"). This discussion does not address specific tax consequences
that may be important to particular persons (including, for example, financial
institutions, broker-dealers, insurance companies, tax-exempt organizations, and
persons in special situations, such as those who hold Notes as part of a
straddle, hedge, conversion transaction, or other integrated investment). This
discussion also does not address the tax consequences to Non-U.S. Holders (as
defined below) that are subject to U.S. federal income tax on a net basis on
income realized with respect to a Note because such income is effectively
connected with the conduct of a U.S. trade or business. This discussion does not
address the tax consequences to persons that have a functional currency other
than the U.S. dollar. In addition, this discussion does not address U.S. federal
alternative minimum tax consequences or any aspect of state, local or foreign
taxation. This discussion is based upon the Code, the Treasury Department
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as of the date hereof and all of which are subject
to change, possibly on a retroactive basis.
PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING
AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
Payments of Interest. In general, interest on a Note will be taxable to a
beneficial owner who or which is: (i) a citizen or resident of the U.S.; (ii) a
corporation created or organized under the laws of the U.S. or any State thereof
(including the District of Columbia); or (iii) a person otherwise subject to a
U.S. federal income taxation on its worldwide income (a "U.S. Holder") as
ordinary income at the time it is (actually or constructively) received or
accrued, depending on the beneficial owner's method accounting for U.S. federal
income tax purposes. The Company is obligated to pay liquidated damages to
holders of Notes in certain circumstances described under "Description of
Notes -- Registration Rights; Liquidated Damages." The Company believes that any
such payments should be treated as subject to an "incidental contingency" for
purposes of the original issue discount rules because the amount of any such
payments, if required to be made, is expected to be insignificant relative to
the total expected amount of remaining payments on the Notes, and accordingly,
if such payments are required to be made, such amounts should be taxable to
holders as payments of interest.
Market Discount. A subsequent purchaser who buys a Note for less than its
principal amount may be subject to the "market discount" rules of Sections 1276
through 1278 of the Code. If a subsequent purchaser of a Note disposes of such
Note (including certain nontaxable dispositions such as a gift), or receives a
principal payment, any gain upon such sale or other disposition will be
recognized, or the amount of such principal payment will be treated, as ordinary
income to the extent of any "market discount" accrued for the period that such
purchaser holds the Note. Such holder may instead elect to include market
discount in income as it accrues with respect to all debt instruments acquired
in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then-current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method. If a holder acquires a Note at a market discount and
receives Common Stock upon conversion of the Note, the amount of accrued market
30
<PAGE> 32
discount with respect to the Note through the date of the conversion will be
treated, under regulations to be issued, as ordinary income on the disposition
of the Common Stock.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the stated redemption price at maturity of the Note multiplied by the number of
complete years to maturity. If market discount is de minimis, the actual amount
of discount must be allocated to the remaining principal distributions on the
Note and, when each such distribution is received, capital gain equal to the
discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than its
principal amount generally will be considered to have purchased the Note at a
premium. The amount of amortizable bond premium will not, however, include any
amount attributable to the conversion feature of the Notes. A holder may
amortize any premium (other than that attributable to the conversion feature),
using a constant yield method, over the remaining term of the Note and, except
as future regulations may otherwise provide, may apply such amortized amounts to
reduce the amount of interest income reportable with respect to such Note over
the period from the purchase date to the date of maturity of the Note. A holder
that elects to amortize such premium must reduce tax basis in the related
obligation by the amount of the aggregate deductions (or interest offsets)
allowable for amortizable premium. If a debt instrument purchased at a premium
is redeemed in full prior to its maturity, a purchaser who has elected to
amortize premium should be entitled to a deduction for any remaining unamortized
premium in the taxable year of redemption.
Disposition of Notes. Upon the sale, exchange, redemption, retirement at
maturity or other disposition of a Note, a U.S. Holder generally will recognize
taxable gain or loss equal to the difference between: (i) the sum of cash plus
the fair market value of all other property received on such disposition (except
to the extent such cash or property is attributable to accrued but unpaid
interest, which will be taxable as ordinary income); and (ii) such beneficial
owner's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal the cost of the Note to such holder, increased by any
market discount includible in income with respect to the Note through the date
of sale and reduced by any principal payments previously received with respect
to the Note, any payments allocable to previously accrued market discount and
any amortized market premium. Gain or loss recognized on the disposition of a
Note generally will be capital gain or loss, and generally should be long-term
capital gain or loss, if at the time of such disposition, the U.S. Holder's
holding period for the Note is more than one year. In the case of individuals,
"net capital gain," i.e. the excess of net long-term capital gain over net
short-term capital loss is generally subject to a reduced rate of federal income
tax. Capital gains and losses from property held for more than 18 months will be
taken into account in determining "adjusted net capital gain," which is subject
to a further reduction in the rate of tax pursuant to a recent amendment of the
Code. Also, in taxable years beginning after December 31, 2000, an additional
reduction in the rate of tax may be available in certain circumstances for
capital gains from property held by the taxpayer for more than five years.
Conversion of the Notes. A U.S. Holder of a Note generally will not
recognize any income, gain or loss upon conversion of a Note into shares of
Common Stock except with respect to cash received either in lieu of a fractional
share of Common Stock or attributable to accrued interest on the converted Note.
A U.S. Holder's tax basis in the Common Stock received on conversion will be the
same as such U.S. Holder's adjusted tax basis in the Note at the time of the
conversion (reduced by any basis allocable to a fractional share interest). The
holding period for the shares of Common Stock received on conversion will
generally include the holding period of the Note converted.
Cash received in lieu of a fractional share of Common Stock upon conversion
will be treated as a payment in exchange for the fractional share of Common
Stock. Accordingly, the receipt of cash in lieu of a fractional share of Common
Stock generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and the U.S. Holder's
adjusted tax basis in the fractional share).
31
<PAGE> 33
Dividends. Distributions paid on shares of Common Stock will constitute
dividends for U.S. federal income tax purposes to the extent of the Company's
current or accumulated earnings and profits and will be includible in the income
of a U.S. Holder as ordinary income. Dividends paid to U.S. Holders that are
U.S. corporations may qualify for a dividends-received deduction.
To the extent that a distribution to a U.S. Holder on shares of Common
Stock that would otherwise constitute a dividend for U.S. federal income tax
purposes exceeds current and accumulated earnings and profits of the Company,
such distribution will be treated first as a non-taxable return of capital,
reducing the U.S. Holder's basis in the shares of Common Stock. Any such
distribution in excess of the U.S. Holder's basis in the shares of Common Stock
will be treated as capital gain.
In general, if at any time the Company makes a distribution of cash or
property to its shareholders or purchases Common Stock and such distribution or
purchase would be taxable to such stockholders as a dividend for U.S. federal
income tax purposes (e.g., distributions of evidences of indebtedness or assets
of the Company, but generally not stock dividends or rights to subscribe for
Common Stock) and: (i) pursuant to the antidilution provisions of the Indenture,
the conversion price of the Notes is decreased; or (ii) the conversion price of
the Notes is decreased at the discretion of the Company, such decrease in
conversion price may be deemed to be the payment of a taxable dividend to U.S.
Holders of Notes (pursuant to Section 305 of the Code) to the extent of the
Company's current or accumulated earnings and profits. Such Holders of Notes
could therefore have taxable income as a result of an event pursuant to which
they received no cash or property.
Sale of Common Stock. Upon the sale or exchange of Common Stock, a U.S.
Holder generally will recognize capital gain or loss equal to the difference
between the amount of cash and the fair market value of any property received
upon the sale or exchange and such U.S. Holder's adjusted tax basis in the
Common Stock. Such gain or loss will be capital gain or loss, and generally
should be long-term capital gain or loss, if at the time of such disposition,
the U.S. Holder's holding period for the Common Stock is more than one year. In
the case of individuals, "net capital gain," i.e. the excess of net long-term
capital gain over net short-term capital loss is generally subject to a reduced
rate of federal income tax. Capital gains and losses from property held for more
than 18 months will be taken into account in determining "adjusted net capital
gain," which is subject to a further reduction in the rate of tax pursuant to a
recent amendment of the Code. Also, in taxable years beginning after December
31, 2000, an additional reduction in the rate of tax may be available in certain
circumstances for capital gains from property held by the taxpayer for more than
five years. A U.S. Holder's basis and holding period in Common Stock received
upon conversion of a Note are determined as discussed above under "-- U.S.
Federal Income Taxation of U.S. Holders; Conversion of the Notes."
Constructive Sale of the Notes or Common Stock. Pursuant to the Taxpayer
Relief Act of 1997, a U.S. Holder generally will be required to recognize gain
with respect to an "appreciated financial position" upon entering into certain
transactions, including, but not limited to, a short sale, certain offsetting
notional principal contracts, or certain future or forward contracts, with
respect to the "appreciated financial position." Both the Notes and the
underlying Common Stock should constitute "appreciated financial positions" if
gain would be recognized were such instruments sold for their fair market value.
U.S. FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
Under present U.S. federal income tax law and subject to the discussion of
backup withholding below:
(i) payments of principal and interest on the Notes by the Company or
any agent of the Company to any beneficial owner of a Note that is not a
U.S. Holder (a "Non-U.S. Holder") will not be subject to U.S. federal
withholding tax, provided that in the case of interest (a)(1) the Non-U.S.
Holder does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled
to vote, (2) the Non-U.S. Holder is not a controlled foreign corporation
that is related to the Company through stock ownership, (3) the Non-U.S.
Holder is not a bank described in Section 881(c)(3)(A) of the Code, and (4)
either (A) the beneficial owner of the Notes certifies to the Company or
its agent on Internal Revenue Service ("IRS") Form W-8 (or a suitable
substitute form), under penalties of perjury, that it is not a "U.S.
person" (as defined in the Code) and
32
<PAGE> 34
provides its name and address or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and
holds the Notes on behalf of the beneficial owner certifies to the Company
or its agent under penalties of perjury that such statement has been
received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payor with a copy
thereof or (b) the Non-U.S. Holder is entitled to the benefits of an income
tax treaty under which interest on the Notes is exempt from U.S. federal
withholding tax and provides a properly executed IRS Form 1001 claiming the
exemption. Under recently adopted United States Treasury regulations, which
generally are effective for payments made after December 31, 1998, subject
to certain transition rules, the certification described in clause 4(B)
above may also be provided by a qualified intermediary on behalf of one or
more beneficial owners or other intermediaries, provided that such
intermediary has entered into a withholding agreement with the IRS and
certain other conditions are met;
(ii) if the Company makes distributions with respect to the Common
Stock to a Non-U.S. Holder and if the distributions are treated as
dividends paid (or deemed paid), as described above under "-- U.S. Federal
Income Taxation of U.S. Holders; Dividends," the distributions will be
subject to U.S. federal withholding tax at a 30 percent rate or at a lower
rate if the Non-U.S. Holder is entitled to the benefits of an income tax
treaty that provides for a lower withholding rate on such distributions. A
Non-U.S. Holder (or in the case of Non-U.S. Holders that are treated as
partnerships or otherwise fiscally transparent, the partners, shareholders
or other beneficiaries of such entity) may be required to satisfy certain
certification requirements in order to claim a reduction of or exemption
from withholding under the forgoing rules; and
(iii) a Non-U.S. Holder will not be subject to U.S. federal income tax
on gain realized on the sale, exchange, or other disposition of a Note
unless (a) the Non-U.S. Holder is an individual who is present in the U.S.
for a period or periods aggregating 183 or more days in the taxable year of
the disposition and certain other conditions are met or (b) the Non-U.S.
Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, the Company is
required to provide the IRS with certain information, including the beneficial
owner's name, address and taxpayer identification number, the aggregate amount
of interest paid to that beneficial owner during the calendar year and the
amount of tax withheld, if any. This obligation, however, does not apply with
respect to certain payments to U.S. Holders, including corporations, tax-exempt
organization, qualified pension and profit sharing trusts and individual
retirement accounts, provided that they establish entitlement to an exemption.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability, the
Company, its agents or paying agents or a broker may be required to "backup"
withhold a tax equal to 31% of each payment of interest and principal (and
premium, if any) on the Notes. This backup withholding is not an additional tax
and may be credited against the U.S. Holder's U.S. federal income tax liability,
provided that the required information is furnished to the IRS.
Under current Treasury regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a U.S. person as set forth in
clause (a)(4) in paragraph (i) above under "-- U.S. Federal Income Taxation of
Non-U.S. Holders" or has otherwise established an exemption (provided that
neither the Company nor its agent has actual knowledge that the holder is a U.S.
person or that the conditions of any exemption are not in fact satisfied).
Payment of the proceeds from the sale of a Note to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding, except that if the broker is a U.S. person, a controlled foreign
corporation for U.S. federal income tax purposes or a foreign person 50 percent
or more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the
33
<PAGE> 35
payment was effectively connected with a U.S. trade or business, information
reporting may apply to such payments. Payment of the proceeds from a sale of a
Note to or through the U.S. office of a broker will be subject to information
reporting and backup withholding unless the holder or beneficial owner certifies
as to its taxpayer identification number or otherwise establishes an exemption
from information reporting and backup withholding.
Recently adopted United States Treasury regulations, which generally are
effective for payments made after December 31, 1998, subject to certain
transition rules, alter the forgoing rules in certain respects. Those
regulations provide presumptions under which a Non-U.S. Holder is subject to
information reporting and back-up withholding at a rate of 31% unless the
Company receives certification of the holder's non-U.S. status. Depending on the
circumstances, this certification will need to be provided (i) directly by the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder that is treated as a
partnership or other fiscally transparent entity, by the partners, shareholders
or other beneficiaries of such entity, or (iii) certain qualified financial
institutions or other qualified entities on behalf of the Non-U.S. Holder.
THE COMPANY
Under Section 279 of the Code, interest paid or incurred by a corporation
with respect to certain convertible, subordinated indebtedness that is utilized
to provide consideration for the acquisition of stock in another corporation (or
a substantial portion of the assets of another corporation) is not deductible
for federal income tax purposes to the extent interest on such "corporate
acquisition indebtedness," as defined in Section 279, exceeds $5 million per
year, reduced by the interest paid on certain other indebtedness that does not
constitute "corporate acquisition indebtedness" for purposes of Section 279, but
is used to fund corporate acquisitions. The Notes may constitute "corporate
acquisition indebtedness" for purposes of Section 279 of the Code, which could
result in all or a portion of the interest payments under the Notes not being
deductible for federal income tax purposes.
LEGAL MATTERS
Certain legal matters relating to the validity of the Notes and Common
Stock offered hereby will be passed upon for the Company by Dewey Ballantine
LLP, Los Angeles, California. Mr. Smith, a director of the Company, is a member
of the law firm of Dewey Ballantine LLP.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1995
and for the years then ended and for the period from inception (October 28,
1994) through December 31, 1994, incorporated herein by reference have been
audited by Price Waterhouse LLP, independent accountants, as stated in their
report incorporated herein by reference.
The financial statements of SmarTel and subsidiaries as of December 31,
1995 and 1996 and for the three years in the period ended December 31, 1996
incorporated herein by reference have been audited by Arthur Andersen LLP,
independent accountants, as indicated in their report to opinion with respect
thereto, and are incorporated herein by reference in reliance upon the authority
of said firm as experts in giving said report.
The financial statements of GTI as of December 31, 1996 and for the year
then ended, incorporated herein by reference have been audited by KPMG Peat
Marwick LLP, independent accountants, as stated in their report incorporated
herein by reference. The report of KPMG Peat Marwick LLP covering the December
31, 1996 financial statements of GTI contains explanatory paragraphs which state
that GTI's financial statements have been restated and that recurring losses
from operations and net capital deficiency raise substantial doubt about GTI's
ability to continue as a going concern. The 1996 GTI financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
34
<PAGE> 36
The financial statements of GTI as of December 31, 1995 and 1994 and for
the years then ended, incorporated herein by reference have been audited by
Price Waterhouse LLP, independent accountants, as stated in their report
incorporated herein by reference.
The financial statements referred to above and the reports of each of the
accountants referred to above are incorporated herein by reference in reliance
upon said firms as experts in accounting and auditing.
The consolidated financial statements of ConQuest as of December 31, 1995
and 1996, and for each of the three years in the period ended December 31, 1996,
incorporated herein by reference have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report incorporated herein by
reference, and are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
35
<PAGE> 37
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING
SECURITYHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Information
by Reference........................ 2
Cautionary Statement Regarding
Forward-Looking Statements.......... 3
Risk Factors.......................... 4
Ratio of Earnings to Fixed Charges.... 11
Plan of Distribution.................. 11
Description of Notes.................. 13
Selling Securityholders............... 27
Certain United States Federal Income
Tax Considerations.................. 30
Legal Matters......................... 34
Experts............................... 34
</TABLE>
======================================================
======================================================
$150,000,000
SMARTALK
TELESERVICES, INC.
5 3/4% CONVERTIBLE
SUBORDINATED NOTES
DUE 2004
------------------------
PROSPECTUS
------------------------
MARCH 11, 1998
======================================================
<PAGE> 38
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
registration of the Notes and Common Stock offered hereby. The Company will bear
all of such expenses. All amounts are estimated except for the Securities and
Exchange Commission registration fee and Nasdaq Smallcap entry fee.
<TABLE>
<CAPTION>
PAYABLE
BY REGISTRANT
-------------
<S> <C>
SEC registration fee..................................... $44,250
Nasdaq Smallcap entry fee................................ 10,000
Accounting fees and expenses............................. 5,000
Legal fees and expenses.................................. 25,000
Miscellaneous fees and expenses.......................... 5,750
-------
Total.................................................... 90,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 317 of the California General Corporation Law (the "CGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorney's fees), as well as judgements, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in parties by
reason of their serving or having served in such capacity. The CGCL provides,
however, that such person must have acted in good faith and in a manner he or
she reasonably believed to be in (or not opposed to) the best interests of the
corporation and, in the case of a criminal action, such person must have had no
reasonable cause to believe his or her conduct was unlawful. In addition, the
CGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for expenses the court deems proper in
light of liability adjudication. With respect to present or former directors and
officers, indemnity is mandatory to the extent a claim, issue or matter has been
successfully defended.
The Company's Bylaws provide for mandatory indemnification of directors and
officers generally to the same extent authorized by the CGCL. Under the
Company's Bylaws, the Company shall advance expenses incurred by an officer or
director in defending any such action if the director or officer undertakes to
repay such amount if it is determined that he or she is not entitled to
indemnification. The Company has obtained directors' and officers' liability
insurance.
The Company has entered into separate indemnification agreements with its
directors and officers. Each indemnification agreement provides for, among other
things: (i) indemnification against any and all expenses, liabilities and losses
(including attorney's fees, judgements, fines, taxes, penalties and amounts paid
in settlement) of any claim against an indemnified party unless it is
determined, as provided in the indemnification agreement, that indemnification
is not permitted under applicable law; and (ii) prompt advancement of expenses
to any indemnified party in connection with his or her defense against any
claim.
II-1
<PAGE> 39
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Purchase Agreement, dated as of September 12, 1997, among
SmarTalk TeleServices, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Salomon Brothers Inc.(7)
2.1 Agreement and Plan of Reorganization and Merger, dated as of
July 30, 1997, by and among Conquest Telecommunication
Services, Corp., SmarTalk TeleServices, Inc. and SMTK
Acquisition Corp. II.(1)
2.2 Agreement and Plan of Merger, dated May 24, 1997, among
SmarTalk TeleServices, Inc., SMTK Acquisition Corporation,
SmarTel Communications, Inc. and each of the stockholders of
Smartel Communications, Inc.(2)
2.3 Stock Purchase Agreement, dated as of May 31, 1997, by and
among SmarTalk TeleServices, Inc., GTI Telecom, Inc.,
Waterton Investment Group I, LLC and William H. Harger.(3)
2.4 Asset Purchase Agreement, dated October 22, 1997, among
SmarTalk TeleServices, Inc., SMTK NY-1 Corp. and Frontier
Corporation.(4)
2.5 Stock Purchase Agreement, dated as of December 22, 1997, by
and among SmarTalk TeleServices, Inc., American Express
Telecom, Inc. and American Express Travel Related Services
Company, Inc.(8)
4.1 Registration Rights Agreement.(5)
4.2 Specimen Stock Certificate.(5)
4.3 Terms of Contingent Value Rights.(2)
4.4 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note
Due 2001.(3)
4.5 Registration Rights Agreement, dated as of May 31, 1997,
among SmarTalk TeleServices, Inc., William R. Harger and
Waterton Investment Group I, LLC.(3)
4.6 Indenture, dated as of September 17, 1997, between SmarTalk
TeleServices, Inc. and Wilmington Trust Company, as
Trustee.(6)
4.7 Registration Rights Agreement, dated as of September 12,
1997, among SmarTalk TeleServices, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Salomon Brothers Inc.(6)
4.8 Form of SmarTalk TeleServices, Inc. 5 3/4% Convertible
Subordinated Note Due 2004.(6)
5.1 Opinion of Dewey Ballantine LLP regarding legality of shares
being registered.(7)
12.1 Statements regarding computation of ratios.(7)
23.1 Consent of Price Waterhouse LLP.(7)
23.2 Consent of Arthur Andersen LLP.(7)
23.3 Consent of KPMG Peat Marwick LLP.(7)
23.4 Consent of Price Waterhouse LLP.(7)
23.5 Consent of Ernst & Young LLP.(7)
23.6 Consent of Dewey Ballantine LLP (included in its opinion
filed as Exhibit 5.1).
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
25.1 Form T-1.(7)
</TABLE>
- ---------------
(1) Incorporated by reference to SmarTalk's Form 8-K, dated July 30, 1997.
(2) Incorporated by reference to SmarTalk's Form 8-K, dated May 28, 1997 (as
amended on Form 8-K/A).
(3) Incorporated by reference to SmarTalk's Form 8-K, dated June 1, 1997 (as
amended on Form 8-K/A).
(4) Incorporated by reference to SmarTalk's Form 8-K, dated October 22, 1997.
(5) Incorporated by reference to SmarTalk's Registration Statement on Form S-1,
registration number 333-10391, filed with the Securities and Exchange
Commission on August 19, 1996 and the amendments thereto.
(6) Incorporated by reference to SmarTalk's Form 8-K, dated September 17, 1997.
(7) Previously filed.
(8) Incorporated by reference to SmarTalk's Form 8-K, dated December 22, 1997.
II-2
<PAGE> 40
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
Provided, however, That paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(2) That, for purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California, on the 11th day of March, 1998.
SMARTALK TELESERVICES, INC.
By: /s/ ROBERT H. LORSCH
------------------------------------
Name: Robert H. Lorsch
Title: Chairman of the Board of
Directors
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
H. Lorsch, Erich L. Spangenberg and David A. Hamburger his true and lawful
attorney-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ ROBERT H. LORSCH Chairman of the Board of March 11, 1998
- -------------------------------------------------------- Directors
Robert H. Lorsch
/s/ ERICH L. SPANGENBERG Vice Chairman of the Board of March 11, 1998
- -------------------------------------------------------- Directors and Chief Executive
Erich L. Spangenberg Officer (Principal Executive
Officer)
/s/ GLEN ANDREW FOLCK Chief Financial Officer and March 11, 1998
- -------------------------------------------------------- Vice President
Glen Andrew Folck Finance/Operations (Principal
Financial and Accounting
Officer)
/s/ AHMED O. ALFI Director March 11, 1998
- --------------------------------------------------------
Ahmed O. Alfi
/s/ FRED F. FIELDING Director March 11, 1998
- --------------------------------------------------------
Fred F. Fielding
</TABLE>
II-4
<PAGE> 42
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ KENNETH A. VIELLIEU Director March 11, 1998
- --------------------------------------------------------
Kenneth A. Viellieu
/s/ ROBERT M. SMITH Director March 11, 1998
- --------------------------------------------------------
Robert M. Smith
</TABLE>
II-5
