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PROSPECTUS
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-49279
OFFER TO EXCHANGE
SERIES B 12% SENIOR SECURED PIK NOTES DUE 2003
FOR ALL OUTSTANDING SERIES A 12% SENIOR SECURED PIK NOTES DUE 2003
OF
MENTUS MEDIA CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 19,
1998 UNLESS EXTENDED.
Mentus Media Corp., a Delaware corporation (the "Company"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), to exchange $1,000 principal amount of its Series
B 12% Senior Secured PIK Notes due 2003 (the "Series B Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this Prospectus is a part, for
each $1,000 principal amount of its outstanding Series A 12% Senior Secured PIK
Notes due 2003 (the "Series A Notes"), of which $45,000,000 in aggregate
principal amount are outstanding on the date hereof. The form and terms of the
Series B Notes are the same as the form and terms of the Series A Notes except
that (i) the Series B Notes will bear a "Series B" designation, (ii) the Series
B Notes will have been registered under the Securities Act and, therefore, will
not bear legends restricting their transfer, and (iii) the holders of Series B
Notes will not be entitled to certain rights of holders of Series A Notes under
the Registration Rights Agreement (as defined), including the provisions
providing for an increase in the interest rate on the Series A Notes in certain
circumstances relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer." The Series B Notes will
evidence the same debt as the Series A Notes (which they replace) and will be
entitled to the benefits of the Indenture (as defined). The Series A Notes and
the Series B Notes are sometimes referred to herein collectively as the "Notes."
See "Descriptions of Notes."
The Series B Notes will mature on February 1, 2003. Interest on the Series B
Notes will be payable semi-annually in arrears on February 1 and August 1 of
each year, commencing August 1, 1998. Interest on the Series B Notes is payable
either in cash or in additional Series B Notes, at the option of Company, until
August 1, 2000, and thereafter is payable in cash. The Company expects to pay
interest through August 1, 2000 by issuing additional Notes, which would
increase the principal amount of the Notes to approximately $60.2 million. The
Company may not redeem the Series B Notes prior to February 1, 2000. On and
after such date, the Company may redeem the Series B Notes, in whole or in part,
at the redemption prices set forth herein, together with the accrued and unpaid
interest, if any, to the date of redemption. The Series B Notes will not be
subject to any sinking fund requirement. Upon the occurrence of a Change of
Control (as defined), the Company will be required to make an offer to
repurchase the Series B Notes at a price equal to 101% of the principal amount
thereof, plus accrued unpaid interest thereon until the date of repurchase. See
"Description of Notes-- Optional Redemption" and "--Change of Control." There
can be no assurance that sufficient funds will be available if necessary to make
any required repurchases. See "Risk Factors--Ability to Purchase Notes Upon a
Change of Control."
The Series B Notes will be senior obligations of the Company and will, with
the exception of certain equipment representing approximately 1.7% of the total
assets of the Company as of March 31, 1998, be secured by a first priority lien
on substantially all of the assets of the Company, provided that in the event
that a security interest on the Receivables (as defined) is granted to secure
the Working Capital Facility (as defined), the security interest on the
Receivables securing the Series B Notes will be a second priority lien and
security interest. The assets of the Company which secure the obligations under
the Notes had a book value of approximately $47.0 million as of March 31, 1998.
See "Description of Notes-- Security." The Series B Notes will rank PARI PASSU
in the right of payment with all existing and future senior indebtedness of the
Company and will rank senior to all existing and future subordinated
indebtedness of the Company. See "Description of Notes--Ranking."
The Company will accept for exchange any and all validly tendered Series A
Notes not withdrawn prior to 5:00 p.m., New York City time, on August 19, 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
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ANYONE INVESTING IN THE SERIES B NOTES OFFERED HEREBY SHOULD HAVE THE
ABILITY TO SUSTAIN A TOTAL LOSS ON THEIR INVESTMENT, AS THE COMPANY MAY NOT HAVE
THE ABILITY TO SERVICE ITS DEBT BASED ON ITS SHORT OPERATING HISTORY IN WHICH IT
HAS INCURRED SUBSTANTIAL LOSSES TO DATE. SEE "RISK FACTORS" BEGINNING ON PAGE 11
FOR FURTHER CONSIDERATIONS BY POTENTIAL HOLDERS OF THE SERIES B NOTES OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 8, 1998
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Tenders of Series A Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. The Exchange Offer is subject to certain
customary conditions. See "The Exchange Offer--Conditions." Series A Notes may
be tendered only in integral multiples of $1,000. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Series A
Notes, the Company will promptly return all previously tendered Series A Notes
to the holders thereof.
The Series A Notes were sold by the Company on February 18, 1998 to the
Initial Purchaser (as defined) in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act. The
Initial Purchaser subsequently resold the Series A Notes to qualified
institutional buyers in reliance upon Rule 144A under the Securities Act.
Accordingly, the Series A Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Series B Notes are being offered hereunder in
order to satisfy the obligations of the Company under the Registration Rights
Agreement. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Series B Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such Series
B Notes are acquired in the ordinary course of such holder's business and that
such holder does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such Series
B Notes. See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and
"--Resale of the Series B Notes." Each holder of the Series A Notes (other than
certain specified holders) who wishes to exchange the Series A Notes for Series
B Notes in the Exchange Offer will be required to represent in the Letter of
Transmittal that (i) it is not an affiliate of the Company, (ii) the Series B
Notes to be received by it are being acquired in the ordinary course of its
business, (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Series B Notes and (iv) such holder is not
acting on behalf of any person who could not truthfully make the foregoing
representations. Each broker-dealer (a "Participating Broker-Dealer") that
receives Series B Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Series B Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used in connection with resales of Series B Notes received in exchange for
Series A Notes only by Participating Broker-Dealers ("Eligible Participating
Broker-Dealers") who acquired such Series A Notes as a result of market-making
activities or other trading activities and not by Participating Broker-Dealers
who acquired such Series A Notes directly from the Company. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus available to any Eligible Participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
Holders of Series A Notes not tendered and accepted in the Exchange Offer
will continue to hold such Series A Notes and will be entitled to all the rights
and benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Series A Notes or
the Series B Notes. The Company does not intend to list the Series B Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the Series
B Notes will develop. See "Risk Factors--Absence of a Public Market Could
Adversely Affect the Value of Series B Notes." Moreover, to the extent that
Series A Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Series A Notes could be
adversely affected.
The Series B Notes will be available initially only in book-entry form. The
Company expects that the Series B Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined), which will be
deposited with, or on behalf of, The Depositary Trust Company (the "Depositary")
and registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Note representing the Series B Notes will be shown on,
and transfers thereof to qualified institutional buyers will be effected
through, records maintained by the Depositary and its participants. After the
initial issuance of the Global Note, Series B Notes in certified form will be
issued in exchange for the Global Note only on the terms set forth in the
Indenture. See "Book Entry--Delivery and Form."
FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS UNDER THE CAPTIONS
"PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR
INDUSTRY RESULTS, TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS INCLUDE, AMONG OTHERS:
ADVERTISING RATES; THE ABILITY TO SECURE NEW SITES FOR NGN DISPLAYS (AS
DEFINED); THE LOSS OF KEY EXISTING SITE AGREEMENTS; CHANGES IN THE POLITICAL AND
REGULATORY CLIMATE; OUT-OF-HOME ADVERTISING INDUSTRY TRENDS; COMPETITION;
CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT
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PLANS; AVAILABILITY OF QUALIFIED PERSONNEL; CHANGES IN, OR THE FAILURE OR
INABILITY TO COMPLY WITH, GOVERNMENT REGULATIONS; AND OTHER FACTORS REFERENCED
IN THIS PROSPECTUS.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND HISTORICAL FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS
OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE
"COMPANY" SHALL MEAN MENTUS MEDIA CORP., A DELAWARE CORPORATION.
THE COMPANY
OVERVIEW
The Company sells advertising space and provides programming through an
electronic out-of-home advertising network known as NGN--Next Generation
Network. Out-of-home advertising derives its name from reaching audiences out of
their homes. The Company believes that out-of-home advertising is a $3.8 billion
industry, consisting primarily of billboards, transit advertising and stadium
and other signage. NGN is a "billboard-TV" network of color video monitors ("NGN
Displays") located at high traffic public locations. NGN Displays are connected
by ordinary voice-grade telephone lines and controlled from a single operations
center in Minneapolis, Minnesota. By utilizing technology to reduce labor costs
and provide immediacy and flexibility to advertisers, NGN seeks to preserve the
positive attributes while avoiding the negative attributes of the out-of-home
advertising industry. Specifically, the Company seeks to achieve the high
operating profit margins and recurring cash flows inherent in the industry,
while reducing fixed costs and labor intensity, and avoiding zoning regulations
that may impede expansion.
By presenting a sequence of partially animated, television-quality images,
NGN is intended to capture audience attention in busy out-of-home environments,
thereby effectively delivering advertising and programming messages. NGN
Displays present repeating two-and-one-half minute sequences, or "loops," of
advertising and programming. As currently configured, the loops consist of
twelve advertising slots of approximately ten seconds each and six to eight
programming slots of approximately six seconds each. Advertising slots currently
consist of advertisements principally for local and regional advertisers, and
programming slots include information such as local and national weather,
sports, news headlines and financial information, as well as Company sponsored
promotional contests. For example, a Baltimore, Maryland 7-Eleven customer
waiting in line to purchase merchandise may view the three day Baltimore
forecast, the Baltimore Orioles baseball score and local news headlines
interspersed with advertisements for Haagen-Dazs ice cream, a Chrysler
dealership and a local dentist, among other messages.
Management believes that consumers view NGN programming as a useful source
of information, and that advertisers view NGN as a flexible, effective
advertising medium to reach a targeted audience. Additionally, Management
believes that site operators benefit from NGN because (i) site operators
generally share in the Company's advertising revenue typically at no cost to the
site operators and (ii) NGN increases customer satisfaction by making the
customer's visit to the site more enjoyable.
The Company currently operates NGN in the following nine DMAs* and their
surrounding areas: Washington, D.C.; Dallas-Ft. Worth, TX; Tampa, FL; Miami, FL;
Orlando, FL; Baltimore, MD; Norfolk, VA; West Palm Beach, FL; and Fort Meyers,
FL. As of March 31, 1998, the Company had NGN Displays operating in
approximately 1,800 sites. Based on the average of the daily transaction counts
submitted to the Company by the site operators (the "Daily Audience"), the
Company estimates that NGN presently can be viewed by approximately 2 million
people daily. Additionally, the Company holds site agreements for approximately
5,700 additional sites. Collectively with the Company's presently installed
sites, NGN could be viewed by an estimated Daily Audience of approximately 9
million people in 41 of the top 50 DMA's in the United States.
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* The Company categorizes by size the various advertising markets or Designated
Market Areas ("DMAs") in the United States.
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The Company targets NGN Displays for installation in high traffic, public
venues where people remain for several minutes, including convenience stores,
fast food restaurants, office building lobbies, pharmacies, movie theater
lobbies and self-serve gas pumps. Companies currently under site agreements with
the Company include The Southland Corporation (7-Eleven Stores), Cumberland
Farms, Jerry's Subs, Uni-Marts, Convenient Food Marts and Crown Central
Petroleum. Site agreements generally (i) provide operators with a share of the
Company's revenues derived from a particular site, typically at no cost to the
site operator, and (ii) establish that the Company is the exclusive provider of
video-based information, entertainment and advertising services. The Company is
solely responsible for the installation and maintenance of its NGN Displays.
The Company seeks to take advantage of its inherent flexibility of
geographically targeted advertising by emphasizing sales to local advertisers,
the traditional area of strength for out-of-home advertising. The Company
conducts its advertising sales efforts through a dedicated, local sales force
within each of the DMAs in which it operates NGN Displays. The local sales force
is thereby able to work closely with each of the Company's advertisers to
develop advertising campaigns that match specifically targeted audience segments
with the advertisers' overall marketing strategies. The Company has attracted
over 200 advertisers to date, including The Washington Post, WRC-TV (NBC station
in Washington, D.C.), Chrysler Plymouth Florida Dealers Association, Elle
Magazine, George Magazine, The Dallas Morning News, the Virginia Lottery and Fox
Sports Southwest.
The advertising and programming loops for each NGN Display are all created
and controlled from a central hub facility in Minneapolis, allowing the Company
to quickly and cost-effectively custom-tailor both the advertising and
programming content on a regional or micro-targeted basis. NGN integrates
industry standard computer hardware and software with proprietary software
developed by the Company specifically for its out-of-home advertising
application. By utilizing the Company's network management software, the Company
customizes programming information for local markets. Attributes such as
instantaneous copy changes, minimal lead times, negligible production costs and
expedited electronic communications distinguish NGN from other out-of-home
advertising. The computer architecture of NGN is intended to make the system
"scaleable" so that the network can be expanded to facilitate growth at minimal
incremental cost. The Company believes that NGN is reliable, experiencing
"up-time" (representing the daily average of functioning units) in excess of
99%.
BUSINESS STRATEGY
As the American lifestyle has become increasingly busy, reaching the
consumer through traditional advertising mediums has become more difficult. The
Company believes that approximately 64% of the adult population read newspapers
daily in 1997 as compared to approximately 77% in 1970. In addition, the Company
believes that subscribers to America On-Line tend to watch approximately 15%
less television than the average person. In recognition of these trends, among
other trends, Management believes that advertisers are seeking innovative ways
to reach out-of-home audiences. As a result of the limitations that characterize
many traditional forms of out-of-home advertising, such as less desirable
demographics due to zoning, long lead times to implement advertisements, and
complexity of buying space nationally, Management believes there will be a
strong demand for media vehicles such as NGN.
The Company's objectives are to (i) increase and diversify the physical
presence of NGN in the United States by building upon the Company's existing
site agreements and negotiating additional site agreements and (ii) utilize
NGN's flexibility as an advertising medium to sell advertisements through the
Company's dedicated sales force on a local, regional and national basis. To
achieve its objectives, the Company has adopted the following business
strategies:
- INCREASE PHYSICAL PRESENCE OF NGN. The Company's expansion strategy is to
increase the Company's geographic presence in top markets and diversify
distribution venues. The Company intends to complete the installation of
NGN Displays in the approximately 5,700 additional sites currently
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under site agreements, while continuing to secure new site agreements
within its existing operating DMAs as well as the DMAs targeted by the
Company for expansion. The Company currently has NGN Displays in two of
the ten top DMAs, and has site agreements in nine of the top ten DMAs and
41 of the top 50 DMAs. The Company's immediate geographic expansion
focuses on the top ten DMAs, with the intention of having a presence in
all of the top 25 DMAs by 2002.
- CONTINUE TO INCREASE ADVERTISING REVENUES. To date, the Company has
attracted over 300 advertisers, which Management believes indicates a
present market acceptance of NGN as an advertising medium. The Company
conducts its sales efforts through a dedicated sales force within each of
the DMAs in which it operates, which enables NGN to accommodate
micro-targeted advertising needs of local advertisers while offering both
flexibility and breadth of coverage to full-market and multi-market
advertisers. By combining its local sales presence with continued
expansion and diversification of distribution venues, the Company believes
it will broaden the audience for NGN programming and advertising, and will
appeal to an increasing pool of advertisers by providing a truly local,
regional and national advertising medium.
FINANCING PLAN
On February 18, 1998, the Company completed the sale of 45,000 Units (the
"Units Offering") to NatWest Capital Markets Limited (the "Initial Purchaser")
in a transaction not registered under the Securities Act in reliance upon an
exemption under the Securities Act. Each Unit ("Unit") consisted of $1,000
principal amount of Series A Notes and 2.78311 Warrants ("Warrants"), each to
purchase one share of the Company's common stock, $.01 par value ("Common
Stock"), representing in the aggregate at the time of issuance approximately 20%
of the Common Stock on a fully diluted basis. The Initial Purchaser then resold
the Units to qualified institutional buyers pursuant to Rule 144A of the
Securities Act. The Series A Notes and the Warrants became separately
transferable, subject to compliance with applicable securities laws, on March
20, 1998.
The Company intends to use the net proceeds from the Units Offering
primarily to implement its business strategy and expand its network of NGN
Displays, including the funding of capital expenditures and general and working
capital needs through 1999. Approximately $17.4 million of the net proceeds are
intended to be used to fund capital expenditures relating to the installation of
NGN Displays at sites for which the Company presently has site agreements as
well as new sites for which the Company obtains site agreements in the future.
In addition, the net proceeds are intended to be used to fund corporate capital
expenditures and operating expenses as well as for working capital and general
corporate purposes. Management believes that cash flow from operations will be
sufficient to fund its projected ongoing capital expenditure and working capital
needs following such period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company's principal corporate offices are located at 9531 West 78th
Street, Suite 400, Minneapolis, Minnesota 55344, and its telephone number is
(612) 944-7944.
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THE UNITS OFFERING
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Units........................... The Company sold 45,000 Units to the Initial Purchaser on
February 18, 1998 pursuant to a Purchase Agreement dated
February 12, 1998 (the "Purchase Agreement"). The Initial
Purchaser subsequently resold the Units to qualified
institutional buyers in reliance upon Rule 144A under the
Securities Act. Each Unit consisted of $1,000 principal
amount of Series A Notes and 2.78311 Warrants, each to
purchase one share of Common Stock, representing in the
aggregate at the time of issuance approximately 20% of the
Common Stock on a fully diluted basis. The Series A Notes
and the Warrants became separately transferrable, subject
to compliance with applicable securities laws, on March
20, 1998 (the "Exercisability Date").
Registration Rights............. Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into an Exchange Offer and
Registration Rights Agreement (the "Registration Rights
Agreement") dated February 18, 1998, which grants the
holders of the Series A Notes certain exchange and
registration rights. The Exchange Offer is intended to
satisfy such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.............. $45,000,000 aggregate principal amount of Series B 12%
Senior Secured PIK Notes due 2003 (the "Series B Notes").
The Exchange Offer.............. $1,000 principal amount of the Series B Notes in exchange
for each $1,000 principal amount of Series A Notes. As of
the date hereof, $45,000,000 aggregate principal amount of
Series A Notes are outstanding. The Company will issue the
Series B Notes to holders on or promptly after the
Expiration Date.
Based on no-action letters issued by the staff of the
Commission to third parties, the Company believes the
Series B Notes issued pursuant to the Exchange Offer may
be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such Series B Notes are
acquired in the ordinary course of such holder's business
and that such holder does not intend to participate and
has no arrangement or understanding with any person to
participate in the distribution of such Series B Notes.
Each Participating Broker-Dealer that receives Series B
Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in
connection with any resale of such Series B Notes. The
Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter"
within the meeting of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time,
may be used in connection with resales of Series B Notes
received in exchange for Series A Notes only by
Participating
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Broker-Dealers ("Eligible Participating Broker-Dealers")
who acquired such Series A Notes as a result of
market-making activities or other trading activities and
not by Participating Broker-Dealers who acquired such
Series A Notes directly from the Company. The Company has
agreed that, for a period of 180 days after the Expiration
Date, it will make this Prospectus available to any
Eligible Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders Series A Notes in the Exchange
Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Series
B Notes could not rely on the position of the staff of the
Commission communicated in no-action letters and, in the
absence of an exception therefrom, must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Failure to comply with such requirements in such instance
may result in such holder incurring liability under the
Securities Act for which the holder is not indemnified by
the Company.
Expiration Date................. The Exchange Offer will expire at 5:00 p.m., New York City
time, on August 19, 1998 unless the Exchange Offer is
extended, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offer is
extended.
Accrued Interest on Series B and
Series A Notes................ Each Series B Note will bear interest from its issuance
date. Holders of Series A Notes that are accepted for
exchange will receive, in cash or in additional Series B
Notes, at the option of the Company, accrued interest
thereon to, but not including, the issuance date of the
Series B Notes. Such interest will be paid with the first
interest payment on the Series B Notes. Interest on the
Series A Notes accepted for exchange will cease to accrue
upon issuance of the Series B Notes.
Conditions to the Exchange The Exchange Offer is subject to certain customary
Offer......................... conditions, which may be waived by the Company. See "The
Exchange Offer-- Conditions."
Procedures for Tendering Series
A Notes....................... Each holder of Series A Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together with
the Series A Notes and any other required documentation to
the Exchange Agent (as defined) at the address set forth
therein. By executing the Letter of Transmittal, each
holder will represent to the Company that, (i) it is not
an Affiliate of the Company, (ii) the Series B Notes to be
received by it are being acquired in the ordinary course
of its business, (iii) at the time of commencement of the
Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the
Securities Act) of the Series B Notes and (iv) it is not
acting on behalf of any person who could not truthfully
make the foregoing representations. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer" and
"--Procedures for Tendering."
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Untendered Series A Notes....... Following the consummation of the Exchange Offer, holders
of Series A Notes eligible to participate but who do not
tender their Series A Notes will not have any further
exchange rights and such Series A Notes will continue to
be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A
Notes could be adversely affected.
Consequences of Failure to The Series A Notes that are not exchanged pursuant to the
Exchange...................... Exchange Offer will remain restricted securities.
Accordingly, such Series A Notes may be resold only (i) to
the Company, (ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to another exemption under
the Securities Act, (iii) outside the United States to a
foreign person pursuant to the requirements of Rule 904
under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act. See "The
Exchange Offer--Consequences of Failure to Exchange."
Shelf Registration Statement.... If any holder of the Series A Notes (other than any such
holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) is not
eligible under applicable securities laws to participate
in the Exchange Offer, and such holder has provided
information regarding such holder and the distribution of
such holder's Series A Notes to the Company for use
therein, the Company has agreed to register the Series A
Notes with a shelf registration statement (the "Shelf
Registration Statement") and use its best efforts to cause
it to be declared effective by the Commission as promptly
as practical on or after the consummation of the Exchange
Offer. The Company has agreed to maintain the
effectiveness of the Shelf Registration Statement for,
under certain circumstances, a maximum of two years, to
cover resales of the Series A Notes held by any such
holders.
Special Procedures for Any beneficial owner whose Series A Notes are registered
Beneficial Owners............. in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and delivering its
Series A Notes, either make appropriate arrangements to
register ownership of the Series A Notes in such owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. The Company will keep the
Exchange Offer open for not less than thirty (30) business
days (or longer if required by applicable law) after
notice of the Exchange Offer is mailed to the holders of
the Series A Notes.
Guaranteed Delivery Holders of the Series A Notes who wish to tender their
Procedures.................... Series A Notes and whose Series A Notes are not
immediately available or who cannot deliver their Series A
Notes, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date must tender their
Series A Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Withdrawal Rights............... Tendered Series A Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date.
Acceptance of Series A and
Delivery of Series B Notes.... The Company will accept for exchange any and all Series A
Notes which are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration
Date. The Series B Notes issued pursuant to the Exchange
Offer will be delivered on or promptly after the
Expiration Date. See "The Exchange Offer-- Terms of the
Exchange Offer."
Use of Proceeds................. There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent.................. United States Trust Company of New York (the "Exchange
Agent").
THE SERIES B NOTES
General......................... The form and terms of the Series B Notes are the same as
the form and terms of the Series A Notes except that (i)
the Series B Notes will bear a "Series B" designation,
(ii) the Series B Notes will have been registered under
the Securities Act and, therefore, will not bear legends
restricting their transfer, and (iii) the holders of
Series B Notes will not be entitled to certain rights of
holders of Series A Notes under the Registration Rights
Agreement, including the provisions providing for an
increase in the interest rate on the Series A Notes in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the
Exchange Offer is consummated. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer." The
Series B Notes will evidence the same debt as the Series A
Notes (which they replace) and will be entitled to the
benefits of the Indenture. See "Description of Notes."
Securities Offered.............. $45,000,000 principal amount of Series B 12% Senior
Secured PIK Notes due 2003.
Maturity........................ February 1, 2003.
Interest........................ The Series B Notes will bear interest from their date of
issuance (the "Issue Date"). Holders of Series A Notes
that are accepted for exchange will receive, in cash or
additional Series B Notes, at the option of the Company,
accrued interest thereon to, but not including, the date
of issuance of the Series B Notes. Such interest will be
paid with the first interest payment on the Series B Notes
on August 1, 1998. Interest on the Series A Notes accepted
for exchange will cease to accrue upon issuance of the
Series B Notes. Interest on the Series B Notes is payable
either in cash or in additional Notes, at the option of
the Company, through August 1, 2000, and thereafter is
payable in cash. The Company expects to pay interest
through August 1, 2000 by issuing additional Notes, which
would increase the principal amount of the Notes to
approximately $60.2 million.
Interest Payment Date........... February 1 and August 1 of each year, commencing on August
1, 1998 (each an "Interest Payment Date").
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Ranking and Security............ The Series B Notes will be secured by a first priority
lien on and a security interest in substantially all of
the assets of the Company except for the Pledged Equipment
(as defined) which represent approximately 1.7% of the
total assets of the Company as of March 31, 1998, provided
that in the event that a security interest on the
Receivables (as defined) is granted to secure the Working
Capital Facility (as defined), the security interest on
the Receivables securing the Series B Notes will be a
second priority lien and security interest. The assets of
the Company that secure the obligations under the Notes
had a book value of approximately $47.0 million as of
March 31, 1998. See "Description of Notes-- Security." The
Series B Notes will rank PARI PASSU with any future senior
indebtedness of the Company and will rank senior to all
subordinated indebtedness of the Company. See "Description
of Notes--Ranking."
Optional Redemption............. The Company may not redeem the Series B Notes prior to
February 1, 2000. On and after such date, the Company may
redeem the Series B Notes, in whole or in part, at the
redemption prices set forth herein, together with accrued
and unpaid interest, if any, to the date of redemption.
See "Description of Notes-- Optional Redemption."
Change of Control............... Upon the occurrence of a Change of Control (as defined),
the Company will be required to make an offer to
repurchase the Series B Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus any
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes-- Optional
Redemption" and "Change of Control." There can be no
assurance that sufficient funds will be available if
necessary to make any required repurchases. See "Risk
Factors--Ability to Purchase Notes Upon a Change of
Control."
Restrictive Covenants........... The indenture under which the Series B Notes will be
issued (the "Indenture") contains certain covenants that,
among other things, will limit (i) the incurrence of
additional indebtedness by the Company and its
subsidiaries, (ii) the payment of dividends on, and
redemption of capital stock of the Company and the
redemption of certain subordinated obligations of the
Company, (iii) investments, (iv) sales of assets and
subsidiary stock, (v) transactions with affiliates and
(vi) consolidation, mergers and transfers of all or
substantially all the assets of the Company. The Indenture
also prohibits certain restrictions on distribution from
subsidiaries. However, all of these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Description of
Notes--Certain Covenants."
</TABLE>
For a more complete description of the Series B Notes, see "Description of
Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain risks to be considered by
holders who tender their Series A Notes in the Exchange Offer.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical financial data of the
Company for the three years ended December 31, 1997, which has been derived from
the Company's audited financial statements, and condensed unaudited historical
financial data. The historical financial data of the Company for the three
months ended March 31, 1997 and 1998 has been derived from the Company's
unaudited financial statements which, in the opinion of Management of the
Company, have been prepared on the same basis as the audited financial
statements and include all normal and recurring adjustments and accruals
necessary for a fair presentation of such information. The unaudited pro forma
data has been presented as if the Units Offering had been effected on January 1,
1997.
The information in this table should be read in conjunction with "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, -----------------------------------
-------------------------------------------------
HISTORICAL
HISTORICAL PRO FORMA (5) (UNAUDITED) PRO FORMA (5)
------------------------------- ---------------- -------------------- -------------
1995 1996 1997 1997 1997 1998 1998
--------- --------- --------- ---------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net Advertising revenues........ -- -- $ 1,205 $ 1,205 $ 13 $ 397 $ 397
Network equipment and
territorial rights sales(1)... -- $ 2,688 137 137 12 26 26
Network operating revenues...... -- 490 485 485 189 -- --
--------- --------- --------- -------- --------- --------- -------------
Total revenue(1)............ -- 3,178 1,827 1,827 214 423 423
Cost of network equipment
sales......................... -- 2,214 61 61 12 10 10
Network operating expenses(2)... -- 363 2,799 2,799 601 844 844
Selling expenses................ -- -- 1,757 1,757 266 957 957
General and administrative
expenses...................... $ 2,103 2,507 3,429 3,429 816 1,295 1,295
--------- --------- --------- -------- --------- --------- -------------
Operating loss............ (2,103) (1,906) (6,219) (6,219) (1,481) (2,683) (2,683)
Nonoperating income (expense):
Interest expense................ (240) (231) (281) (7,161) (65) (844) (1,995)
Interest income................. 9 82 113 113 37 263 263
Other expense................... -- -- (1) (1) -- -- --
--------- --------- --------- -------- --------- --------- -------------
Net loss.................. (2,334) (2,055) (6,388) (13,268) (1,509) (3,264) (4,415)
Preferred stock dividends....... 248 541 1,631 1,631 266 529 529
--------- --------- --------- -------- --------- --------- -------------
Net loss applicable to
common stockholders..... $ (2,582) $ (2,596) $ (8,019) $ (14,899) $ (1,775) $ (3,793) $ (4,944)
--------- --------- --------- -------- --------- --------- -------------
--------- --------- --------- -------- --------- --------- -------------
Net loss per common
share................... $ (11.20) $ (10.16) $ (30.12) $ (55.96) $ (6.67) $ (14.24) $ (18.57)
--------- --------- --------- -------- --------- --------- -------------
--------- --------- --------- -------- --------- --------- -------------
OTHER DATA (UNAUDITED):
EBITDA(3)....................... $ (1,911) $ (1,695) $ (5,506) $ (5,506) $ (1,359) $ (2,442) $ (2,442)
Cash flows from operating
activities.................... (1,656) (1,452) (4,652) (4,502) (1,342) (2,320) (2,300)
Cash flows from investing
activities.................... (91) (2,143) (1,388) (1,388) (564) (605) (605)
Cash flows from financing
activities.................... 1,986 7,023 5,008 45,333 (13) 40,530 (15)
Depreciation and amortization... 192 211 714 714 122 241 241
Capital expenditures............ 92 2,141 2,275 2,275 910 597 597
Ratio of deficiency of earnings
to cover fixed charges........ (2,334) (2,055) (6,388) (13,268) (1,509) (3,264) (4,415)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1998
-------------------
<S> <C>
HISTORICAL
(UNAUDITED)
-------------------
<CAPTION>
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(4)................................................................. $ 40,395
Working capital.............................................................................. 38,313
Total assets................................................................................. 47,821
Total long term debt and other obligations (including current maturities).................... 38,652(6)
Mandatory redeemable preferred stock......................................................... 15,033
Stockholders' deficit........................................................................ (8,183)(6)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
9
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
- ------------------------------
(1) The Company entered into territorial agreements with two separate unrelated
owner-operators in 1996. Each agreement granted exclusive territorial rights
to NGN within certain designated markets for a period of ten years. In the
aggregate, the Company received initial payments of approximately $2,688,000
for the purchase of hardware and exclusive territorial rights. The
agreements also provided for payments to the Company based on advertising
revenue and reimbursement of certain network operating expenses. In 1997,
the Company entered into repurchase agreements with both NGN owner-operators
whereby the Company repurchased the equipment originally sold in 1996 and
the owner-operators forfeited their territorial rights and options to
purchase the exclusive rights to certain additional designated NGN
territories. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Includes direct costs necessary to run the network (i.e. site agreement
expense, local phone cost, long distance and maintenance costs).
Approximately 4,900 sites are provided for under agreements with The
Southland Corporation and its franchisees ("Southland") and are subject to
minimum payments. The agreement provides that Southland will receive a
quarterly per store payment. Some portion of the payments to Southland are
accumulated and paid in January of each year.
(3) EBITDA represents income before interest, income taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance as it is commonly used in the out-of-home advertising industry
to analyze and compare out-of-home advertising companies on the basis of
operating performance, leverage and liquidity. EBITDA should not be
considered in isolation from or as a substitute for net income, cash flows
from operating activities or other consolidated income or cash flows
statement data prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity.
(4) For the purposes of reporting cash flows, the Company considers any Treasury
bills, commercial paper, certificates of deposit and money market funds with
a maturity of three months or less to be cash equivalents.
(5) Gives effect to the pro forma adjustments related to the Units Offering and
the application of the net proceeds therefrom as if the Units Offering had
occurred as of January 1, 1997. Pro forma adjustments relative to the 1997
statement of operations data are comprised of: a) $7,030,000 of additional
interest expense representing one year's interest on the Senior Secured PIK
Notes, amortization of the note discount resulting from the proceeds
ascribed to the Warrants and amortization of estimated debt issuance costs,
to effect a level interest rate over the recorded balance of the notes and
b) a $150,000 reduction of interest expense resulting from a note payable to
shareholder repaid with proceeds of the "Units Offering". Pro forma
adjustments relative to the 1997 cash flows data are comprised of: a)
$45,000,000 gross proceeds of the "Units Offering", b) payment of an
estimated $2,800,000 of fees and expenses of "Units Offering"; c) repayment
of $1,875,000 note payable to shareholder using proceeds of "Units
Offering"; and d) reduction of interest expense of $150,000 applicable to
the shareholder note repaid. Pro forma adjustments relative to the statement
of operations data for the three months ended March 31, 1998 are comprised
of: a) $1,171,000 of additional interest expense necessary to reflect a full
three months interest on the Senior Secured PIK Notes, amortization of note
discount and amortization of estimated debt issuance costs and b) a $20,000
reduction of interest expense necessary to remove all interest on the
shareholder note repaid with "Units Offering" proceeds. Pro forma
adjustments relative to the cash flows data for the three months ended March
31, 1998 are comprised of removal of: a) $45,000,000 of gross proceeds of
the "Units Offering"; b) $2,580,000 of "Units Offering" fees and expenses
paid; c) repayment of note payable to shareholder of $1,875,000; and d)
$20,000 of interest expense on the shareholder note payable.
(6) Total debt reported with respect to the Notes is net of the value ascribed
to the Warrants which is recorded as additional paid-in capital. The value
ascribed to the Warrants is $7.7 million.
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<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE SERIES B NOTES SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, BEFORE MAKING AN INVESTMENT IN THE SERIES B NOTES.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged and substantially all its assets are subject
to security interests securing the Series A Notes (and, upon consummation of the
Exchange Offer, the Series B Notes). The Company had total indebtedness at March
31, 1998 of approximately $38.7 million (for reporting under GAAP, total debt
reported is net of the value ascribed to the Warrants of approximately $7.7
million which is recorded as additional paid-in capital). See "Summary
Historical and Pro Forma Financial Data," "Capitalization" and the Financial
Statements.
The degree to which the Company is leveraged, together with the covenants
imposed by the Indenture, could have adverse consequences to holders of the
Series B Notes, including the following: (i) substantial cash flow from the
Company's operations will be required for the payment of principal and interest
on its indebtedness and will not be available for other purposes; (ii) the
Company's ability to obtain additional financing in the future, whether for
acquisitions, capital expenditures, further expansion of its network of NGN
Displays, refinancings or otherwise, may be impaired; (iii) the Company may be
more leveraged than certain of its competitors, which may place it at a
competitive disadvantage; (iv) the Indenture will impose significant financial
and operating restrictions; and (v) the Company's high degree of leverage makes
it more vulnerable to changes in economic conditions and may limit its ability
to withstand competitive pressures and technological developments, consummate
acquisitions and capitalize on significant business opportunities.
The Company will require substantial cash flow to meet its interest payment
obligations with respect to the Series B Notes and any other borrowings. The
Company's cash flow is dependent on the Company's future performance and is
subject to financial, economic and other factors, some of which are beyond its
control. If the Company is unable to generate such cash flow from operations or
otherwise to satisfy its interest obligations on the Series B Notes and other
indebtedness, it may be required to refinance all or a portion of such
obligations or to sell assets. The Company expects that any payment of the
principal of any of the Series B Notes or any other borrowings, whether upon
maturity, acceleration, redemption or other repurchase obligation, such as a
change of control, may have to be refinanced in whole or in part or financed by
the sale of assets or similar transactions. The Indenture contains restrictions
on the Company's ability to incur additional indebtedness and to sell assets
and, notwithstanding such restrictions, the Company may not be able to effect a
refinancing or sell assets on acceptable terms when needed.
INSUFFICIENT COLLATERAL
The Company expects to pay interest through August 1, 2000 by issuing
additional Notes, which would increase the principal amount of the Notes to
approximately $60.2 million. The proceeds of any sale of the Collateral (as
defined in the Indenture) following an event of default under the Indenture
would most likely not be sufficient to repay the Series B Notes in full. The
tangible assets comprising the Collateral, which, as of March 31, 1998, had a
book value of approximately $47.0 million, will consist primarily of cash and
cash equivalents, NGN Displays, computer and other equipment and Receivables.
Under the Indenture, the security interests relating to Receivables of the
Company will be subordinated to the security interest of any senior lender
providing a Working Capital Facility to the Company. If a bankruptcy proceeding
were to be commenced by or against the Company and the bankruptcy court were to
conclude that the Series B Notes were inadequately secured, the holders of the
Series B Notes would have only an unsecured deficiency claim to the extent of
such inadequacy and would not be entitled to post-petition interest. Any
deficiency claim (whether or not in a bankruptcy proceeding involving the
Company) of the holders of the Series B Notes would rank PARI PASSU with any
deficiency claims of all other general unsecured creditors. In addition, the
ability of the holders of the Series B Notes to effect a sale of the
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<PAGE>
Collateral may be subject to certain bankruptcy limitations in the event of a
bankruptcy proceeding involving the Company.
RESTRICTIONS IMPOSED BY TERMS OF THE INDEBTEDNESS
The terms and conditions of the Indenture impose restrictions that affect
the ability of the Company, among other things, to incur debt, make
distributions, make acquisitions, create liens and make capital expenditures.
See "Description of Notes." The restrictive covenants contained in the
Indenture, as well as the highly leveraged position of the Company, could
significantly limit the Company's ability to respond to changing business or
economic conditions or to substantial declines in operating results. The ability
of the Company to comply with the provisions applicable to it in the Indenture
can be affected by events beyond its control.
LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. To date, the Company has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company had an accumulated deficit of $22,261,851 at March 31,
1998, representing the effect of losses incurred since its inception. The
Company expects to incur substantial additional costs to install additional NGN
Displays and for operating costs to expand NGN. The Company expects to incur net
losses for the remainder of 1998 and expects to operate at a loss for the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Advertising Sales and
Marketing" and "--NGN Display Sites."
ABILITY TO INCREASE ADVERTISING REVENUE
All or substantially all of the Company's revenue for the foreseeable future
is expected to be derived from the sale of advertising on NGN. To date, the
Company has not achieved sufficient revenue from this source to achieve overall
profitability. Accordingly, the success of the Company is dependent on its
efforts to increase advertising sales. The Company believes it can address this
issue by emphasizing the inherent flexibility of its centrally controlled
display monitor network, its demographically desirable sites and geographically
targeted advertising and directing sales efforts through its seven existing and
additional planned local and national sales offices. In addition, the Company
plans to open local and national sales offices in major media centers in order
to obtain geographically targeted advertising from major national accounts and
increasing amounts of national advertising as NGN grows. See
"Business--Advertising Sales and Marketing." However, there can be no assurance
that the Company will be successful in its sales efforts.
Because the utility and the ultimate attractiveness of NGN to advertisers is
in large part dependent on the ability to offer advertising in a wide array of
local and regional as well as national markets, the size of the Company's
installed display base significantly affects its revenue generation potential.
The Company's profitability and the success of its growth plans will be
significantly affected by its ability to contract with additional high traffic
public locations for the installation of NGN Displays and to install NGN
Displays in such locations in a rapid and orderly manner. While the Company has
contractual commitments for approximately an additional 5,700 sites, there can
be no assurance that site operators who currently or in the future have NGN
Displays installed will retain them at their sites beyond the expiration of
existing agreements or that the Company will be able to continue to increase the
number of sites in which NGN Displays are installed or for which commitments
have been made.
MANAGEMENT OF GROWTH; EARLY STAGE PRODUCTS AND SERVICES; ACCELERATED
INSTALLATION
The Company's anticipated rapid growth is expected to place significant
pressure on the Company's managerial, operational and financial systems. To
manage its growth, the Company must continue to strengthen its management team,
implement and improve its operational and financial systems and
12
<PAGE>
expand, train and manage its employee base. The Company also will be required to
develop and manage multiple relationships with site operators, advertisers,
suppliers and other third parties. The Company's systems, procedures or controls
may not be adequate to support the Company's operations and the Company may not
be able to achieve the rapid expansion necessary to exploit potential market
opportunities for NGN. The Company's future operating results will also depend
on its ability to expand its sales and marketing organization, to penetrate
markets and to expand its support organization. The failure to manage growth
effectively could create a negative image of the Company in the advertising
industry and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Although it has been implemented at the Company's approximately 1,800
existing sites in commercial environments, NGN is subject to the risks inherent
in the large scale commercialization of new products and services. The Company
relies largely on third party contractors for the installation and maintenance
of NGN Displays. No assurance can be given that such third party contractors
will be able to continue to accommodate the Company's growth as NGN Displays are
installed on a greater scale. As the Company continues to install NGN Displays
on a greater scale, there could be unforeseen technical implementation problems,
some of which may be material. The occurrence of difficulties in installing and
operating a large number of NGN Displays could have a material adverse effect on
the Company's business, financial condition and results of operations.
NEW METHOD
Although out-of-home advertising is over 125 years old, NGN is a relatively
new method of providing out-of-home advertising and, as is typical in the case
of a new product or method, the ultimate level of demand for and continued
market acceptance of NGN as an advertising medium is uncertain. There can be no
assurance that NGN will achieve market acceptance from advertisers or that the
Company will be able to meet its current marketing objectives or that it will be
able to enter into site agreements for new sites.
DEPENDENCE ON ADVERTISING REVENUES
The Company's ability to generate revenues is dependent on its sale of
advertising on NGN, and is expected to be so concentrated for the foreseeable
future, thereby making the Company susceptible to a downturn in the advertising
industry. Factors affecting the advertising industry generally could also have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The competition for advertising dollars is intense. NGN competes against
other media outlets, such as television, radio, newspapers and, most directly,
other out-of-home advertising such as billboards. A number of new out-of-home
advertising vehicles and services also have been introduced, and it is likely
that other new out-of-home advertising will be developed. A number of potential
competitors have failed because of a lack of acceptance, lack of capital,
technical problems or a combination of these factors. While the Company believes
it provides a cost-effective targeted advertising medium, there are many factors
an advertiser will take into account in allocating advertising expenditures, and
there can be no assurance that the Company will compete effectively against
alternative media. Many of the Company's competitors in the media business are
larger, possess significantly greater financial resources and have longer
operating histories than the Company. See "Business--Competition."
DEPENDENCE ON KEY AGREEMENT
The Company is highly dependent on its contract (the "Southland Contract")
with The Southland Corporation and its franchisees ("Southland"), which as of
March 31, 1998 covered 1,452 of the approximately 1,800 installed NGN Displays
and 3,414 of the approximately 5,700 additional installation sites for
13
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which the Company has site agreements (representing, in the aggregate,
approximately 65% of the sites currently covered by site agreements). The
Southland Contract expires on January 1, 2004. Although there is no obligation
to renew, extend or enter into a new agreement, the Southland Contract provides
that Southland and the Company will negotiate in good faith to renew or extend
the Southland Contract for at least 5 years. Under the Southland Contract, if
Southland desires to enter into an agreement with a provider of services
competitive with the Company, the Company has a right to match the competitor's
terms for a substantially similiar product. Southland may terminate the
Southland Contract in the event the Company materially breaches its obligations
and fails to cure such breach within 30 days of receiving notice thereof, or if
minimum installations are not completed by June 30, 2000. Either the non-renewal
of the Southland Contract or any difficulty that might arise in the Company's
relationship with Southland would have a material adverse affect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTIES
The expected growth of NGN makes the success of the Company and its business
dependent on, among other things, the work of third parties. The Company will,
therefore, be dependent upon its ability to maintain suitable arrangements with
third parties, and the failure of third parties to perform could have a material
adverse effect on the Company's business, financial condition or results of
operations.
All NGN Displays are assembled and tested by a third party contractor
utilizing component parts that are readily available from a number of suppliers.
The Company does not presently intend to contract for assembly and testing of
NGN Displays from alternative third party suppliers. The Company does not have
any formal long-term agreement with such third party contractor. Therefore, the
contractor is not obligated to assemble NGN Displays as required by the Company
for any specific time period, or otherwise, except as may be provided in a
particular purchase order that has been accepted by the contractor. The
contractor may choose to prioritize production for other customers or cease
production for the Company's NGN Displays on short notice. The Company is also
dependent on a single independent contractor for the nationwide installation and
maintenance of all of its NGN Displays. The Company's reliance on outside
sources expose it to certain risks. Risks inherent in the use of such outside
sources may include the transportation of finished products from the outside
source, destruction, damage, loss or theft at the outside source's facilities,
delays in delivery of ordered parts, bankruptcy and other financial problems of
the outside source, and potential misappropriation of proprietary intellectual
property. The ability of the Company to realize increased revenue from
advertising sales is dependent on the success of the Company's plan to
accelerate installation of its NGN Displays at sites where the Company has or
will secure contractual commitments. Failure of the Company through its outside
sources to sustain production and satisfy demand for the installation and
maintenance of finished NGN Displays would have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company does not hold any patents which cover any aspect of its systems
and methods. The Company believes that its early entrance into electronic
out-of-home advertising provides an advantage over later market entrants.
However, it is possible that certain aspects of the Company's software may not
be adequately protected from infringement or copying. Further, there can be no
assurance that competitors might not develop similar or superior hardware or
software outside the protection of any patents that the Company may obtain in
the future.
DEPENDENCE ON MANAGEMENT
The Company is highly dependent on certain of its key executive and
technical employees and on its ability to recruit, retain and motivate high
quality executive, sales and technical personnel. Competition for such personnel
is intense, and the inability to attract and retain additional qualified
employees or the loss
14
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of current key employees could materially and adversely affect the Company's
business, operating results and financial condition. See "Management."
POSSIBILITY OF CHANGE IN CONTROL
Gerard P. Joyce and Thomas M. Pugliese, the Chairman of the Board of
Directors and President, and the Vice Chairman of the Board of Directors and
Chief Executive Officer, of the Company, respectively, together beneficially own
approximately 78.3% of the Company's outstanding Common Stock and, accordingly,
are effectively in control of the election of a majority of the Company's Board
of Directors and thereby control the Company. The Company's policies to date
have been implemented under the direction and management of such individuals.
The Company has outstanding shares of currently convertible Preferred Stock and
Warrants which, if converted or exercised, could effectively remove control of
the Company from such individuals. Specifically, if the persons and entities
other than Messrs. Joyce and Pugliese listed in the "Principal Stockholders"
table appearing elsewhere herein were to convert or exercise their preferred
stock and warrants, such persons and entities would own in the aggregate a
majority of the Company's outstanding Common Stock and thereby have the ability
to reconstitute the Company's Board of Directors.
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company could be required to
make an offer to purchase all outstanding Notes at a purchase price in cash
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing or be permitted under
the terms of other indebtedness arrangements, to pay the purchase price for all
Notes tendered by holders thereof.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF SERIES B NOTES
Prior to the Exchange Offer, there has not been any public market for the
Series A Notes. The Series A Notes have not been registered under the Securities
Act and will be subject to restrictions on transferability to the extent that
they are not exchanged for Series B Notes by holders who are entitled to
participate in this Exchange Offer. The holders of Series A Notes (other than
any such holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) who are not eligible to participate in the
Exchange Offer are entitled to certain registration rights, and the Company is
required to file a Shelf Registration Statement with respect to such Series A
Notes. The Series B Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Series B
Notes on any securities exchange or to seek their admission to trading in any
automated quotation system. The Initial Purchaser has advised the Company that
it currently intends to make a market in the Series B Notes, but is not
obligated to do so and may discontinue such market making at any time without
notice. In addition, such market making activity will be subject to the limits
imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and may be limited during the Exchange Offer and
the pendency of any Shelf Registration Statement. Accordingly, no assurance can
be given that an active public or other market will develop for the Series B
Notes or as to the liquidity of the trading market for the Series B Notes. If a
trading market does not develop or is not maintained, holders of the Series B
Notes may experience difficulty in reselling the Series B Notes or may be unable
to sell them at all. If a market for the Series B Notes develops, any such
market may be discontinued at any time.
If a public trading market develops for the Series B Notes, future trading
prices of the Series B Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Depending on prevailing interest rates, the
market
15
<PAGE>
for similar securities and other factors, including the financial condition of
the Company, the Series B Notes may trade at a discount from their principal
amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Series B Notes in exchange for the Series A Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Series A Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Series A
Notes desiring to tender such Series A Notes in exchange for Series B Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to the
tenders of Series A Notes for exchange. Series A Notes that are not tendered or
are tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer thereof
and, upon consummation of the Exchange Offer, certain registration rights under
the Registration Rights Agreement will terminate. In addition, any holder of
Series A Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Series B Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each holder of the Series A Notes
(other than certain specified holders) who wishes to exchange the Series A Notes
for Series B Notes in the Exchange Offer will be required to represent in the
Letter of Transmittal that (i) it is not an Affiliate of the Company, (ii) the
Series B Notes to be received by it are being acquired in the ordinary course of
its business and (iii) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Series B Notes and (iv) it is not acting
on behalf of any person who could not truthfully make the foregoing
representations. Each Participating Broker-Dealer that receives Series B Notes
for its own account in exchange for Series A Notes, where such Series A Notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Notes. See "Plan of
Distribution." To the extent that Series A Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Series A Notes could be adversely affected. See "The Exchange Offer."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the exchange and issuance of the Series B Notes
in the Exchange Offer. The net proceeds from the issuance of the Units were
approximately $40.3 million after deducting fees and expenses of approximately
$2.8 million payable by the Company and the repayment of outstanding secured
indebtedness in the amount of approximately $1.9 million to Gerard P. Joyce, the
Company's Chairman of the Board of Directors and President. Of the net proceeds
of the Units Offering, the Company intends to use approximately (i) $17.4
million to fund capital expenditures relating to NGN Displays, (ii) $2.5 million
for corporate capital expenditures, (iii) $7.5 million to fund operating
expenses and (iv) the remaining $12.9 million for working capital and general
corporate purposes.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 the unaudited historical
capitalization of the Company. This table should be read in conjunction with the
Financial Statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
<S> <C>
HISTORICAL
(UNAUDITED)
---------------
Current maturities of long-term debt, including capital leases................................... $ 38,945
Long-term debt, including capital leases, less current maturities................................ 1,174,013
12% Senior Secured PIK Notes due 2003............................................................ 37,438,678(1)
---------------
Total Debt................................................................................... 38,651,636
---------------
Mandatory Redeemable Preferred Stock:
14.8% Series B, non-voting; 91,100 shares authorized; 91,059 shares issued and outstanding;
stated at liquidation value, plus accrued dividends.......................................... 8,737,549
14.8% Series C, non-voting; 90,000 shares authorized; 75,540 shares issued and outstanding;
stated at liquidation value, plus accrued dividends.......................................... 6,295,868
---------------
Total Mandatory Redeemable Preferred Stock 15,033,417
---------------
Stockholders' Deficit:
8.25% Series A Cumulative Preferred Stock, non-voting; 20,000 shares authorized; 6,000 shares
issued and outstanding; stated at liquidation value.......................................... 3,000,000
Common Stock, $.01 par value; 1,000,000 shares authorized; 266,268 shares issued and
outstanding.................................................................................. 2,663
Additional paid-in capital..................................................................... 11,076,212(2)
Accumulated deficit............................................................................ (22,261,851)
---------------
Total stockholders' deficit.................................................................... (8,182,976)
---------------
Total capitalization............................................................................. $ 45,502,077
---------------
---------------
</TABLE>
- ------------------------
(1) Through August 1, 2000, interest is payable in either cash or by issuing
additional Notes. The Company expects to pay interest through August 1, 2000
by issuing additional Notes, which would increase the principal amount of
the Notes to approximately $60.2 million. For reporting under GAAP, total
debt is net of the value ascribed to the Warrants of approximately $7.7
million which is reflected as additional paid-in capital. The Company is, in
turn, increasing this Note balance for the interest amortization of the
discount attributable to the Warrants.
(2) For reporting under GAAP, additional paid-in capital was increased by $7.7
million which is the value ascribed to the Warrants. The Warrant value was
determined based on the total estimated potential market capitalization of
the Company's Common Stock, on a fully diluted basis before Warrant
issuance, using an estimated per share value of $77 per share and the
percentage of such value that the Warrants represent if exercised.
17
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company for the five years ended December 31, 1997, which has been derived from
the Company's audited financial statements, and condensed unaudited historical
financial data. The historical financial data of the Company for the three
months ended March 31, 1997 and 1998 has been derived from the Company's
unaudited financial statements which, in the opinion of Management of the
Company, have been prepared on the same basis as the audited financial
statements and includes all normal and recurring adjustments and accruals
necessary for a fair presentation of such information. The unaudited pro forma
data has been presented as if the Units Offering had been effected on January 1,
1997.
The information in this table should be read in conjunction with the
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The Company has not paid dividends on its capital stock during any of
the periods presented below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
-------------
YEAR ENDED DECEMBER 31, HISTORICAL
------------------------------------------------------------------ -------------
PRO
HISTORICAL FORMA(5) (UNAUDITED)
----------------------------------------------------- ----------- -------------
1993 1994 1995 1996 1997 1997 1997
--------- --------- --------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net advertising revenues............. -- -- -- -- $ 1,205 $ 1,205 $ 13
Network equipment and territorial
rights sales(1).................... -- -- -- $ 2,688 137 137 12
Network operating revenues........... -- -- -- 490 485 485 189
--------- --------- --------- --------- --------- ----------- -------------
Total revenue(1)............... -- -- -- 3,178 1,827 1,827 214
Cost of network equipment sales...... -- -- -- 2,214 61 61 12
Network operating expenses(2)........ -- -- -- 363 2,799 2,799 601
Selling expenses..................... -- -- -- -- 1,757 1,757 266
General and administrative
expenses........................... $ 1,650 $ 1,957 $ 2,103 2,507 3,429 3,429 816
--------- --------- --------- --------- --------- ----------- -------------
Operating loss................. (1,650) (1,957) (2,103) (1,906) (6,219) (6,219) (1,481)
Nonoperating income (expense):.......
Interest expense..................... (145) (191) (240) (231) (281) (7,161) (65)
Interest income...................... 3 5 9 82 113 113 37
Other income (expense)............... -- -- -- -- (1) (1) --
--------- --------- --------- --------- --------- ----------- -------------
Net loss....................... (1,792) (2,143) (2,334) (2,055) (6,388) (13,268) (1,509)
Preferred stock dividends............ 248 248 248 541 1,631 1,631 266
--------- --------- --------- --------- --------- ----------- -------------
Net loss applicable to common
stockholders....................... $ (2,040) $ (2,391) $ (2,582) $ (2,596) $ (8,019) $ (14,899) $ (1,775)
--------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- ----------- -------------
Net loss per common share............ $ (10.56) $ (11.27) $ (11.20) $ (10.16) $ (30.12) $ (55.96) $ (6.67)
--------- --------- --------- --------- --------- ----------- -------------
--------- --------- --------- --------- --------- ----------- -------------
OTHER DATA (UNAUDITED):
EBITDA(3)............................ $ (1,449) $ (1,744) $ (1,911) $ (1,695) $ (5,506) $ (5,506) $ (1,359)
Cash flows from operating
activities......................... (1,388) (1,272) (1,656) (1,452) (4,652) (4,502) (1,342)
Cash flows from investing
activities......................... (94) (42) (91) (2,143) (1,388) (1,388) (564)
Cash flows from financing
activities......................... 1,624 1,224 1,986 7,023 5,008 45,333 (13)
Depreciation and amortization........ 201 213 192 211 714 714 122
Capital expenditures................. 94 43 92 2,141 2,275 2,275 910
Ratio of deficiency of earnings to
cover fixed charges................ (1,792) (2,143) (2,334) (2,055) (6,388) (13,268) (1,509)
BALANCE SHEET DATA (AS OF END OF
YEAR):
Cash and cash equivalents(4)......... $ 244 $ 155 $ 393 $ 3,821 $ 2,789
Working capital (deficit)............ (407) (3,260) 3,245 3,202 1,261
Total assets......................... 929 614 1,303 6,399 7,536
Total long term debt and other
obligations (including current
maturities)........................ 2,390 17 107 2,506 3,064
Mandatory redeemable preferred
stock.............................. -- -- -- 7,305 14,487
Stockholders' deficit................ (2,220) (2,858) (2,901) (4,141) (12,090)
<CAPTION>
PROFORMA(5)
-------------
1998 1998
----------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net advertising revenues............. $ 397 $ 397
Network equipment and territorial
rights sales(1).................... 26 26
Network operating revenues........... -- --
----------- -------------
Total revenue(1)............... 423 423
Cost of network equipment sales...... 10 10
Network operating expenses(2)........ 844 844
Selling expenses..................... 957 957
General and administrative
expenses........................... 1,295 1,295
----------- -------------
Operating loss................. (2,683) (2,683)
Nonoperating income (expense):.......
Interest expense..................... (844) (1,995)
Interest income...................... 263 263
Other income (expense)............... -- --
----------- -------------
Net loss....................... (3,264) (4,415)
Preferred stock dividends............ 529 529
----------- -------------
Net loss applicable to common
stockholders....................... $ (3,793) $ (4,944)
----------- -------------
----------- -------------
Net loss per common share............ $ (14.24) $ (18.57)
----------- -------------
----------- -------------
OTHER DATA (UNAUDITED):
EBITDA(3)............................ $ (2,442) $ (2,442)
Cash flows from operating
activities......................... (2,320) (2,300)
Cash flows from investing
activities......................... (605) (605)
Cash flows from financing
activities......................... 40,530 (15)
Depreciation and amortization........ 241 241
Capital expenditures................. 597 597
Ratio of deficiency of earnings to
cover fixed charges................ (3,264) (4,415)
BALANCE SHEET DATA (AS OF END OF
YEAR):
Cash and cash equivalents(4)......... $ 40,395
Working capital (deficit)............ 38,313
Total assets......................... 47,821
Total long term debt and other
obligations (including current
maturities)........................ 38,652(6)
Mandatory redeemable preferred
stock.............................. 15,033
Stockholders' deficit................ (8,183)
</TABLE>
18
<PAGE>
- ------------------------
(1) The Company entered into territorial agreements with two separate unrelated
owner-operators in 1996. Each agreement granted exclusive territorial rights
to NGN within certain designated markets for a period of ten years. In the
aggregate, the Company received initial payments of approximately $2,688,000
for the purchase of hardware and exclusive territorial rights. The
agreements also provided for payment to the Company based on advertising
revenue and reimbursement of certain network operating expenses. In 1997,
the Company entered into repurchase agreements with both NGN owner-operators
whereby the Company repurchased the equipment originally sold in 1996 and
the owner-operators forfeited their territorial rights and options to
purchase the exclusive rights to certain additional designated NGN
territories. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Includes direct costs necessary to run the network (i.e. site agreement
expense, local phone cost, long distance and maintenance costs).
Approximately 4,900 sites are provided for under agreements with The
Southland Corporation and its franchisees ("Southland") and are subject to
minimum payments. The agreement provides that Southland will receive a
quarterly per store payment. Some portion of the payments to Southland are
accumulated and paid in January of each year.
(3) EBITDA represents income before interest, income taxes, depreciation and
amortization. The Company believes that EBITDA is a meaningful measure of
performance as it is commonly used in the out-of-home advertising industry
to analyze and compare out-of-home advertising companies on the basis of
operating performance, leverage and liquidity. EBITDA should not be
considered in isolation from or as a substitute for net income, cash flows
from operating activities or other consolidated income or cash flows
statement data prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity.
(4) For the purposes of reporting cash flows, the Company considers any Treasury
bills, commercial paper, certificates of deposit and money market funds with
a maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
(5) Gives effect to the pro forma adjustments related to the Units Offering and
the application of the net proceeds therefrom as if the Units Offering had
occurred as of January 1, 1997. Pro forma adjustments relative to the 1997
statement of operations data are comprised of: a) $7,030,000 of additional
interest expense representing one year's interest on the Senior Secured PIK
Notes, amortization of the note discount resulting from the proceeds
ascribed to the Warrants and amortization of estimated debt issuance costs,
to effect a level interest rate over the recorded balance of the notes and
b) a $150,000 reduction of interest expense resulting from a note payable to
shareholder repaid with proceeds of the "Units Offering". Pro forma
adjustments relative to the 1997 cash flows data are comprised of: a)
$45,000,000 gross proceeds of the "Units Offering", b) payment of an
estimated $2,800,000 of fees and expenses of "Units Offering"; c) repayment
of $1,875,000 note payable to shareholder using proceeds of "Units
Offering"; and d) reduction of interest expense of $150,000 applicable to
the shareholder note repaid. Pro forma adjustments relative to the statement
of operations data for the three months ended March 31, 1998 are comprised
of: a) $1,171,000 of additional interest expense necessary to reflect a full
three months interest on the Senior Secured PIK Notes, amortization of note
discount and amortization of estimated debt issuance costs and b) a $20,000
reduction of interest expense necessary to remove all interest on the
shareholder note repaid with "Units Offering" proceeds. Pro forma
adjustments relative to the cash flows data for the three months ended March
31, 1998 are comprised of removal of: a) $45,000,000 of gross proceeds of
the "Units Offering"; b) $2,580,000 of "Units Offering" fees and expenses
paid; c) repayment of note payable to shareholder of $1,875,000; and d)
$20,000 of interest expense on the shareholder note payable.
(6) Total debt reported with respect to the Notes is net of the value ascribed
to the Warrants which is recorded as additional paid-in capital. The value
ascribed to the Warrants is $7.7 million.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Financial Statements included in this
Prospectus.
OVERVIEW
The Company was founded in 1990 and thereafter focused its efforts, among
other things, on the development of NGN by developing and improving the NGN
technology. At the same time, the Company concentrated its efforts on securing
site agreements for the placement of NGN Displays as well as recruiting local
sales personnel and opening local sales offices in its initially developed DMAs.
The operating revenues of the Company presently are derived from the sale of
advertising on NGN. The Company's primary operating expenses are for NGN Display
operating costs and employee compensation. Advertising rates are based upon the
availability of space on the network for the location targeted by the
advertiser, the size and demographic makeup of the market served by the NGN
Displays and the availability of alternative advertising media in the market
area. Most advertising contracts are short-term, and generally run for only a
few weeks. Most of the Company's annual gross revenues are generated from local
advertising, and the remainder represents national advertising, both of which
primarily are sold directly by the Company's own sales personnel.
In 1996, the Company generated its initial revenues primarily from two
sources: (1) sales of NGN Displays and its rights under exclusive site
agreements within defined territories not then targeted by the Company; and (2)
royalties on advertising sales and network operating revenues in owner-operator
markets. At the same time, the Company continued to concentrate its efforts on
sales of advertising and establishing site agreements for its own NGN Displays.
The purpose of the sale of territorial rights to third parties was to generate
immediate cash to enable the Company to expand its own network and increase
marketing efforts for the sale of advertising in its targeted markets.
Approximately 85% of the Company's 1996 revenues were generated from network
equipment and territorial rights sales to two network owner-operators. Effective
in January and August 1997, the Company entered into agreements with these
owner-operators whereby the Company repurchased the equipment on terms that the
Company considered favorable. In addition, through this process the
owner-operators forfeited the territorial rights. The owner-operators were
disappointed in the level of sales they had attained and during 1997 both
expressed an interest in terminating the owner-operator agreements. The Company
believes that the results were below expectations because the owner-operators
had an insufficient number of employees dedicated to sales of advertising on NGN
Displays and since NGN was only a small part of the owner-operators' businesses.
The Company repurchased the assets not only because of the favorable purchase
terms but management's belief that operating results could be substantially
improved. The Company has opened 4 sales offices in former owner-operator
territories and plans to staff the offices with an aggregate of approximately 30
employees. In addition, the Company has established a corporate marketing
department and has developed advertising and promotional materials that were not
available to the owner-operators. See Note 7 of Notes to Financial Statements.
In 1997, the scope of the Company's business shifted from sales of network
equipment and territorial rights to sales of advertising on the Company's own
NGN installations.
20
<PAGE>
The following table presents the number of NGN installations in their
respective markets as of December 31, 1996 and 1997 and March 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 MARCH 31, 1998
--------- --------- ---------------
<S> <C> <C> <C>
Market:
Washington, D.C.............................................. 183 502 505
Dallas-Ft. Worth, TX......................................... 47 226 226
Tampa-Clearwater-St. Petersburg, FL.......................... 135 136 135
Miami, FL.................................................... 90 87 86
Orlando, FL.................................................. 220 233 238
Baltimore, MD................................................ 111 208 204
Norfolk, VA.................................................. 244 239 237
West Palm Beach, FL.......................................... 65 63 63
Ft. Meyers, FL............................................... 40 43 45
Other........................................................ 4 32 36
--------- --------- ------
Total.................................................... 1,139 1,769 1,775
</TABLE>
As of December 31, 1996, 798 NGN Displays in the aforementioned table
represented owner operator installations, and 341 were Company owned. As of
March 31, 1998, 1,741 installed NGN Displays were Company owned, and the
remainder represent NGN Displays purchased by site owners and operated by the
Company as part of the NGN network.
The Company's ability to generate revenues is highly dependent on its
contract with Southland, whose stores account for approximately 82% of currently
installed NGN Displays and approximately 65% of total installed and future sites
currently covered by site agreements. This contract expires in 2004.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenues for the three months ended March 31, 1998 were $423,000, an
increase of $209,000, or 98%, compared to $214,000 for the three months ended
March 31, 1997. The increase is attributable to the shift in the Company's
business from owner-operator network operating fees to sales of advertising on
the Company's own NGN installations and the opening of local sales offices.
Three sales offices were opened during the first quarter of 1997 and an
additional office was opened in late 1997. Three offices were opened in former
owner-operator markets during the first quarter of 1998. However, advertising
revenues from these markets were minimal since efforts were concentrated on
staff hiring and training. During the first quarter of 1997, the Company
realized the first net advertising revenues from Company owned installations of
approximately $13,000 and had network operating revenues and equipment sales of
approximately $201,000. Advertising revenues increased to $397,000 during the
first quarter of 1998 while network operating revenues were minimal due to the
termination of owner-operator agreements as discussed above. For the three
months ended March 31, 1998, the Company had equipment sales and network
operating revenues from site owners of $26,000. Barter revenue was $85,000
during such period and is included in advertising revenue.
Costs and expenses for the three months ended March 31, 1998 were $3.1
million, an increase of $1.4 million, or 83%, compared to $1.7 million for the
three months ended March 31, 1997. Network operating expenses increased $243,000
due to the increase in both the number of NGN Display installations and
equivalent months in operation. Major components of network operating expenses
include local telephone service, telephone long distance, depreciation,
maintenance and site lease expense related to the NGN Displays. Site leases
generally provide the site operator with a percentage of the advertising
revenues derived by the Company from the NGN Display at the particular site. The
Company accrues monthly site lease expenses, which are the computed amount based
on a percentage of revenues or, where applicable,
21
<PAGE>
the appropriate portion of an annual minimum. Accordingly, such expenses as a
percentage of advertising revenues will continue to decrease as the Company's
advertising revenues increase.
Site lease expense incurred in connection with site lease agreements
increased to $367,000 in the first quarter of 1998 compared to $186,000 during
the same period of 1997. The increase was due primarily to the repurchase of
equipment in former owner-operator markets in August, 1997, and to a lesser
extent, additional NGN installations. Site lease expense was recorded net of
reimbursement from owner-operators so the Company expense increased when the
owner-operators forfeited their territorial rights.
Maintenance expense related to NGN displays decreased to $52,000 during the
first quarter of 1998 compared to $95,000 during the comparable period in 1997.
The 1997 expenses included a one time charge of $65,000 to relocate NGN Displays
to better locations within certain stores after the initial installation.
Excluding the relocation charge, maintenance expense increased due to the
increase in Company owned NGN Displays in service during the period. Currently,
network operating expenses exceed advertising revenues due to the Company's
limited operating history.
Selling expenses increased to $957,000 during the first quarter of 1998
compared to $266,000 during the comparable period of 1997 as a result of the
addition of sales staff and the opening of additional regional sales offices as
noted above. General and administrative expenses increased approximately
$480,000 for the first quarter of 1998 due to the additional administrative
staff in computer operations, graphic creation and accounting which were added
to support the sales offices and increased advertising revenues as well as
marketing efforts such as printing expenses related to promotional material,
market research, sales promotion, and public relations expenses. Major
components of general and administrative expense include compensation, rent,
professional fees, depreciation, travel, and printing and marketing expenses.
Research and development costs decreased to $80,000 for the first quarter of
1998, compared to $120,000 for the same period in 1997, primarily due to
reductions in software consulting fees.
Interest expense for the three months ended March 31, 1998 was $844,000
compared to $65,000 for the same period in 1997 due to the issuance of $45.0
million of Notes and Warrants in the Unit Offering completed in February 1998.
Interest income increased from $37,000 in the first quarter of 1997 to $263,000
in the same period in 1998 due to investing the unused proceeds from the Unit
Offering.
The net loss for the three months ended March 31, 1998 increased to $3.3
million, from $1.5 million in the same period in 1997, primarily as a result of
the items discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
As discussed above, in 1996 the Company entered into agreements with two
owner-operators for the installation of NGN Displays. Net revenues generated
during 1996, the first year of network operations, were approximately $3.2
million, including $2.7 million resulting from sales of network equipment and
territorial rights. The remaining $490,000 of revenues were network operating
revenues received from the two network owner-operators.
Net revenues for the year ended December 31, 1997 were $1.8 million, a
decrease of $1.4 million, or 43%, compared to $3.2 million for the year ended
December 31, 1996. The decrease was attributable to the shift in the Company's
business from sales of network equipment and territorial rights to sales of
advertising on the Company's own NGN installations. During 1997, the Company
realized the first net advertising revenues from Company owned installations of
approximately $1.2 million and had equipment sales of approximately $137,000,
primarily to site owners. Although the Company does not anticipate any future
equipment and territorial rights sales to owner-operators, sales of equipment to
site owners may continue. Network operating revenues from owner-operators were
approximately the same at $490,000 in 1996 and $485,000 in 1997 as a result of
equivalent months of network operating fees from owner-operators. The
owner-operators forfeited the territories and the Company repurchased the NGN
equipment in 1997. The Company does not anticipate any future owner-operator
network operating revenues.
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Barter revenue was $158,000 during 1997 and is included in advertising revenue.
The majority of the unused barter credit of $104,000 at December 31, 1997
relates to a major radio promotional campaign and will be recognized as expense
in the first quarter of 1998.
Costs and expenses for the year ended December 31, 1997 were $8.0 million,
an increase of $3.0 million, or 58%, compared to $5.1 million for the year ended
December 31, 1996. Network operating expenses increased $2.4 million due to the
increase in both the number of NGN Display installations and equivalent months
in operation. Site lease expense incurred in connection with site lease
agreements was approximately $1.1 million for the year ended December 31, 1997
and $8,000 for the year ended December 31, 1996. Site lease expense increased
since the first Company owned units were not installed until December, 1996.
Maintenance expense related to NGN Displays increased to $251,000 during 1997
compared to $69,000 during 1996. The 1997 expenses included a one time charge of
$111,000 to relocate NGN Displays to better locations within certain stores
after the initial installation. Excluding the relocation charge, maintenance
expense increased due to the increase in Company owned NGN Displays in service
during the period. Selling expenses of $1.8 million were incurred for the first
time during 1997 as the result of the addition of sales staff and the opening of
seven regional sales offices and the generation of the first advertising
revenues from Company owned NGN installations. General and administrative
expenses increased approximately $921,000. Compensation costs increased $286,000
primarily due to additional administrative staff in computer operations, graphic
creation, and accounting added to support the sales offices and increased
advertising revenues. General and administrative expenses also increased due to
increases in marketing costs such as printing, market research, sales promotion,
and public relations ($266,000), and increases of $189,000 in professional fees
due primarily to increased computer related consulting fees. The cost of network
equipment sales decreased $2.2 million due to the change in scope of the
Company's business as mentioned above. Research and development costs increased
to $363,000 for 1997, compared to $222,000 for 1996, primarily due to the
Company's efforts in the area of software development.
Interest expense for 1997 was $49,000 higher than in 1996 due to slightly
higher average level of long term debt and capital lease obligations. Interest
income increased $31,000 from 1996 to 1997 due to investing the unused proceeds
from the issuance of the Company's 14.8% Series B and Series C Mandatory
Redeemable Preferred Stock.
The net loss for the year ended December 31, 1997 increased to $6.4 million,
from $2.1 million in 1996, primarily as a result of the items discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues generated during 1996 were approximately $3.2 million,
including $2.7 million resulting from sales of network equipment and territorial
rights. The remaining $490,000 of revenues were network operating revenues
received from the two network owner-operators. Prior to 1996 the Company was in
the development stage and had no revenues.
The cost of the equipment sold to the two network owner-operators was
approximately $2.2 million, and network operating expenses were $363,000.
Selling, general and administrative expenses for the year ended December 31,
1996 were $2.5 million, an increase of $404,000, or 19%, compared to $2.1
million for the year ended December 31, 1995. This increase was a result of the
commencement of network operations during the year resulting in increased
depreciation, telephone and salary expense. Telephone expense is significant
since the programming sent to the NGN Displays uses standard phone lines.
Net non-operating expense dropped $81,000 for the year ended December 31,
1996 from the comparable period in 1995. This was due primarily to an increase
in interest income of $73,000 due to investments resulting from unused proceeds
from the issuance of the Series B Preferred Stock.
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As a result of the factors discussed above, the Company's net loss was $2.1
million for the year ended December 31, 1996, compared to $2.3 million for the
prior year.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately $17.1
million at December 31, 1997 which are available to reduce income taxes payable
in future years. Future utilization of these loss carryforwards is subject to
certain limitations under provisions of the Internal Revenue Code including
Section 382 which relates to a 50 percent change in control over a three year
period, and are further dependent upon the Company attaining profitable
operations. The Company believes that the issuance of the Warrants resulted in
an "ownership change" under Section 382. Accordingly, the Company's ability to
use net operating loss carryforwards through February 1, 1998 would be limited
to approximately $1.3 million per year. To the extent the Company is able to
generate taxable income in a period in which this net operating loss
carryforward is available, the Company's cash requirements for the payment of
income tax would be reduced.
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 1998, the Company's primary source of liquidity has been
proceeds from the sale of equity and debt securities.
As of March 31, 1998, total cash and cash equivalents were $40.4 million
compared to $2.8 million as of December 31, 1997. The increase in cash was a
result of $2.3 million of cash used in operating activities and $605,000 of cash
used in investing activities being offset by $40.5 million of net cash provided
by the Units Offering after offering expenses and repayment of long-term debt.
The Company's increasing sales volume has and will require additional cash to
fund increased receivable levels. In addition, the Company paid in 1998
approximately $1.3 million of accrued obligations to site operators relative to
site agreements.
The net cash used in operating activities during 1997 primarily resulted
from an increase in accounts receivable and the year to date net loss, after add
back of depreciation, offset by an increase in accrued expenses. The increase in
accounts receivable is the result of the commencement of advertising sales
during late 1996 and the continued increases of advertising sales in 1997. The
net cash used in investing activities was primarily for capital expenditures to
expand the Company's NGN network. The net cash provided by financing activities
was primarily as a result of proceeds received from the issuance of the
Company's 14.8% Series C Mandatory Redeemable Preferred Stock (the "Series C
Preferred Stock").
Upon consummation of the Units Offering, the Company used approximately $1.9
million of the net proceeds therefrom to repay in full its outstanding secured
indebtedness to Gerard P. Joyce, the Company's Chairman of the Board of
Directors and President. The interest rate of such indebtedness was 8% per
annum. Of the remaining net proceeds of the Units Offering, the Company intends
to use approximately (i) $17.4 million to fund capital expenditures relating to
NGN Displays, (ii) $2.5 million for corporate capital expenditures, (iii) $7.5
million to fund operating expenses and (iv) the remaining $12.9 million for
working capital and general corporate purposes.
Interest on the Notes (which were issued as part of the Units in the Units
Offering) is payable on February 1 and August 1 of each year, commencing August
1, 1998. Interest on the Notes is payable either in cash or additional Notes, at
the option of the Company through August 1, 2000, and thereafter is payable in
cash. Accordingly, the Company will not be required to pay cash interest
payments on the Notes until the February 1, 2001 interest payment date. The
Company expects to pay interest through August 1, 2000 by issuing additional
Notes, which would increase the principal amount of the Notes to approximately
$60.2 million.
In 1997, the Company issued 75,310 shares of Series C Preferred Stock to
private investors at $77 per share. Proceeds upon the issuance of this stock,
net of issuance costs of approximately $156,000, totaled
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approximately $5.6 million, which consisted of approximately $5.1 million of
cash, and conversion of approximately $500,000 of a shareholder note.
In 1996, the Company issued 91,059 shares of Series B Preferred Stock to
private investors at $77 per share. Proceeds upon the issuance of this stock,
net of issuance costs of approximately $137,000, totaled approximately $6.9
million, which consisted of approximately $6.4 million of cash and conversion of
a bridge loan for $500,000.
In 1991, the Company issued 6,000 shares of Series A 8.25% Cumulative
Preferred Stock (the "Series A Preferred Stock") to private investors at $500
per share. Proceeds upon the issuance of this stock, net of issuance costs of
approximately $160,000, totaled approximately $2.8 million.
The Series B Preferred Stock and Series C Preferred Stock are on par with
each other, and are senior to all other classes of capital stock of the Company
with respect to dividend and liquidation rights. Each of the Series B and Series
C Preferred Stock accrues dividends at the rate of 14.8% per annum on the
liquidation value. The Company is permitted to make quarterly dividend payments
in cash, payable on March 1, June 1, September 1 and December 1, or in lieu of
cash dividends the Company may accrue the dividend and add the accrued amount to
the liquidation value. The initial liquidation value for each of the Series B
Preferred Stock and the Series C Preferred Stock was $77 per share. With respect
to the Series B Preferred Stock, accrued dividends that have been added to the
liquidation value totaled approximately $1.6 million at March 31, 1998, and
approximately $105,000 in respect of dividends had accrued but had not been
added to the liquidation value. With respect to the Series C Preferred Stock,
accrued dividends that have been added to the liquidation value totaled
approximately $401,000 at March 31, 1998, and approximately $76,000 in respect
of dividends had accrued but had not been added to liquidation value. The
aforementioned accrued dividends are included in the mandatory redeemable
preferred stock amounts on the balance sheet, and would be payable upon
liquidation but do not become part of the liquidation value for purposes of
compounding dividends until the dividend payment date, to the extent not paid.
The Company has not paid cash dividends on either the Series B Preferred Stock
or the Series C Preferred Stock. See "Description of Capital Stock".
The Series A Preferred Stock is senior in rank to the Company's Common Stock
and junior in rank to the Series B and Series C Preferred Stock with respect to
dividend and liquidation rights. The Series A Preferred Stock accrues dividends
at the rate of $41.25 per share per annum. The initial liquidation value for the
Series A Preferred Stock was $500 per share. Accrued dividends that have been
added to the liquidation value totaled approximately $1.5 million at December
31, 1997.
Capital expenditures were approximately $2.1 million and $2.3 million for
the years ended December 31, 1996 and 1997, respectively. The majority of these
expenditures were used to expand NGN. Management believes that the minimum
capital expenditures required to enter a new market are approximately $500,000
depending on the number of sites in the market. Capital expenditures were
approximately $910,000 and $597,000 for three months ended March 31, 1997 and
1998, respectively. Subsequent to March 31, 1998, the Company executed purchase
orders that provide for additional capital expenditures of approximately $6
million for NGN Displays.
The Company anticipates that its $40.4 million of cash and operating cash
flow, together with the net proceeds of the Units Offering, will be sufficient
to finance the operating requirements of the Company and anticipated capital
expenditures through 1999. However, if advertising revenues do not increase as
anticipated or operating expenses are higher than anticipated, the Company may
need to raise additional capital. There can be no assurance that the additional
funds will be available, or if available, will be available on terms acceptable
to the Company. The Company believes that the current installed base of NGN
Displays is large enough to attain profitable operations when advertising
revenues reach desired levels.
YEAR 2000
The Company has performed a review of its year 2000 preparedness relative to
its NGN delivery and accounting systems. Management believes that no material
costs will be necessary to become year 2000 compliant.
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BUSINESS
COMPANY OVERVIEW
The Company sells advertising space and provides programming through an
electronic out-of-home advertising network known as NGN--Next Generation
Network. Out-of-home advertising derives its name from reaching audiences out of
their homes. The Company believes that out-of-home advertising is a $3.8 billion
industry, consisting primarily of billboards, transit advertising and stadium
and other signage. NGN is a "billboard-TV" network of color video monitors ("NGN
Displays") located at high traffic public locations. NGN Displays are connected
by ordinary voice-grade telephone lines and controlled from a single operations
center in Minneapolis, Minnesota. By utilizing technology to reduce labor costs
and provide immediacy and flexibility to advertisers, NGN seeks to preserve the
positive attributes while avoiding the negative attributes of the out-of-home
advertising industry. Specifically, the Company seeks to achieve the high
operating profit margins and recurring cash flows inherent in the industry,
while reducing fixed costs and labor intensity, and avoiding zoning regulations
that may impede expansion.
By presenting a sequence of partially animated, television-quality images,
NGN is intended to capture audience attention in busy out-of-home environments,
thereby effectively delivering advertising and programming messages. NGN
Displays present repeating two-and-one-half minute sequences, or "loops," of
advertising and programming. As currently configured, the loops consist of
twelve advertising slots of approximately ten seconds each and six to eight
programming slots of approximately six seconds each. Advertising slots currently
consist of advertisements principally for local and regional advertisers, and
programming slots include information such as local and national weather,
sports, news headlines and financial information, as well as Company sponsored
promotional contests. For example, a Baltimore, Maryland 7-Eleven customer
waiting in line to purchase merchandise may view the three day Baltimore
forecast, the Baltimore Orioles baseball score and local news headlines
interspersed with advertisements for Haagen-Dazs ice cream, a Chrysler
dealership and a local dentist, among other messages.
Management believes that consumers view NGN programming as a useful source
of information, and that advertisers view NGN as a flexible, effective
advertising medium to reach a targeted audience. Additionally, Management
believes that site operators benefit from NGN because (i) site operators
generally share in the Company's advertising revenue typically at no cost to the
site operators and (ii) NGN increases customer satisfaction by making the
customer's visit to the site more enjoyable.
The Company currently operates NGN in the following nine DMAs and their
surrounding areas: Washington, D.C.; Dallas-Ft. Worth, TX; Tampa, FL; Miami, FL;
Orlando, FL; Baltimore, MD; Norfolk, VA; West Palm Beach, FL; and Fort Meyers,
FL. As of March 31, 1998, the Company had NGN Displays operating in
approximately 1,800 sites. Based on the average of the daily transaction counts
submitted to the Company by the site operators (the "Daily Audience"), the
Company estimates that NGN presently can be viewed by approximately 2 million
people daily. Additionally, the Company holds site agreements for approximately
5,700 additional sites. Collectively with the Company's presently installed
sites, NGN could be viewed by an estimated Daily Audience of approximately 9
million people in 41 of the top 50 DMA's in the United States.
BUSINESS STRATEGY
As the American lifestyle has become increasingly busy, reaching the
consumer through traditional advertising mediums has become more difficult. The
Company believes that approximately 64% of the adult population read newspapers
daily in 1997 as compared to 77% in 1970. In addition, the Company believes that
subscribers to America On-Line tend to watch approximately 15% less television
than the average person. In recognition of these trends, among other trends,
Management believes that advertisers are seeking innovative ways to reach
out-of-home audiences. As a result of the limitations that characterize many
traditional forms of out-of-home advertising, such as less desirable
demographics due to zoning, long
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lead times to implement advertisements, and complexity of buying space
nationally, Management believes there will be a strong demand for media vehicles
such as NGN.
The Company's objectives are to (i) increase and diversify the physical
presence of NGN in the United States by building upon the Company's existing
site agreements and negotiating additional site agreements and (ii) utilize
NGN's flexibility as an advertising medium to sell advertisements through the
Company's dedicated sales force on a local, regional and national basis. To
achieve its objectives, the Company has adopted the following business
strategies:
- INCREASE PHYSICAL PRESENCE OF NGN. The Company's expansion strategy is to
increase the Company's geographic presence in top markets and diversify
distribution venues. The Company intends to complete the installation of
NGN Displays in the approximately 5,700 additional sites currently under
site agreements, while continuing to secure new site agreements within its
existing operating DMAs as well as the DMAs targeted by the Company for
expansion. The Company currently has NGN Displays in two of the ten top
DMAs, and has site agreements in nine of the top ten DMAs and 41 of the
top 50 DMAs. The Company's immediate geographic expansion focuses on the
top ten DMAs, with the intention of having a presence in all of the top 25
DMAs by 2002.
- CONTINUE TO INCREASE ADVERTISING REVENUES. To date, the Company has
attracted over 300 advertisers, which Management believes indicates a
present market acceptance of NGN as an advertising medium. The Company
conducts its sales efforts through a dedicated sales force within each of
the DMAs in which it operates, which enables NGN to accommodate
micro-targeted advertising needs of local advertisers while offering both
flexibility and breadth of coverage to full-market and multi-market
advertisers. By combining its local sales presence with continued
expansion and diversification of distribution venues, the Company believes
it will broaden the audience for NGN programming and advertising, and will
appeal to an increasing pool of advertisers by providing a truly local,
regional and national advertising medium.
FINANCING PLAN
On February 18, 1998, the Company completed the sale of 45,000 Units to
NatWest Capital Markets Limited in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act. Each Unit
consisted of $1,000 principal amount of Series A Notes and 2.78311 Warrants,
each to purchase one share of the Common Stock, representing in the aggregate at
the time of issuance approximately 20% of the Common Stock on a fully diluted
basis. The Initial Purchaser then resold the Units to qualified institutional
buyers pursuant to Rule 144A of the Securities Act. The Series A Notes and the
Warrants became separately transferable, subject to compliance with applicable
securities laws, on March 20, 1998.
The Company intends to use the net proceeds from the Units Offering
primarily to implement its business strategy and expand its network of NGN
Displays, including the funding of capital expenditures and general and working
capital needs through 1999. Approximately $17.4 million of the net proceeds are
intended to be used to fund capital expenditures relating to the installation of
NGN Displays at sites for which the Company presently has site agreements as
well as new sites for which the Company obtains site agreements in the future.
In addition, the net proceeds are intended to be used to fund corporate capital
expenditures and operating expenses as well as for working capital and general
corporate purposes. Management believes that cash flow from operations will be
sufficient to fund its projected ongoing capital expenditure and working capital
needs following such period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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FOUNDING VISION
The Company's co-founder and Chairman, Gerard Joyce, has over 26 years of
experience as an entrepreneur in the out-of-home advertising business. Prior to
founding the Company, Mr. Joyce founded Patrick Media Group, Inc. which, through
internal growth and acquisitions, became the largest out-of-home advertising
company in the United States.
Mr. Joyce's founding vision for the Company was to build an out-of-home
advertising network that preserved the positive attributes and avoided the
negative attributes of the outdoor advertising industry. Specifically, Mr. Joyce
sought to utilize technology to provide immediacy and flexibility to advertisers
as well as to reduce labor costs thereby achieving the high operating profit
margins and recurring cash flows inherent in the industry, while reducing the
high fixed costs and labor intensity, and avoiding zoning regulations that may
impede expansion.
This founding vision led to the development of NGN, which utilizes advanced
technology to reduce labor costs and provides immediacy and flexibility to
advertisers. Since NGN Displays are located indoors, or otherwise within
privately-owned facilities, NGN reaches into desirable demographic areas by
avoiding zoning issues that are typically associated with the outdoor
advertising business.
The Company was founded in 1990 and thereafter focused its efforts, among
other things, on the development of NGN by developing and improving the NGN
technology. At the same time, the Company concentrated its efforts on securing
site agreements for the placement of NGN Displays as well as recruiting local
sales personnel and opening local sales offices in its initially developed DMAs.
INDUSTRY OVERVIEW
NGN competes in the out-of-home advertising industry. Out-of-home
advertising derives its name from reaching audiences out of their homes, and
consists primarily of billboards, transit advertising and stadium and other
signage. The Company believes that the total expenditures for the out-of-home
industry in 1996 were approximately $3.8 billion, and the industry is growing at
a rate of 7.5% annually, which is 16% faster than overall advertising
expenditures. The Company believes that out-of-home advertising, which has
existed for over 125 years, is a proven, resilient industry.
Management believes that recent demographic and marketing trends, such as
changing lifestyles and habits associated with dual career households and the
high costs and audience fragmentation associated with in-home mass media, have
created a favorable environment for out-of-home advertising in general and NGN
specifically. The Company believes that the in-home market is becoming more
competitive with more TV channels per home (41 channels in 1995 compared to 9 in
1980) and rising distractions from video games and Internet usage. Tangible
evidence of this trend is the declining newspaper readership, which is now 64.2%
of the adult population on weekdays, down from 77.6% in 1970. In addition, the
Company believes that subscribers to America On-Line watch approximately 15%
less television than the average person.
Many traditional forms of out-of-home advertising are hampered by
limitations such as less desirable demographics due to zoning, long lead times
to implement advertisements, complexity of buying space nationally and high
production costs. For example, billboard advertisers are subject to numerous
state and local regulations restricting the permitted locations of
advertisements. Zoning regulations frequently restrict the height and size of
outdoor advertisements, and governmental authorities from time to time ban the
use of outdoor advertisements or order their removal. NGN Displays are placed in
privately-owned establishments primarily indoors and generally are not subject
to the same regulatory pressures affecting the placement of other out-of-home
media.
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NGN SYSTEM
NGN incorporates a sophisticated telephone based communication system that
includes the NGN Displays, computers and related operating and network
management software. From a central hub facility in Minneapolis, Minnesota, the
Company creates programming and advertising that is transmitted to NGN Displays
in multiple locations by means of standard telephone lines. NGN presents a
sequence of partially animated, television-quality images that are intended to
capture audience attention in busy out-of-home environments, thereby effectively
delivering advertising and programming messages.
NGN integrates industry standard computer hardware and software with
proprietary software developed by the Company specifically for its out-of-home
advertising application. The computer architecture of NGN is intended to make
the system "scaleable" so that the network can be expanded to facilitate growth
at minimal incremental cost. The Company believes that NGN is reliable,
experiencing "up-time" (representing the daily average of functioning units) in
excess of 99%.
NGN DISPLAY SITES
The Company's objective is to place NGN Displays in thousands of locations
throughout the United States, with target sites consisting of high traffic,
public venues where people remain for several minutes, including convenience
stores, fast food restaurants, office building lobbies, pharmacies, movie
theater lobbies and self-serve gas pumps. The Company historically has targeted
convenience stores as NGN Display sites because of the existence of numerous
large regional and national chains which allow for economies of scale. Companies
currently under site agreements with the Company include The Southland
Corporation (7-Eleven Stores), Cumberland Farms, Jerry's Subs, Uni-Marts,
Convenient Food Marts and Crown Central Petroleum.
As of March 31, 1998, the Company had NGN Displays operating in
approximately 1,800 sites. Based on the average of the daily transaction counts
submitted to the Company by the site operators (the "Daily Audience"), the
Company estimates that NGN presently can be viewed by approximately 2 million
people daily. Additionally, the Company holds site agreements for approximately
5,700 additional sites. Collectively with the Company's presently installed
sites, NGN could be viewed by an estimated Daily Audience of approximately 9
million people in 41 of the top 50 DMAs in the United States.
The Company is highly dependent on the Southland Contract, which as of March
31, 1998 covered 1,452 of the Company's installed NGN Displays and 3,414 of the
additional sites for which the Company has agreements. A total of 97% of the
Southland-owned and franchisee-owned 7-Elevens presently are party to exclusive
site agreements with the Company. The Southland Contract expires on January 1,
2004. The Southland Contract provides that NGN Displays may be installed in all
Southland owned 7-Eleven's. In addition, Southland has agreed to use its
reasonable best efforts to solicit franchisee participation in the program.
Although there is no obligation to renew, extend or enter into a new agreement,
the Southland Contract provides that Southland and the Company will negotiate in
good faith to renew or extend the Southland Contract for at least 5 years. Under
the Southland Contract, if Southland desires to enter into an agreement with a
provider of services competitive with the Company, the Company has a right to
match the competitors terms for a substantially similar product as the other
provider. Southland may terminate the Southland Contract in the event the
Company materially breaches its obligations and fails to cure such breach within
30 days of receiving notice thereof or if minimum installations are not
completed by June 30, 2000. Either the non-renewal of the Southland Contract or
any difficulty that might arise in the Company's relationship with Southland
would have a material adverse effect on the Company's business.
Under the site agreements with site operators, the NGN Displays are
installed, maintained and operated by the Company. The store owner generally
receives a percentage of the advertising revenues derived by the Company from
the particular site, typically at no cost to the operator (other than, in
certain circumstances, the cost of the NGN Displays). The Company is solely
responsible for the installation and maintenance of its NGN Displays. This
additional source of income provides the site operators with an
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incentive to renew the agreements at the end of their terms, which range in
initial term from five to fifteen years. The Company's agreements with
convenience store chains have varying expiration dates ranging from
approximately June 2000 to December 2010 and generally provide that the Company
shall be the exclusive provider of video-based information, entertainment and
advertising services. Under the Southland Contract, the Company is required to
make minimum annual payments.
The Company intends to maximize its planned expansion through creation of a
specialized corporate development group aimed at increasing the Company's
geographic presence by identifying and negotiating with companies and
organizations that would provide multiple potential new locations. The corporate
development group currently consists of three full-time professionals, based in
Dallas, Texas and the Company hopes to expand the group to five by the end of
1998. The Company also intends to utilize the local knowledge of its general
managers, sales managers and sales personnel to identify locations for further
expansion in existing markets.
PROGRAMMING
NGN Displays present repeating two-and-one-half minute sequences, or
"loops," of advertising and programming. As currently configured, the loops
consist of twelve advertising slots of approximately ten seconds each and six to
eight programming slots of approximately six seconds each. Advertising slots
currently consist of advertisements principally for local and regional
advertisers, and programming slots include information such as local and
national weather, sports, news headlines and financial information, as well as
Company sponsored promotional contests. For example, a Baltimore, Maryland
7-Eleven customer waiting in line to purchase merchandise may view the three day
Baltimore forecast, the Baltimore Oriole's baseball score and local news
headlines interspersed with advertisements for Haagen-Dazs ice cream, a Chrysler
dealership and a local dentist, among other messages.
The advertising and programming loops for each NGN Display are all created
and controlled from a central hub in Minneapolis, allowing the Company to
quickly and cost-effectively custom-tailor both the advertising and programming
content on a regional or micro-targeted basis. By utilizing the Company's
network management software, the Company customizes programming information for
local markets. Attributes such as instantaneous copy changes, minimal lead
times, negligible production costs and expedited electronic communications
distinguish NGN from other out-of-home advertising. NGN is designed so that
programming information can be provided to the Company via electronic feed from
providers of such information, such as Accu-Weather, which provides weather
information. Once the feed is received at the Company's facilities, it generally
is processed automatically and distributed to the NGN Displays over telephone
lines.
ASSEMBLY, INSTALLATION AND MAINTENANCE
The Company has designed its NGN Displays so that their component parts are
readily available from a number of suppliers. All of the NGN Displays are
assembled and tested prior to installation by a third party contractor. The
principal components of NGN Displays, the monitor and embedded computer, are
purchased from separate third party contractors, with three-year warranties. All
components for NGN Displays, including electronic and computer-related
equipment, are available from a number of well-established suppliers. The
Company intends to continue to rely on its contractors for the assembly of its
NGN Displays for the foreseeable future. Although the Company to date has not
experienced any difficulties or delays in obtaining the desired quantities of
NGN Displays, there can be no assurance that assembly delays will not result in
delays in obtaining the necessary quantities of NGN Displays in the future. The
Company has utilized the services of its contractors for several years and has
maintained a good relationship. However, the Company does not have any formal
long-term agreement with such contractors. See "Risk Factors--Dependence on
Third Parties."
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The Company has a contractual arrangement with an independent contractor for
the nationwide installation and maintenance of all of its NGN Displays. The
independent contractor has a network of offices and subcontractors throughout
the United States, and has been able to adequately satisfy all of the Company's
installation and maintenance needs to date. Pursuant to its agreement with the
independent contractor, the Company pays a fixed fee per installation and a
fixed monthly maintenance fee based on the number of existing NGN Display
installations. The independent contractor maintains an inventory of spare parts
for NGN Displays at local warehouses within the vicinity of NGN Display sites.
If an NGN Display cannot be repaired on-site, it is exchanged with a new one.
Since the independent contractor is an authorized repair center for the
Company's computer manufacturer, if the malfunctioning component is the embedded
computer, it can generally be repaired at no additional cost to the Company. The
agreement with the independent contractor expires in June 1999. The Company
believes that performance under its existing agreement has been satisfactory,
and the Company does not foresee any difficulties in obtaining these services in
the future.
The Company believes it can find other outside sources to adequately satisfy
its assembly, installation and maintenance needs. However, there can be no
assurance that it will be able to do so in a timely manner or that such new
outside sources would be able to meet the Company's requirements. Although to
date the Company has not experienced any material adverse effects due to such
risks, there can be no assurance that the business of the Company will not be
adversely affected by such risks in the future.
ADVERTISING SALES AND MARKETING
The Company seeks to take advantage of its inherent flexibility of
geographically targeted advertising by emphasizing sales to local advertisers,
the traditional area of strength for out-of-home advertising. The Company
believes that in 1997, an estimated 60-70% of all out-of-home advertising
revenue (comprised principally of outdoor advertising) was derived from local
advertisers. The Company conducts its advertising sales efforts through a
dedicated, local sales force within each of the DMAs in which it operates NGN
Displays. The local sales force is thereby able to work closely with each of the
Company's advertisers to develop advertising campaigns that match specifically
targeted audience segments with the advertisers' overall marketing strategies.
The Company currently has sales offices in seven DMAs, Washington, D.C.,
Dallas-Ft. Worth, TX, Tampa, FL, Miami, FL, Orlando, FL, Baltimore, MD and
Norfolk, VA. The Company intends to staff each local sales office with either a
general manager or a sales manager, and with between 4 and 10 sales persons. The
size of the sales staff depends on various factors, including the physical size
of the DMA and the number of NGN locations within the DMA. In early 1997, the
Company realized its first operating revenues from advertising sales in markets
where the Company has a dedicated sales force, and has attracted over 300
advertisers, including The Washington Post, WRC-TV (NBC station in Washington
D.C.), Chrysler Plymouth Florida Dealers Association, Elle Magazine, George
Magazine, The Dallas Morning News, the Virginia Lottery and Fox Sports
Southwest. The Company is able to locate its NGN Displays in highly desirable
demographic sites as it is not restricted by the zoning regulations that
typically limit the placement of many other forms of out-of-home advertising.
The Company generally attracts candidates for its general manager, sales
manager and sales representative positions from existing media sales personnel
in the local areas, including from radio and broadcasting and cable television
operators as well as from outdoor advertising and various print media companies.
Currently, the Company utilizes placement services and the Company's existing
industry contacts to locate qualified sales personnel. The Company believes
that, as NGN expands, the Company will continue to attract qualified sales and
sales management personnel.
All graphic design, network management, billing and other functions are
handled from the Company's main corporate headquarters in Minneapolis. Through
local links to the main database and the use of modem-equipped laptop computers,
the local offices can utilize the Company's sophisticated technology and
dedicated technical and creative staff to support local selling efforts. The
laptop computers can be linked to the Company's main database and include the
Company's proprietary proposal generating
31
<PAGE>
software. Such software was developed by the Company to allow a sales person to
customize advertising proposals instantly to accommodate the stated preferences
of the advertiser. For example, a sales person can generate proposals based on a
location within a specified radius, or site by site purchases. The proposals can
specify cost (as well as other schedule information) and can prepare maps and
location lists to show the exact NGN Display locations on which an advertisement
will appear.
In coordination with the installation of NGN Displays, the Company intends
to open sales offices in major media markets at the rate of approximately one
sales office per month. The targeted markets include New York, Los Angeles,
Chicago, Philadelphia, San Francisco, Boston, Detroit, Seattle, Cleveland and
Denver. The Company intends to continue its expansion into additional markets so
that, by the end of the year 2000, the Company has sales offices in all of the
top twenty-five DMAs.
While the Company believes that achieving its growth strategy requires
concentration on local advertisers, the Company also intends to target national
advertisers. The Company has appointed Capital Cities/ABC as its exclusive agent
for national advertising sales for NGN until March 28, 2002. The Company
believes that as it continues to grow, it will hire additional sales personnel
to concentrate on national advertising, providing the Company with the
opportunity to recognize significant national advertising sales revenues.
The Company charges a fixed daily rate for the advertising slots provided to
advertisers on its NGN Displays. Based on traffic counts at NGN Display sites,
the present cost to the Company's advertisers per thousand impressions ("CPM")
is between $3 and $4. By comparison, the Company believes that radio, newspaper
and television advertising has a CPM of between $7 and $20. Traditional outdoor
advertising, which bases impressions on the number of vehicles which pass a
site, has a CPM of between $1.50 to $3.40 depending on the size, type and
location of the display surface, plus substantial production costs. While
enjoying a substantial cost advantage over television, radio and print
advertising, the Company believes it can compete effectively with traditional
outdoor advertising because of the flexibility and efficiencies inherent in the
Company's display medium and centrally controlled network.
COMPETITION
The advertising and promotional industries are intensely competitive. The
Company will be competing for advertising dollars directly with advertising and
promotional vehicles such as broadcast and cable television, radio, magazines,
newspapers, billboards, direct mail marketers and others. In addition, the
Company also competes with a wide variety of out-of-home advertising, including
highway logo signs, advertising in shopping centers and malls, airports,
stadiums, movie theaters and supermarkets, as well as on taxis, trains, buses
and subways. Management believes that the out-of-home advertising industry is
attracting numerous alternative media products, many of which will compete
directly or indirectly with NGN. These products may be offered by companies with
greater resources and with greater industry recognition than the Company. The
Company is aware of other companies that place displays that look similar to NGN
Displays in specific venues for commercial purposes, such as in airports and
subways. Although the Company believes that these companies are not competing in
the venues targeted by the Company, there can be no assurance that such
companies will not commence marketing in the same venues and within the same
DMAs targeted by the Company. While Management believes that NGN is favorably
differentiated from other available media, in competing with existing media for
advertising sales the Company encounters media that is more established and
recognized by potential advertisers and advertising agencies.
PROTECTION OF TECHNOLOGY
The Company does not have patent or registered copyright protection on any
of the software technology that the Company utilizes in connection with NGN, and
such technology might not be eligible for patent protection. The Company
believes that significant portions of its software are entitled to
32
<PAGE>
copyright protection in the United States. Should the Company seek and obtain
federally registered copyright protection for any of its software in the future,
no assurance can be given that the copyright application would be accepted or
that a capable and adequately financed competitor could not lawfully develop
software that would perform the same function.
The Company views the computer software technology that it has developed as
proprietary, and attempts to protect its technology and trade secrets through
the use of confidentiality and non-disclosure agreements and by other security
measures. The protection offered by trade secret law and confidentiality
agreements is limited in comparison to patent protection. Confidentiality and
non-disclosure agreements may be difficult to enforce, and the Company's
products might be subject to reverse engineering. Consequently, no assurance can
be given that competitors will not be able to develop or obtain technology
similar to the Company's and produce products similar to those the Company is
utilizing.
The Company has applied for several federal registrations of trademarks,
including "NGN," "Next Generation Network" and "Out of Home That's In Your
Face." While no assurance can be given that the trademarks will be issued, the
Company is not aware that the trademarks for which federal registration is
sought infringe on existing trademarks.
GOVERNMENT REGULATION
The Company is not aware of any material legal or other regulatory
restrictions which may adversely affect its business, other than those that
affect businesses generally. The furnishing of in-store marketing services is
subject to compliance with the Robinson-Patman Act. In general, the
Robinson-Patman Act prohibits price discrimination and discriminatory
promotional allowances and services between different purchasers of commodities
of like grade and quality, the effect of which may be substantially to lessen
competition in any line of commerce.
The Company's use of telephone lines to transmit messages to its NGN
Displays subjects the Company to regulation by the Federal Communications
Commission ("FCC") as well as laws and regulations affecting the advertising
industry generally. While the Company has not sought determination on the issue,
the FCC may attempt to prohibit the Company from transmitting tobacco
advertisements on NGN. In addition, certain state statutes restrict advertising
of alcoholic beverages on NGN.
EMPLOYEES
As of May 15, 1998, the Company had 96 employees, of which 6 were involved
in engineering, purchasing and field operations, 13 were involved in network
operations, marketing and creative services, 8 were involved in management and
administration, 16 were involved in management information systems and
accounting, and 53 were involved in the regional sales offices. The Company's
employees are not represented by a collective bargaining agreement. Management
considers relations with the Company's employees to be very good.
FACILITIES
The Company's headquarters are located in approximately 11,300 square feet
of office space in Eden Prairie, Minnesota, a suburb of Minneapolis. The Company
also leases 2,150 square feet of warehouse space in Minneapolis. Both leases
expire December 31, 1998. In addition, the Company has a regional sales office
in each of Dallas, Texas (1,811 square feet); Washington, D.C. (2,250 square
feet); Norfolk, Virginia (832 square feet); Baltimore, Maryland (1,680 square
feet); Orlando, Florida (2,399 square feet); Fort Lauderdale, Florida (1,893
square feet); and Tampa, Florida (1,964 square feet). The Company's leases
expire on various dates, ranging from February 28, 2000 to October 31, 2002, and
many provide for renewal options.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party, or
to which any of its properties is subject.
33
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Gerard P. Joyce...................................... 46 Chairman of the Board of Directors and President
Thomas M. Pugliese................................... 35 Vice Chairman of the Board of Directors, Chief
Executive Officer and Secretary
Timothy P. Hartman................................... 58 Director
Michael J. Marocco................................... 39 Director
David R. Voelker..................................... 44 Director
Thomas J. Davis...................................... 50 Director
James P. Sheehan..................................... 55 Director
Alejandro Zubillaga.................................. 30 Director
Carol A. Lundstrom................................... 46 Executive Vice President
Michael J. Kolthoff.................................. 45 Treasurer and Assistant Secretary
</TABLE>
GERARD P. JOYCE. Mr. Joyce founded the Company in 1990 and has served as
the Company's Chairman of the Board of Directors since inception and as its
President since December 1991. Prior to founding the Company, Mr. Joyce was
Chairman and Chief Executive Officer of the Patrick Media Group, Inc., a
successor to a company he formed in 1969. The Patrick Media Group, Inc., through
internal growth and a series of acquisitions, became the largest out-of-home
advertising company in the United States. Mr. Joyce sold his controlling
interest in the Patrick Media Group, Inc. in September 1989.
THOMAS M. PUGLIESE. Mr. Pugliese founded the Company together with Gerard
Joyce in 1990 and has served as the Company's Vice Chairman of the Board of
Directors since its inception. From 1988 to 1990, Mr. Pugliese was President of
Thomas More & Company Inc., a private investment banking firm. From 1984 through
1988, Mr. Pugliese was an investment banker with Shearson, Lehman, Hutton Inc.
and its predecessor firm, E.F. Hutton & Company, Inc. where he held various
positions in New York and London, including as American representative for the
firm's international investment banking operations.
TIMOTHY P. HARTMAN. Mr. Hartman has been a director of the Company since
1996. Mr. Hartman was employed by NationsBank Corporation from 1982 until his
retirement in 1995, at which time he served as Vice Chairman and as a director
as well as the Chairman of the Board of its subsidiary, NationsBank of Texas. He
is currently a private investor. Mr. Hartman serves as a Director of Sensormatic
Electronics Corporation, a public company listed on the New York Stock Exchange
("NYSE"), and chairs its Finance Committee.
MICHAEL J. MAROCCO. Mr. Marocco has been a director of the Company since
1996. Mr. Marocco has been in the securities industry since 1984, when he joined
Morgan Stanley as a fixed income research analyst, specializing in media and
entertainment companies in the high yield bond market. He moved to the
investment banking division and assisted media and entertainment companies in
raising capital and in mergers and acquisitions. In 1989, he joined Sandler
Capital Management, a communications specific capital management firm, managing
approximately $1 billion invested in both public and private companies. He is a
general partner with primary responsibility for private investment activities.
He serves as a director for Source Media Inc., which is a public company listed
on Nasdaq.
DAVID R. VOELKER. Mr. Voelker has been a director of the Company since
1996. Since 1993, Mr. Voelker has been a partner of Frantzen/Voelker
Investments, LLC, and is a substantial private investor with interests in real
estate, oil & gas, media and restaurants. From 1988 until founding
Frantzen/Voelker Investments, LLC, Mr. Voelker was a partner in Johnson Rice and
Company, a New Orleans, Louisiana,
34
<PAGE>
investment brokerage firm. He is a Director of several companies including Stone
Energy Corporation, which is listed on NYSE.
THOMAS J. DAVIS, CPA. Mr. Davis has been a director of the Company since
1996. Mr. Davis is an executive with Piaker & Lyons, P.C., a New York accounting
firm where he has been employed since 1972. Mr. Davis' practice specializes in
auditing, financial reporting and planning for closely held businesses in the
communications and other industries. He is a member of numerous community
charity organizations, including Chairman of the Lourdes Hospital Foundation.
Mr. Davis is a Certified Public Accountant in the State of New York. Mr. Davis
is Gerard Joyce's brother-in-law.
JAMES P. SHEEHAN. Mr. Sheehan has been a director of the Company since
January 1998. Mr. Sheehan is a private investor who retired as the President and
Chief Operating Officer of A.H. Belo Corporation. A.H. Belo is a NYSE listed
diversified media company with interests in television and newspapers. Prior to
A.H. Belo, Mr. Sheehan held executive positions at Pratt and Whitney Aircraft
and Otis Elevator Company, both Divisions of United Technologies Corporation. He
currently serves as a Director of Goss Graphic Systems, Inc.
ALEJANDRO ZUBILLAGA. Mr. Zubillaga was elected as a director in January
1998. He is the founder and Chairman of Veninfotel LLC, Venezuela's leading
provider of cable television and other telecom services. Mr. Zubillaga is also
the Chief Executive Officer of Grupo Zubillaga, a family holding company which
holds interests in real estate and mining.
CAROL A. LUNDSTROM. Ms. Lundstrom currently serves as Executive Vice
President of the Company. She has been an employee of the Company since its
inception in 1990. From 1989 until 1990, she was a Marketing and Administration
Executive with Electric Avenue, Inc. From 1981 to 1989, she was an executive
with Apache Corporation, an asset management company, and held positions
including Project Manager, Manager of Investor Relations, Reporting, Systems and
Accounting.
MICHAEL J. KOLTHOFF, CPA. Mr. Kolthoff currently serves as the Company's
Treasurer and Assistant Secretary. From January 1993 until he joined the Company
in July 1995, Mr. Kolthoff was Chief Financial Officer for ONYX Real Estate
Services. From May 1985 until November 1992, he was Chief Financial Officer of
Maico Hearing Instruments. Prior to that time, he was Corporate Controller for
Econo-Therm Energy Systems Corporation and held various senior audit positions
with Coopers & Lybrand. Mr. Kolthoff is a Certified Public Accountant in the
State of Minnesota.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered to the
Company paid to the Chief Executive Officer and the Company's executive officers
as to whom the total annual salary and bonus exceeded $100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
SALARY BONUS
NAME AND PRINCIPAL POSITION YEAR ($) ($)
- -------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Gerard P. Joyce............................................... 1997 251,741 60,000
Chairman of the Board of Directors and President
Thomas M. Pugliese............................................ 1997 212,587
Vice Chairman of the Board of Directors and Chief Executive
Officer
</TABLE>
35
<PAGE>
Non-employee directors of the Company receive a director's fee of $1,000 for
each Board of Directors meeting attended in person.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Gerard Joyce, its Chairman of
the Board of Directors and President. The term of Mr. Joyce's employment
agreement expires on December 31, 1999. Under the agreement, Mr. Joyce is
entitled to an annual base salary of $251,741 and an annual bonus of $60,000
payable after each calendar year if certain revenue goals for the year are met.
In addition, the agreement requires the Company to provide to Mr. Joyce if
requested by him a life insurance policy payable to his designated beneficiary,
with a death benefit of at least $1,000,000. To date, no such life insurance
policy has been requested by Mr. Joyce. Subject to certain exceptions, Mr. Joyce
has agreed during the term of the Agreement and for a period of two years
thereafter not to engage in certain competitive business activities and not to
solicit any employee of the Company to leave the Company's employ. Pursuant to
his employment agreement, in September 1996 Mr. Joyce was granted 8,831 shares
of the Company's Common Stock which are subject to forfeiture if Mr. Joyce's
employment with the Company is terminated by him, or by the Company for cause,
prior to December 31, 2006 or the earlier happening of certain other events.
Such forfeiture provisions will be removed December 31, 2006 or earlier upon the
occurrence of such events, which include death, disability, a public offering of
the Company's Common Stock in which such shares are registered for resale, and
the merger, consolidation or sale of substantially all of the Company's assets.
Thomas Pugliese, the Company's Vice Chairman of the Board of Directors and
Chief Executive Officer, is party to a similar employment agreement with the
Company, providing for a term expiring on December 31, 1999, an annual base
salary of $212,600 and the grant in September 1996 of 4,983 shares of Common
Stock, which are similarly subject to forfeiture. Mr. Pugliese's agreement
provides that one third of each semi-monthly installment of his base salary
payable on or after January 1, 1998 shall be paid in the form of Series C
Preferred Stock, subject to forfeiture provisions similar to those applicable to
the stock grant. The agreement also provides for similar life insurance and
disability benefits for Mr. Pugliese. To date, Mr. Pugliese has not requested
the Company to obtain such a life insurance policy.
401(K) PLAN
The Company maintains a retirement plan (the "401(k) Plan") established in
conformity with Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"), covering all of the eligible employees of the Company. Pursuant to
the 401(k) Plan, employees may elect to defer up to 15% of their current pre-tax
compensation and have the amount of such deferral contributed to the 401(k)
Plan. The maximum elective deferral contribution was $9,500 in 1997, subject to
adjustment for cost-of-living in subsequent years. Certain highly compensated
employees may be subject to a lesser limit on their maximum elective deferral
contribution. The 401(k) Plan permits, but does not require, matching
contributions and non-matching (profit sharing) contributions to be made by the
Company up to a maximum dollar amount or maximum percentage of participant
contributions, as determined annually by the Company. The Company presently does
not match employee contributions. The 401(k) Plan is qualified under Section 401
of the Code so that contributions by employees and employer, if any, to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by the
Company, if any, will be deductible by the Company when made.
STOCK OPTION PLANS AND OTHER EMPLOYEE INCENTIVE PLANS
The Company has adopted Stock Option Plans (the "Plans") for the purpose of
advancing the interests of the Company and its stockholders by strengthening the
Company's ability to attract and retain competent employees, to make service on
the Board of Directors of the Company more attractive to present and prospective
non-employee directors and to provide a means to encourage stock ownership and
36
<PAGE>
proprietary interest in the Company by officers, non-employee directors and
valued employees and other individuals upon whose judgment, initiative and
efforts the financial growth of the Company largely depend. The Plans are
currently, and have been since their adoption, administered by the Board of
Directors and the compensation committee of the Board.
Incentive stock options ("ISOs") may be granted only to officers and key
employees of the Company. Nonqualified stock options may be granted to such
officers and employees as well as to agents and directors of and consultants to
the Company, whether or not otherwise employees of the Company. In determining
the eligibility of an individual for grants under the Plans, as well as in
determining the number of shares to be optioned to any individual, the Board
takes into account the position and responsibilities of the individual being
considered, the nature and value to the Company of his or her service or
accomplishments, his or accomplishments, his or her present or potential
contribution to the success of the Company and such other factors as the Board
may deem relevant.
The Plan provides for the granting of ISOs to purchase the Company's Common
Stock at not less than the fair market value on the date of the option grant and
the granting of nonqualified options with any exercise price. The total number
of shares with respect to which options may be granted under the Plans is
currently 12,000. As of the date of this Prospectus, options for an aggregate of
6,606 shares have been granted to various individuals. The Plans contain certain
limitations applicable only to ISOs granted thereunder. To the extent that the
aggregate fair market value, as of the date of grant, of the shares to which
ISOs become exercisable for the first time by an optionee during the calendar
year exceeds $100,000, the option will be treated as a nonqualified option. In
addition, if an optionee owns more than 10% of the total voting power of the
Company's stock at the time the individual is granted an ISO, the option price
per share cannot be less than 110% of the fair market value per share and the
term of the ISO cannot exceed five years. No option may be granted under the
Plans after January 1, 2004 with respect to 4,000 of the options, and January 1,
2005 with respect to 8,000 of the options, and no option may be outstanding for
more than four years thereafter.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made under certain circumstances in shares
of Common Stock. The Plans may be terminated at any time by the Board of
Directors, which may also amend the Plans.
In addition to the Plans, the Company intends to implement additional
incentive plans which may include stock options, stock appreciation rights,
profit sharing or similar type plans.
CERTAIN TRANSACTIONS
On September 15, 1993, Gerard P. Joyce, the Chairman of the Board of
Directors and President of the Company, loaned $2,375,000 to the Company, and
the Company granted to Mr. Joyce a security interest in all of the Company's
assets as security for its obligation. On August 29, 1997, in consideration for
the issuance of shares of Series C Preferred Stock to Mr. Joyce, the principal
amount of the obligation was reduced by $500,038. The Company repaid such
indebtedness in the amount of $1,875,462 to Mr. Joyce in full with the net
proceeds of the Units Offering and the security interest held by Mr. Joyce was
terminated. See "Use of Proceeds." See "Employment Agreements" for a discussion
of the employment agreements entered into by the Company with certain of its
executive officers.
In 1997, the Company issued 75,310 shares of its Series C Preferred Stock in
a private placement for an aggregate price of approximately $5.8 million, or $77
per share. As indicated in "Principal Stockholders," David Voelker, Timothy P.
Hartman, James P. Sheehan, Michael J. Marocco and Alejandro Zubillaga, each of
whom is a director of the Company, purchased directly or indirectly shares in
such private placement.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 30, 1998 with
respect to the beneficial ownership of the outstanding shares of Common Stock by
(i) any stockholder known by the Company to beneficially own more than five
percent of such outstanding shares, (ii) the Company's directors and executive
officers and (iii) the directors and executive officers of the Company as a
group. Except as otherwise indicated, the address of each beneficial owner of
five percent or more of such Common Stock is the same as the Company. Shares of
Common Stock included in the table which are issuable upon conversion of shares
of Preferred Stock give effect to the accrual of dividends added to the
liquidation value. The Company's outstanding Preferred Stock may be converted at
any time at the holder's option. See "Description of Capital Stock."
<TABLE>
<CAPTION>
AMOUNT
NAME AND ADDRESS OF BENEFICIALLY OWNERSHIP
BENEFICIAL OWNER OWNED PERCENTAGE
- --------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Gerard P. Joyce............................................................ 157,355(1) 54.6%
Thomas M. Pugliese......................................................... 68,549(2) 25.7
Thomas J. Davis............................................................ 1,720(3) *
David Voelker.............................................................. 9,739(4) 3.6
Timothy P. Hartman......................................................... 17,180(5) 6.1
James P. Sheehan........................................................... 2,133(6) *
Michael J. Marocco......................................................... 96,206(7) 26.5
Alejandro Zubillaga........................................................ 13,906(8) 5.0
John Strauss............................................................... 15,700 5.6
200 Crescent Court
Dallas, Texas 75201
Pulitzer Publishing Company................................................ 28,629(9) 9.7
900 North Tucker Boulevard
St. Louis, Missouri 63101
Western Asset.............................................................. 42,093 (10 13.7
117 East Colorado Blvd.
Pasadena, CA 91105
SunAmerica Investments, Inc................................................ 28,062 (10 9.5
1 SunAmerica Center
38th Floor
Century City
Los Angeles, CA 90067-6022
Northstar Investment Management............................................ 23,852 (10 8.2
2 Pickwick Plaza
Greenwich, CT 06830
All directors and executive officers as a Group............................ 366,788 88.1
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 21,857 shares of Common Stock issuable upon conversion of shares of
Series A Preferred Stock and Series C Preferred Stock.
(2) Includes 233 shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock.
(3) Includes 820 shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock and 200 shares issuable upon exercise of warrants.
(4) Represents shares owned by Frantzten/Voelker Investments, LLC, of which Mr.
Voelker is a manager, including 1,789 shares of Common Stock issuable upon
conversion of shares of Series C Preferred Stock.
(5) Includes 13,680 shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock and Series C Preferred Stock.
(6) Includes 1,433 shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock.
(7) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock and Series C Preferred Stock owned by affiliates of
21st Century Communications Partners, each of which is a limited partnership
of which Sandler Investment Partners, L.P. is a general partner. Mr. Marocco
is a general partner of Sandler Investment Partners, L.P.
(8) Represents shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock owned by Elektra Investments A.V.V., which is
controlled by Mr. Zubillaga.
(9) Represents shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock.
(10) Represents shares of Common Stock issuable upon exercise of Warrants issued
in the Units Offering.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 1,000,000 shares of
common stock, par value $.01 per share ("Common Stock"), and 500,000 shares of
preferred stock, par value $1 per share ("Preferred Stock").
COMMON STOCK
The Company has one class of Common Stock. Each share of Common Stock has
equal dividend and liquidation rights. As of April 30, 1998, of the 1,000,000
authorized shares, 266,268 shares of Common Stock were outstanding and 6,606
shares were issuable upon exercise of employee stock options. The Company also
has outstanding warrants (the "Old Warrants") to purchase 3,100 shares of Common
Stock. In addition, in connection with the Units Offering, the Company issued
125,240 warrants (the "Warrants"), representing in the aggregate at the time of
issuance approximately 20% of the Common Stock on a fully-diluted basis. As of
April 30, 1998, giving effect to anti-dilation adjustments, there were 126,678
shares issuable upon exercise of the Warrants. As of April 30, 1998, 230,740
shares of Common Stock were issuable upon conversion of the outstanding shares
of the Company's Series A, Series B and Series C Preferred Stock.
Authorized shares of Common Stock may be issued from time to time, without
further action by the stockholders, for such consideration as may be fixed by
the Board of Directors in compliance with the laws of the State of Delaware. The
shares of Common Stock presently outstanding are fully paid and nonassessable.
Holders of Common Stock are entitled to one vote for each share for all
matters on which stockholders vote, including the election of directors, other
than in connection with the election of a director by any series of Preferred
Stock. There is no cumulative voting in the election of directors, enabling
holders of a majority of shares of Common Stock to elect all members of the
Board of Directors which the holders of Common Stock are entitled to elect.
Holders of Common Stock generally have no preemptive or other rights to purchase
additional shares of the Company's capital stock. Shares of Common Stock are not
subject to any redemption or sinking fund provision and are not convertible into
any other securities of the Company. Subject to the preferential rights of any
outstanding shares of Preferred Stock and any series of Preferred Stock which
may be authorized in the future, the holders of the Common Stock are entitled to
such dividends as may be declared from time to time in the discretion of the
Board of Directors out of funds legally available therefor. The Company has not
paid dividends on its Common Stock since its inception and intends to continue
following a policy of retaining funds to provide for the expansion of its
advertising network. Holders of Common Stock are entitled to share ratably in
the Company's net assets upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding.
PREFERRED STOCK
The Company's Certificate of Incorporation (the "Certificate") authorizes
the issuance of 500,000 shares of Preferred Stock, of which there are presently
designated 20,000 shares of Series A 8.25% Cumulative Preferred Stock, par value
$1 per share (the "Series A Preferred Stock"), 91,100 shares of 14.8% Series B
Mandatory Redeemable Preferred Stock, par value $1 per share (the "Series B
Preferred Stock"), and 90,000 shares of 14.8% Series C Mandatory Redeemable
Preferred Stock, par value $1 per share (the "Series C Preferred Stock"), and of
which 6,000 shares of Series A Preferred Stock, 91,059 shares of Series B
Preferred Stock and 75,540 shares of Series C Preferred Stock were outstanding
as of April 30, 1998.
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The Board of Directors has the authority, without further action of the
holders of the Common Stock and for such consideration as may be fixed by the
Board of Directors in compliance with the Delaware General Corporation Law (the
"GCL"), to create by designation and issue and sell additional classes or series
of Preferred Stock up to the authorized number of shares of Preferred Stock with
such preferences, priorities and voting and other rights as the Board shall
determine. The Company does not have any present plans to create and issue
shares of Preferred Stock of any additional class or series. The designation of
any additional class or series of Preferred Stock is subject to the limitations
set forth in the instruments establishing the outstanding series of Preferred
Stock and agreements with certain stockholders, including in certain instances
the approval of the holders of one or more of the outstanding series of
Preferred Stock.
The Series A Preferred Stock ranks senior to the Common Stock and junior to
the Series B Preferred Stock and the Series C Preferred Stock both as to
dividends and upon liquidation. Subject to the preferential rights of the Series
B Preferred Stock and the Series C Preferred Stock, the holders of the Series A
Preferred Stock are entitled (i) to semi-annual cumulative dividends in
preference over Common Stock dividends in the amount of $41.25 per share per
annum, (ii) to a liquidation preference over the Common Stock of $500 per share
plus the amount of accrued and unpaid cumulative dividends and (iii) in case
shares of Series A Preferred Stock are called for redemption, to convert their
shares into shares of Common Stock prior to the tenth day prior to the date
fixed for redemption, at the rate of one share of Common Stock for each $135.27
in liquidation preference, including the preference arising from the amount of
accrued and unpaid cumulative dividends of the preferred stock so converted. The
Series A Preferred Stock is subject to redemption, at the option of the Company,
at a redemption price of $500 for each share plus such accrued and unpaid
dividends. The Series A Preferred Stock is not entitled to the benefit of any
mandatory "sinking" or "purchase" fund. The amount of accrued and unpaid
dividends that have been added to the liquidation preference of the shares of
such series totaled $1,485,000 at April 30, 1998.
The Series B and Series C Preferred Stock rank on a parity with each other
and senior to both the Common Stock and the Series A Preferred Stock as to
dividends and upon liquidation. The holders of the shares of Series B Preferred
Stock and Series C Preferred Stock are entitled to vote as a class on certain
significant corporate matters and each such series is entitled to elect one
member of the Company's Board of Directors whether or not dividends are in
arrears. Michael J. Marocco and Alejandro Zubillaga are presently serving as
such designees of the holders of the Series B and Series C Preferred Stock,
respectively. In addition, the holders of shares of Series B and Series C
Preferred Stock are entitled to jointly elect one member of the Company's Board
of Directors whether or not dividends are in arrears.
The holders of the shares of Series B Preferred Stock and Series C Preferred
Stock are each entitled (i) to quarterly cumulative dividends in preference over
Common Stock and Series A Preferred Stock at the rate of 14.8% of the amount of
the liquidation preference of the shares of such series, (ii) to a liquidation
preference over Common Stock and Series A Preferred Stock of $77 per share plus
the amount of accrued and unpaid cumulative dividends and (iii) to convert their
shares into shares of Common Stock at the rate of one share of Common Stock for
each $77 in liquidation preference, including the preference arising from the
amount of accrued and unpaid cumulative dividends of the preferred stock so
converted. On each dividend payment date, accrued dividends, to the extent
unpaid, are compounded upon the stock's liquidation value. The shares of Series
B and Series C Preferred Stock are also subject to conversion into shares of
Common Stock at the option of the Company in the event of certain qualifying
public offerings of the Common Stock. The Series B Preferred Stock and the
Series C Preferred Stock are each subject to redemption at the option of the
Company, in whole but not in part, at a redemption price of $308 for each share,
and are subject to mandatory redemption by the Company on September 1, 2003, in
the case of the Series B Preferred Stock, and on March 1, 2003, in the case of
the Series C Preferred Stock, in each case at a redemption price of $77 for each
share plus such accrued and unpaid dividends. However, the holders of the Series
B and Series C Preferred Stock are precluded from requiring redemption of their
shares, as described herein, if such redemption would not be permitted under the
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terms of the Indenture or other financing documents to which the Company is
subject. See "Description of Notes--Limitation on Restricted Payments."
Upon the completion by the Company of an initial public offering generating
proceeds of at least $20 million on a pre-money equity valuation of at least
$308 per share and certain other qualifying events relating to the public
trading of the Company's securities, the Company may require conversion of the
Series B and Series C Preferred Stock in accordance with the conversion ratios
set forth above. If such public offering reflects a pre-money equity valuation
of less than $231 per share, subject to the consent of the majority holders of
the Series B Preferred Stock or Series C Preferred Stock, as the case may be,
the holders of Series B and Series C Preferred Stock shall be entitled to
receive upon conversion the greater of the following: (i) the number of shares
to be received upon a conversion as described above, and (ii) the number of
shares obtained by dividing (a) the lesser of (1) $231 and (2) $77 per share
plus the amount of accrued and unpaid cumulative dividends, plus the
Participating Amount, by (b) the pre-money value per share of the Common Stock
on a fully diluted basis implied by such public offering.
Upon liquidation, if a distribution is to be made to the holders of Common
Stock, then the holders of Series B Preferred Stock and Series C Preferred Stock
are entitled to receive, in addition to their liquidation preference, an amount
(the "Participation Amount") that such holders would have been entitled to
receive if their shares of Series B and Series C Preferred Stock had been
converted immediately prior to such distribution, provided that the total amount
that such holders shall be entitled to receive shall not exceed $308 per share.
Upon the bankruptcy or other reorganization of the Company or upon the death
of either Gerard P. Joyce or Thomas M. Pugliese, (if no acceptable replacement
is found) the holders of Series B and Series C Preferred Stock may require the
Company to redeem their shares at the liquidation price for each share plus
accrued and unpaid dividends. Such holders may also require redemption upon
certain "Participating Events" or upon a "Change of Control," which include (i)
merger or other reorganization, (ii) sale or other disposition of all or
substantially all assets, (iii) any person or group other than certain permitted
holders (including Messrs. Joyce and Pugliese) acquire 50% or more voting power,
(iv) Messrs. Joyce and Pugliese cease to serve as directors or executive
officers or (v) Messrs. Joyce and Pugliese cease to hold at least 80% of the
shares of Common Stock held by them on September 25, 1996 (other than as a
result of their death). In any such event, such holders may require the Company
to redeem their shares at a redemption price equal to the liquidation price plus
accrued and unpaid dividends, plus a Participation Amount, but in no event shall
such price exceed $308 per share.
The Indenture prohibits the Company from redeeming any Capital Stock. See
"Description of Notes--Limitation on Restricted Payments." If redemption of
shares of Series B or Series C Preferred Stock is required by their terms, and
if the payment of the redemption price would result in a breach of or event of
default under the Indenture (or other governing document), then unless and until
otherwise approved by the requisite holders of the Series B Notes or the
outstanding Series B Notes are paid in full, the Company shall not pay the
redemption price or consummate any Investor Approved Action (as defined in the
Certificates of Designation for each of the Series B and Series C Preferred
Stock) to the extent that such a breach or event of default would occur. The
above described provisions of the respective Certificates of Designation exist
for the benefit of the holders of the Notes, and are not intended to impair
obligations of the Company to the holders of Series B and Series C Preferred
Stock.
The Company has not paid any cash dividends on either the Series B Preferred
Stock or the Series C Preferred Stock. With respect to the Series B Preferred
Stock, the amount of accrued and unpaid dividends that have been added to the
liquidation preference of the shares of such series totaled $1,617,539 as of
April 30, 1998, and $213,434 in respect of dividends had accrued but had not
been added to the liquidation preference. With respect to the Series C Preferred
Stock, the amount of accrued and unpaid dividends that have been added to the
liquidation preference of the shares of such series totaled $401,373 at April
30, 1998, and $153,573 in respect of dividends had accrued but had not been
added to the liquidation preference.
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<PAGE>
WARRANTS
In connection with the private placement of $775,000 principal amount of
promissory notes, the Company issued warrants to purchase in the aggregate 3,100
shares of Common Stock (the "Old Warrants"). The Old Warrants are exercisable at
any time prior to May 1, 2000 in whole or in part at $71.43 per share. The
number of shares subject to the Old Warrants and the exercise price per share
are subject to anti-dilution adjustments. Additionally, in connection with the
Units Offering, the Company issued 125,240 Warrants representing in the
aggregate at the time of issuance approximately 20% of the Common Stock on a
fully-diluted basis. As of April 30, 1998, giving effect to anti-dilution
adjustments, there were 126,678 shares of Common Stock issuable upon exercise of
the Warrants. The Warrants will expire on February 1, 2008. Each Warrant will
entitle the holder to acquire prior to February 1, 2008 one share of Common
Stock at a price equal to $0.01 per share ("Warrant Shares"). The Warrant Shares
are subject to adjustment from time to time upon the occurrence of certain
changes in Common Stock, certain Common Stock distributions, certain issuances
of Common Stock options or convertible securities, certain dividends and
distributions, certain adjustments in the Preferred Stock and certain other
increases in the number of shares of Common Stock. The Existing Warrants and the
Warrants do not, prior to their exercise, confer any of the rights and
privileges of Common Stock.
REGISTRATION RIGHTS
As of April 30, 1998, holders of 260,039 shares of Common Stock (including
shares issuable upon exercise of outstanding Warrants or upon conversion of
Preferred Stock), or their transferees, are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of various agreements between the Company and such holders, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, certain holders (depending on the applicable agreement) are
entitled to notice of such registration and are entitled to include shares of
such Common Stock therein subject to the terms and conditions set forth in the
various agreements, including, under certain agreements, that the underwriters
of any offering have the right to limit the number of such shares included in
such registration. In addition, certain stockholders may require the Company on
various occasions to file a registration statement under the Securities Act with
respect to shares held by them, and the Company is required to use its best
efforts to effect such registration, subject to certain conditions and
limitations.
In connection with the Units Offering, the Company entered into a Common
Stock Registration Rights and Stockholders Agreement whereby the holders of the
Warrants have the right to include their Warrant Shares in any registration
statement relating to any common equity securities of the Company under the
Securities Act filed by the Company for the account of any of its holders of
Common Stock (other than a registration statement on Form S-8) subject to PRO
RATA reduction to the extent that the Company or the selling security holders
are advised by the managing underwriter thereof that the total number of Warrant
Shares and other shares of Common Stock proposed to be included therein is such
as to materially and adversely affect the success of the offering.
PREEMPTIVE RIGHTS
As of April 30, 1998, holders of 161,210 shares of Common Stock (including
shares issuable upon exercise of outstanding Warrants or upon conversion of
Preferred Stock), or their transferees, are entitled to certain rights
permitting them to maintain their percentage common equity interest in the
Company (on a fully diluted basis). Under the terms of agreements between the
Company and such holders, subject to certain conditions and limitations, if the
Company proposes to issue securities in a manner that is not exempt from the
applicable agreement it must first provide notice to such holders containing the
terms of the proposed issuance and allow such holders to purchase a number of
the new securities that will enable it to maintain its percentage common equity
interest.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of the
GCL. In general, these provisions prohibit a publicly held Delaware corporation
from engaging in a "business combination" with
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an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior
to the proposed business combination, did own) 15% or more of the corporation's
voting stock. These provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.
The GCL authorizes corporations to limit or eliminate the personal liability
of directors to corporations and their stockholders for monetary damages for
breach of directors' fiduciary duty of care. The Certificate limits the
liability of the Company's directors to the Company or its stockholders to the
fullest extent permitted by the Delaware statute as in effect from time to time.
Specifically, directors of the Company will not be personally liable for
monetary damages except for liability: (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 175 of the GCL, or (iv) for any transaction
from which the director derived an improper personal benefit.
STOCKHOLDERS' AGREEMENT
The Company is party to a Stockholders' Agreement among certain holders of
its Series B and Series C Preferred Stock. Under the Stockholders' Agreement,
the approval of a majority of the votes represented by the preferred
stockholders party to the Stockholders' Agreement is required for certain
significant corporate transactions. Pursuant to the Stockholders' Agreement,
Thomas M. Pugliese, the Company's Vice Chairman of the Board of Directors and
Chief Executive Officer, as representative of certain stockholders party
thereto, is entitled to nominate six directors of the Company, four of which are
independent directors. Mr. Pugliese has nominated himself and Gerard P. Joyce as
employee directors, and Timothy P. Hartman, David R. Voelker, Thomas J. Davis
and James P. Sheehan as such independent directors. The holders of Preferred
Stock are also entitled to appoint directors, as discussed in "-- Preferred
Stock" above.
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DESCRIPTION OF NOTES
GENERAL
The Series A Notes were issued and the Series B Notes will be issued under
an Indenture, dated as of February 1, 1998 (the "Indenture"), between the
Company and United States Trust Company of New York, as Trustee (the "Trustee"),
a copy of which is available upon request to the Company and is filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part. The
following is a summary of certain provisions of the Indenture and the Series B
Notes and does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture (including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended) and the Series B Notes.
Principal of, premium, if any, and interest on the Series B Notes will be
payable, and the Series B Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which initially shall be the corporate trust office of the Trustee in New York,
New York), except that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holders as such address appears in
the Note Register. Initially, the Trustee will act as Paying Agent and Registrar
for the Notes. The Series B Notes may be presented for registration of transfer
and exchange at the offices of the Registrar, which initially will be the
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of the Series B Notes.
The Series B Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Series B Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
TERMS OF NOTES
The Company is offering to exchange for Series B Notes $45,000,000 in
aggregate principal amount of Series A Notes, which will mature on February 1,
2003. Each Series B Note will bear interest at a rate of 12% per annum from the
date of issuance, or from the most recent date to which interest has been paid
or provided for, and be payable in cash semi-annually on each Interest Payment
Date, commencing August 1, 1998, to holders of record at the close of business
on the January 15 or July 15 preceding such Interest Payment Date. Interest will
be payable in cash or in additional Series B Notes on each Interest Payment
Date, at the option of the Company, until August 1, 2000 and thereafter will be
payable in cash. The Company expects to pay interest through August 1, 2000 by
issuing additional Notes, which would increase the principal amount of the Notes
to approximately $60.2 million. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. The Series B Notes will not be
entitled to the benefit of any mandatory sinking fund.
SECURITY
The Series B Notes are secured by a first priority security interest in
substantially all of the assets of the Company except for the Pledged Equipment.
The Company assigned and pledged to the Trustee each of the following assets,
owned by the Company on the Issue Date or, if later, the date such assets are
acquired by the Company: (a) all material interests in real property (including
material real property leases) permitted to be assigned or pledged; (b) all
contracts permitted to be assigned or pledged, together with all contract rights
arising thereunder; (c) all Receivables, inventory, equipment and fixtures
(including motor vehicles, trailers and rolling stock but excluding the Pledged
Equipment); (d) all federal and state trademarks and service marks permitted to
be assigned or pledged, together with the registrations and rights to all
renewals thereof; (e) all federal and state patents and copyrights permitted to
be assigned or pledged; (f) all computer programs and all intellectual property
rights therein permitted to be assigned or
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pledged and all other proprietary information, including, but not limited to,
trade secrets; (g) all other federal and state intellectual property rights,
permitted to be assigned or pledged; (h) all other goods, general intangibles,
chattel paper, money (but only to the extent such money is proceeds of
Collateral), securities documents, instruments and tax refund claims that are
assignable; (i) all other assets of the Company having a fair market value (as
reasonably determined by the Board of Directors of the Company) greater than
$100,000 that are permitted to be assigned or pledged; (j) all proceeds and
products of any and all of the foregoing; and (k) all books and records relating
to any of the foregoing (collectively, the "Collateral").
The security interest in favor of the Trustee in the Collateral is a first
priority interest, subject only to Permitted Liens pursuant to the Indenture;
provided, however, that in the event the Company shall enter into a Working
Capital Facility as described under (i) of paragraph (b) under "Certain
Covenants-- Limitation on Indebtedness", the security interest in the
Receivables in favor of the Trustee shall be subordinate to the security
interest in the Receivables granted pursuant to the terms of the Working Capital
Facility. In addition, the Company will assign and pledge to the Trustee all
Pledged Equipment, which lien shall be subordinate to the Lien granted in favor
of the Pledged Equipment Sellers.
If the Series B Notes become due and payable prior to the final stated
maturity thereof or are not paid in full at the final stated maturity thereof
and after any applicable grace period has expired, the Trustee has the right to
foreclose upon the Collateral in accordance with instructions from the holders
of 25% in aggregate principal amount of the Notes or, in the absence of such
instructions, in such manner as the Trustee deems appropriate in its absolute
discretion; provided, however that in the event the Company shall have entered
into a Working Capital Facility, the Trustee shall have no right to foreclose on
the Receivables without 30 days prior written notice to the secured party under
the Working Capital Facility. The Trustee does not have the right to foreclose
on or otherwise enforce its second lien on the Pledged Equipment except to the
limited extent permitted by the Pledged Equipment Sellers. The proceeds received
by the Trustee will be applied by the Trustee first to pay the expenses of such
foreclosure and fees and other amounts then payable to the Trustee under the
Indenture and the Collateral Documents, and thereafter to pay all amounts owing
to the holders of the Notes under the Indenture, the Notes and the Collateral
Documents.
No assurance can be given with respect to the ultimate value of the
Collateral. The value of the Collateral at any time will depend on market and
other economic and environmental conditions including the availability of
suitable buyers for the Collateral. See "Risk Factors -- Insufficient
Collateral."
That portion of the Collateral consisting of interests in real property to
be pledged to the Trustee have been pledged by means of mortgages, deeds of
trusts, or similar instruments (the "Mortgages"). All intercompany promissory
notes to be pledged for the benefit of the Trustee have been pledged pursuant to
one or more pledge agreements (the "Pledge Agreements"). That portion of the
Collateral consisting of patents and trademarks (and related property) is
subject to one or more collateral assignments of patents and trademarks and/or
patent and trademark security agreements (the "Patent and Trademark
Assignments"). The remaining Collateral has been pledged pursuant to, and the
second Lien on the Pledged Equipment is evidenced by, one or more security
agreements (the "Security Agreements").
The Indenture and the Collateral Documents provide that the Collateral may
be released from the lien and security interest in favor of the Trustee under
the Collateral Documents (a) upon payment in full of the Notes in accordance
with the terms of the Notes and the Indenture and the other Obligations then due
and owing under the Notes, the Indenture and the Collateral Documents or (b)
upon the sale or other disposition of Collateral if such sale or other
disposition is not prohibited under the Indenture and if the proceeds of such
sale or other disposition are applied as provided in the Indenture.
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MANDATORY REDEMPTION
The Company is not required to make mandatory redemptions or sinking fund
payments prior to the maturity of the Series B Notes.
OPTIONAL REDEMPTION
GENERAL. The Series B Notes will not be redeemable by the Company prior to
February 1, 2000. On and after such date, the Series B Notes will be redeemable,
at the Company's option, in whole or in part, upon not less than 30 nor more
than 60 days' prior notice mailed by first-class mail to each holder's
registered address, at the following redemption prices (expressed in percentages
of principal amount), if redeemed during the 12-month period commencing on
February 1 of the years set forth below, plus accrued and unpaid interest to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant Interest Payment Date):
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
- ---------------------------------------------------------------------------- -----------------
<S> <C>
2000........................................................................ 106.50%
2001........................................................................ 103.25%
2002 and thereafter......................................................... 100.00%
</TABLE>
SELECTION. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a PRO RATA basis, by lot or by
such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate. Series B Notes may be redeemed in part in multiples of $1,000
principal amount only. Notice of redemption will be sent, by first class mail,
postage prepaid, at least 45 days (unless a shorter period is acceptable to the
Trustee) prior to the date fixed for redemption to each holder whose Series B
Notes are to be redeemed at the last address for such holder then shown on the
Note Register. If any Series B Note is to be redeemed in part only, the notice
of redemption that relates to such Series B Note shall state the portion of the
principal amount thereof to be redeemed. A new Series B Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Series B Note. On and after any
redemption date, interest will cease to accrue on the Series B Notes or part
thereof called for redemption as long as the Company has deposited with the
Paying Agent funds in satisfaction of the redemption price pursuant to the
Indenture.
RANKING
The Series B Notes are secured senior Indebtedness of the Company and will
rank PARI PASSU in right of payment with all existing and future senior
Indebtedness of the Company and will rank senior in right of payment to all
existing and future Subordinated Obligations of the Company.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require the Company to repurchase all or any part of such holder's Series B
Notes, at a purchase price in cash equal to 101% of the principal amount thereof
plus any accrued and unpaid interest, if any, to the date of repurchase (subject
to the right of holders of record on the relevant record date to receive
interest due on the relevant Interest Payment Date) (such applicable purchase
price being hereinafter referred to as the "Change of Control Purchase Price").
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control, the Company shall mail a notice to each
holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such holder has the right to require the Company to purchase
such holder's Series B Notes at a purchase price in cash equal to the Change of
Control Purchase Price, (2) the repurchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (3) the
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<PAGE>
procedures determined by the Company, consistent with the Indenture, that a
holder must follow in order to have its Series B Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Series B Notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations conflict
with provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
the Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Notes as described above.
The Company's ability to pay cash to the holders upon a repurchase may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
The existence of a holder's right to require the Company to repurchase such
holder's Series B Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; PROVIDED, HOWEVER, that the Company and
any Restricted Subsidiary may Incur Indebtedness subordinated to the Notes if
(i) no Default or Event of Default shall have occurred and be continuing at the
time of such Incurrence or would occur as a consequence of such Incurrence and
(ii) on the date thereof the Consolidated Coverage Ratio would be 2.5:1 or
greater.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness Incurred pursuant to a Working Capital Facility
(including, without limitation, any renewal, extension, refunding,
restructuring, replacement or refinancing, thereof); PROVIDED, HOWEVER, that
the aggregate principal amount of all Indebtedness Incurred pursuant to this
clause (i) does not exceed (a) prior to the date on which the Company shall
have installed 11,000 NGN Displays, $3 million at any one time outstanding
or (b) from and after the date on which the Company shall have installed
11,000 NGN Displays, $8 million at any one time outstanding;
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(ii) Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property or equipment used in a Permitted
Business or Incurred to refinance any such purchase price or cost of
construction or improvement, in each case Incurred no later than 365 days
after the date of such acquisition or the date of completion of such
construction or improvement; PROVIDED, HOWEVER, that the principal amount of
any Indebtedness Incurred pursuant to this clause (ii), together with
Indebtedness Incurred in connection with Sale/ Leaseback Transactions in
accordance with the "Limitation on Sale/Leaseback Transactions" covenant,
shall not exceed $3 million at any time outstanding;
(iii) Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
the Company or any Wholly-Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (a) the Notes, (b) Subsidiary
Guarantees, (c) Existing Indebtedness and (d) any Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (iv) or
Incurred pursuant to paragraph (a);
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on the date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred in anticipation of, or to provide all or
any portion of the funds or credit support utilized to consummate the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Subsidiary or was otherwise acquired by the
Company); PROVIDED, HOWEVER, that at the time such Restricted Subsidiary is
acquired by the Company, the Company would have been able to Incur $1.00 of
additional Indebtedness pursuant to paragraph (a) above after giving effect
to the Incurrence of such Indebtedness pursuant to this clause (v) and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause
(v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of its
Restricted Subsidiaries to their customers in the ordinary course of their
business, (B) in respect of performance bonds or similar obligations of the
Company or any of its Restricted Subsidiaries for or in connection with
pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations, (C) arising from Guarantees to suppliers, lessors, licensees,
contractors, franchises or customers of obligations (other than
Indebtedness) Incurred in the ordinary course of business and (D) under
Currency Agreements and Interest Rate Agreements; PROVIDED, HOWEVER, that in
the case of Currency Agreements and Interest Rate Agreements, such Currency
Agreements and Interest Rate Agreements are entered into for bona fide
hedging purposes of the Company or its Restricted Subsidiaries (as
determined in good faith by the Board of Directors of the Company) and
correspond in terms of notional amount, duration, currencies and interest
rates, as applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture or to business
transactions of the Company or its Restricted Subsidiaries on customary
terms entered into in the ordinary course of business;
(vii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or
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Restricted Subsidiary of the Company (other than Guarantees of Indebtedness
or other obligations Incurred by any Person acquiring all or any portion of
such business assets or Restricted Subsidiary of the Company for the purpose
of financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition; PROVIDED, HOWEVER, that
the principal amount of any Indebtedness Incurred pursuant to this clause
(vii) when taken together with all Indebtedness Incurred pursuant to this
clause (vii) and then outstanding, shall not exceed $250,000;
(viii) Indebtedness consisting of (A) Guarantees by the Company of
Indebtedness Incurred by a Wholly-Owned Subsidiary without violation of the
Indenture (so long as the Company could have Incurred such Indebtedness
directly without violation of the Indenture) and (B) Guarantees by a
Restricted Subsidiary of Senior Indebtedness Incurred by the Company without
violation of the Indenture (so long as such Restricted Subsidiary could have
Incurred such Indebtedness directly without violation of the Indenture);
(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument issued by the Company or
its Restricted Subsidiaries drawn against insufficient funds in the ordinary
course of business in an amount not to exceed $250,000 at any time, provided
that such Indebtedness is extinguished within two business days of its
incurrence; and
(x) Indebtedness (other than Indebtedness described in clauses
(i)--(ix)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(x) and then outstanding, will not exceed $500,000 (it being understood that
any Indebtedness Incurred under this clause (x) shall cease to be deemed
Incurred or outstanding for purposes of this clause (x) (but shall be deemed
to be Incurred for purposes of paragraph (a)) from and after the first date
on which the Company or its Restricted Subsidiaries could have Incurred such
Indebtedness under the foregoing paragraph (a) without reliance upon this
clause (x)).
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the Company
or a Restricted Subsidiary unless such Indebtedness shall be subordinated to the
Notes and the Subsidiary Guarantee, as the case may be, to at least the same
extent as such Subordinated Obligations.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
LIMITATION ON RESTRICTED PAYMENTS
The Company shall not, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on or in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries), (ii) purchase, redeem, retire or otherwise acquire for
value any Capital Stock of the Company or any Restricted Subsidiary held by
Persons other than the Company or another Restricted Subsidiary, (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment as described in preceding clauses (i)
through (iv) being referred to as a "Restricted Payment").
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LIMITATION ON LIENS
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Liens, except for Permitted Liens.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay dividends or make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date; (b) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement relating
to any Indebtedness issued by such Restricted Subsidiary on or prior to the date
on which such Restricted Subsidiary was acquired by the Company and outstanding
on such date (other than Indebtedness Incurred in anticipation of, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary of the Company or was acquired by the
Company); (c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without
violation of the Indenture or effecting a refinancing of Indebtedness issued
pursuant to an agreement referred to in clauses (a) or (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b) or
this clause (c); PROVIDED, HOWEVER, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any of such agreement,
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Notes in any material respect, as determined in good faith by
the Board of Directors of the Company, than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in agreements in effect at, or
entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture, (C) that is included in a licensing
agreement to the extent such restrictions limit the transfer of the property
subject to such licensing agreement or (D) arising or agreed to in the ordinary
course of business and that does not, individually or in the aggregate, detract
from the value of property or assets of the Company or any of its Subsidiaries
in any manner material to the Company or any such Restricted Subsidiary; (e) in
the case of clause (iii) above, restrictions contained in security agreements,
mortgages or similar documents securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property subject to
such security agreements; (f) in the case of clause (iii) above, any instrument
governing or evidencing Indebtedness of a Person acquired by the Company or any
Restricted Subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; PROVIDED, HOWEVER, that
such Indebtedness is not Incurred in connection with or in contemplation of such
acquisition; (g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and (h) encumbrances or
restrictions arising or existing by reason of applicable law.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (as determined in good faith
by the Company's Board of Directors) (including as to the value of all non-cash
consideration), of the shares and assets
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subject to such Asset Disposition, (ii) at least 80% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents and (iii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be): (A) FIRST, to the extent the Company or any
Restricted Subsidiary elects (or is required by the terms of any senior
Indebtedness), (x) to prepay, repay or purchase senior Indebtedness or (y) to
the investment in or acquisition of Additional Assets within 365 days from the
later of the date of such Asset Disposition or the receipt of such Net Available
Cash; (B) SECOND, within 365 days from the receipt of such Net Available Cash,
to the extent of the balance of such Net Available Cash after application in
accordance with clause (A), to make an offer to purchase Notes, at 100% of the
principal amount thereof plus accrued and unpaid interest, if any, thereon; (C)
THIRD, within 90 days after the later of the application of Net Available Cash
in accordance with clause (A) and (B) and the date that is one year from the
receipt of such Net Available Cash to prepay, repay or repurchase Indebtedness
(other than Preferred Stock) of a Wholly-Owned Subsidiary (in each case other
than Indebtedness owed to the Company); and (D) FOURTH, to the extent of the
balance of such Net Available Cash after application in accordance with clauses
(A), (B) and (C), to (w) the investment in or acquisition of Additional Assets,
(x) the making of Temporary Cash Investments, (y) the prepayment, repayment or
purchase of Indebtedness of the Company (other than Indebtedness owing to any
Subsidiary of the Company) or Indebtedness of any Subsidiary (other than
Indebtedness owed to the Company or any of its Subsidiaries) or (z) any other
purpose otherwise permitted under the Indenture, in each case within the later
of 45 days after the application of Net Available Cash in accordance with
clauses (A), (B) and (C) or the date that is one year from the receipt of such
Net Available Cash; PROVIDED, HOWEVER, that, in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (B), (C) or (D)
above, the Company or such Restricted Subsidiary shall retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently reduced
in an amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant at any
time exceed $500,000. The Company shall not be required to make an offer for
Notes pursuant to this covenant if the Net Available Cash available therefor
(after application of the proceeds as provided in clause (A)) is less than
$500,000 for any particular Asset Disposition (which lesser amounts shall be
carried forward for purposes of determining whether an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of senior Indebtedness of the Company or
senior Indebtedness of any Restricted Subsidiary of the Company and the release
of the Company or such Restricted Subsidiary from all liability on such senior
Indebtedness or senior Indebtedness in connection with such Asset Disposition
(in which case the Company shall, without further action, be deemed to have
applied such assumed Indebtedness in accordance with clause (A) of the preceding
paragraph) and (y) securities received by the Company or any Restricted
Subsidiary of the Company from the transferee that are promptly (and in any
event within 60 days) converted by the Company or such Restricted Subsidiary
into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(B), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 100% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the purchase date in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of the Notes tendered pursuant to the offer is less than the Net
Available Cash allotted to the purchase of the Notes, the Company will apply the
remaining Net Available Cash in accordance with clauses (a)(iii)(C) or (D)
above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Series B Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations
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conflict with provisions of this covenant, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Indenture by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any transaction
or series of related transactions (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with or for the
benefit of any Affiliate of the Company, other than a Wholly-Owned Subsidiary
(an "Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction
are no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those that could be obtained at the time of such transaction in
arm's length dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in excess of
$100,000, the terms of such transaction have been approved by a majority of the
members of the Board of Directors of the Company and by a majority of the
disinterested members of such Board, if any (and such majority or majorities, as
the case may be, determines that such Affiliate Transaction satisfies the
criteria in (i) above); and (iii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $250,000, the Company has received a
written opinion from an independent investment banking firm of nationally
recognized standing that such Affiliate Transaction is fair to the Company or
such Restricted Subsidiary, as the case may be, from a financial point of view;
PROVIDED, HOWEVER, that in the event advertising contracts entered into in the
ordinary course of business between the Company and Hachette Filipacchi exceed
$250,000, such contracts need only be approved in the manner contemplated in
(a)(ii) above.
(b) The foregoing paragraph (a) shall not apply to (i) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, or any stock options
and stock ownership plans for the benefit of employees, officers and directors,
consultants and advisors approved by the Board of Directors of the Company, (ii)
loans or advances to employees in the ordinary course of business of the Company
or any of its Restricted Subsidiaries in aggregate amount outstanding not to
exceed $100,000 at any time, (iii) any transaction between Wholly-Owned
Subsidiaries, (iv) indemnification agreements with, and the payment of fees and
indemnities to, directors, officers and employees of the Company and its
Restricted Subsidiaries, in each case in the ordinary course of business, (v)
transactions pursuant to agreements in existence on the Issue Date which are (x)
described in the Prospectus or (y) otherwise, in the aggregate, immaterial to
the Company and its Restricted Subsidiaries taken as a whole, (vi) any
employment, non-competition or confidentiality agreements entered into by the
Company or any of its Restricted Subsidiaries with its employees in the ordinary
course of business, and (vii) the issuance of Capital Stock of the Company
(other than Disqualified Stock).
LIMITATION ON ISSUANCES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit any of its Restricted Subsidiaries to issue any
Capital Stock to any Person (other than to the Company or a Wholly-Owned
Subsidiary of the Company) or permit any Person (other than the Company or a
Wholly-Owned Subsidiary of the Company) to own any Capital Stock of a Restricted
Subsidiary of the Company, if in either case as a result thereof such Restricted
Subsidiary would no longer be a Restricted Subsidiary of the Company; PROVIDED,
HOWEVER, that this provision shall not prohibit (x) the Company or any of its
Restricted Subsidiaries from selling, leasing or otherwise disposing of all of
the Capital Stock of any Restricted Subsidiary or (y) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
Indenture.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, Guarantee or otherwise become liable with
respect to any Sale/Leaseback Transaction with respect to any property or assets
unless (i) the Company or such Restricted Subsidiary, as the case may be, would
be entitled to pursuant to the Indenture Incur Indebtedness secured by a
Permitted Lien on such property or
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assets in an amount equal to the Attributable Indebtedness with respect to such
Sale/Leaseback Transaction, (ii) the Net Cash Proceeds from such Sale/Leaseback
Transaction are at least equal to the fair market value of the property or
assets subject to such Sale/Leaseback Transaction (such fair market value
determined, in the event such property or assets have a fair market value in
excess of $500,000, no more than 30 days prior to the effective date of such
Sale/Leaseback Transaction, by the Board of Directors of the Company as
evidenced by a resolution of such Board of Directors), (iii) the Net Cash
Proceeds of such Sale/Leaseback Transaction are applied in accordance with the
provisions described under "--Limitation on Sales of Assets and Subsidiary
Stock," and (iv) the Indebtedness Incurred in connection with such Sale/
Leaseback Transaction, together with Indebtedness Incurred in accordance with
(ii) of paragraph (b) of the "Limitation on Indebtedness" covenant, does not
exceed $3 million at any time outstanding.
SEC REPORTS
The Company will file with the Trustee and provide to the holders of the
Series B Notes, within 15 days after it files them with the Commission, copies
of the annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may by rules
and regulations prescribe) which the Company files with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act. In the event that the Company is not
required to file such reports with the Commission pursuant to the Exchange Act,
the Company will nevertheless deliver such Exchange Act information to the
holders of the Notes within 15 days after it would have been required to file it
with the Commission.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES
The Company may designate any Subsidiary of the Company (other than a
Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of (i)
fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to Incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Indebtedness" at the time of Designation
(assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
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The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
FUTURE NOTE GUARANTEES
The Company will cause each newly organized or acquired Subsidiary (other
than any Unrestricted Subsidiary) to execute and deliver to the Trustee a
Guarantee of the Series B Notes in form and substance satisfactory to the
Trustee. Such Guaranty will be secured by a first priority lien on all of the
assets of such Subsidiary except that the lien on any Receivables of any such
Subsidiary may be a second priority lien in the event that a first priority lien
secures a Working Capital Facility.
CONDUCT OF BUSINESS
The Company shall not, nor shall permit any of its Subsidiaries, directly or
indirectly, to engage in any business other than a Permitted Business.
MERGER AND CONSOLIDATION
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a corporation, partnership, trust or limited liability company
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and the Successor Company (if not the
Company) shall expressly assume, by supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Series B Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been incurred by the Successor Company or such Restricted Subsidiary at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company (A) would have a Consolidated Net Worth equal or greater to
the Consolidated Net Worth of the Company immediately prior to such transaction
and (B) would be able to Incur at least an additional $1.00 of Indebtedness
pursuant to paragraph (a) of "--Limitation on Indebtedness"; (iv) the Company
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture; and (v) there has
been delivered to the Trustee an Opinion of Counsel to the effect that holders
of Series B Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such consolidation, merger, conveyance,
transfer or lease and will be subject to U.S. federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such consolidation, merger, conveyance, transfer or lease had not occurred.
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The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Series
B Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under the "Merger and Consolidation" covenant described under
"Certain Covenants" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described under
"Change of Control" above or under covenants described under "Certain Covenants"
above (in each case, other than a failure to purchase Notes which shall
constitute an Event of Default under clause (ii) above), other than "Merger and
Consolidation," (v) the failure by the Company or any Subsidiary Guarantor to
comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Subsidiary is not paid within
any applicable grace period after final maturity or is accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $250,000 and such default shall not have been
cured or such acceleration rescinded after a 10-day period, (vii) certain events
of bankruptcy, insolvency or reorganization of the Company or any Subsidiary
(the "bankruptcy provisions"), (viii) any judgment or decree for the payment of
money in excess of $250,000 (to the extent not covered by insurance) is rendered
against the Company or a Subsidiary and such judgment or decree shall remain
unsatisfied, undischarged or unstayed for a period of 60 days after such
judgment becomes final and non-appealable (the "judgment default provision"),
(ix) any Subsidiary Guarantee by a Subsidiary Guarantor ceases to be in full
force and effect (except as contemplated by the terms of the Indenture) or any
Subsidiary Guarantor denies or disaffirms its obligations under the Indenture or
its Subsidiary Guarantee and such Default continues for 10 days, (x) an event of
default under, or if none specified therein, a failure to comply with any
provision of the Collateral Documents and the continuance of such event of
default or failure to comply, as the case may be, for a period of 30 days after
written notice is given by the Trustee to the Company or to the Company and the
Trustee by the Holders of at least 25% in aggregate principal amount of the
Notes outstanding, provided that if such event of default or failure to comply,
as the case may be, adversely affects (1) any Collateral with an aggregate book
value of $100,000, (2) the priority or perfection of the security interests
purported to be created with respect to any portion of the Collateral with an
aggregate book value of $100,000 or (3) the rights and remedies of the Trustee
or the respective secured creditors in respect of any portion of the Collateral
with an aggregate book value of $100,000, then the event of default or failure,
as the case may be, need only continue for a period of 10 days after written
notice is given by the Trustee to the Company or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the outstanding
Notes. However, a default under clause (iv) or (v) will not constitute an Event
of Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clause (iv) or (v) after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of all outstanding series of Notes, voting
as a single class, by notice to the Company may declare to be immediately due
and payable, the principal amount thereof of all the Notes then outstanding plus
accrued interest on the Notes to the date of acceleration. Upon such a
declaration, such principal and premium and accrued and unpaid interest shall be
due and payable immediately. If an Event of Default
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relating to certain events of bankruptcy, insolvency or reorganization of the
Company occurs, the principal of and accrued and unpaid interest on all the
Notes will become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Series B Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and (v)
the holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Note, the Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its Trust officers in good faith determines
that withholding notice is in the interests of the holders of the Notes. In
addition, the Company is required to deliver to the Trustee, within 90 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any events which would constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose holders must consent to an amendment, (ii) reduce the stated rate of or
extend the stated time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under "Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder to receive payment of principal of and interest
on such holder's Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Notes or
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
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Without the consent of any holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation, partnership, trust or limited
liability company of the obligations of the Company under the Indenture
(provided that there has been delivered to the Trustee an Opinion of Counsel to
the effect that holders of Notes will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such assumption and will be
subject to U.S. federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such assumption had not
occurred), to provide for uncertificated Series B Notes in addition to or in
place of certificated Series B Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163 (f) (2)
(B) of the Code), to add further Guarantees with respect to the Series B Notes,
to secure the Series B Notes with additional collateral, to add to the covenants
of the Company for the benefit of the holders or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust Indenture
Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Series B
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Series B Notes, to replace mutilated, destroyed,
lost or stolen Series B Notes and to maintain a registrar and paying agent in
respect of the Series B Notes. The Company at any time may terminate its
obligations under covenants described under "Certain Covenants" (other than
"Merger and Consolidation"), the operation of the cross acceleration provision,
the bankruptcy provisions with respect to Subsidiaries, the judgment default
provision and the Subsidiary Guaranty provision described under "Events of
Default" above and the limitations contained in clauses (iii) and (iv) under
"Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Series B Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Series B Notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
(with respect only to Subsidiaries), (viii) or (ix) under "Events of Default"
above or because of the failure of the Company to comply with clause (iii) or
(iv) under "Certain Covenants--Merger and Consolidation" above. If the Company
exercises either defeasance option, the Trustee shall release all Collateral.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Series B Notes to redemption or maturity, as the case may be,
and must comply with certain other conditions, including delivery to the Trustee
of an Opinion of Counsel to the effect that holders of the Series B Notes will
not recognize income, gain or loss for Federal income tax purposes as a result
of such deposit and defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
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SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture ceases to be of further effect (except as otherwise expressly
provided for in the Indenture) when either (i) all outstanding Notes have been
delivered (other than lost, stolen or destroyed Series B Notes which have been
replaced) to the Trustee for cancellation or (ii) all outstanding Series B Notes
have become due and payable, whether at maturity or as a result of the mailing
of a notice of redemption pursuant to the terms of the Indenture and the Company
has irrevocably deposited with the Trustee funds sufficient to pay at maturity
or upon redemption all outstanding Series B Notes, including interest thereon
(other than lost, stolen, mutilated or destroyed Series B Notes which have been
replaced), and, in either case, the Company has paid all other sums payable
under the Indenture. The Trustee is required to acknowledge satisfaction and
discharge of the Indenture on demand of the Company accompanied by an Officer's
Certificate and an Opinion of Counsel at the cost and expense of the Company.
TRANSFER AND EXCHANGE
Upon any transfer of a Series B Note, the Registrar may require a holder of
Series B Notes, among other things, to furnish appropriate endorsements and
transfer documents, and to pay any taxes and fees required by law or permitted
by the Indenture. The Registrar is not required to transfer or exchange any
Series B Notes selected for redemption nor is the Registrar required to transfer
or exchange any Series B Notes for a period of 15 days before a selection of
Series B Notes to be redeemed. The registered holder of a Series B Note may be
treated as the owner of it for all purposes.
CONCERNING THE TRUSTEE
United States Trust Company of New York is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Series B Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim a security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Indenture) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Series B Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of
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the acquisition of such Capital Stock by the Company or a Restricted Subsidiary
of the Company; (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary of the Company; or (iv)
Permitted Investments of the type and in the amounts described in clause (viii)
of the definition thereof; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Permitted
Business.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in the
ordinary course of business, (iii) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Restricted Subsidiaries and that is disposed of in each
case in the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the beginning of
the calendar year in which such disposition is consummated, do not exceed
$100,000, and (v) transactions permitted under "Certain Covenants--Merger and
Consolidation" above.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years (rounded upwards to the nearest month)
from the date of determination to the dates of each successive scheduled
principal payment of such Indebtedness or redemption or similar payment with
respect to Preferred Stock multiplied by the amount of such payment by (ii) the
sum of all such payments.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully Guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less
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from the date of acquisition, bankers' acceptances with maturities not exceeding
one year and overnight bank deposits, in each case with any commercial bank
having capital and surplus in excess of $500 million, (iv) repurchase
obligations for underlying securities of the types described in clauses (ii) and
(iii) entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper rated A-1 or the
equivalent thereof by Moody's or S&P and in each case maturing within one year
after the date of acquisition, (vi) investment funds investing 95% of their
assets in securities of the types described in clauses (i)-(v) above, (vii)
readily marketable direct obligations issued by any state of the United States
of America or any political subdivision thereof having one of the two highest
rating categories obtainable form either Moody's or S&P and (viii) Indebtedness
or Preferred Stock issued by Persons with a rating of "A" or higher from S&P or
"A2" or higher from Moody's.
"Change of Control" means (i) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Company and its Subsidiaries; or (ii) a majority of the
Board of Directors of the Company or of any direct or indirect holding company
thereof shall consist of Persons who are not Continuing Directors of the
Company; or (iii) the acquisition by any Person or group of related Persons
(other than the Controlling Group) for purposes of Section 13(d) of the Exchange
Act, of the power, directly or indirectly, to vote or direct the voting of
securities having more than 50% of the ordinary voting power for the election of
directors of the Company or of any direct or indirect holding company thereof.
"Collateral Documents" means the Security Agreements, the Pledge Agreements,
the Mortgages, the Patent and Trademark Assignments and any other agreements
creating a lien in favor of the Trustee securing the Notes.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, (v) exchange or
translation losses on foreign currencies, and (vi) all other non-cash items
reducing Consolidated Net Income (excluding any non-cash item to the extent it
represents an accrual of or reserve for cash disbursements for any subsequent
period prior to the Stated Maturity of the Notes) and less, to the extent added
in calculating Consolidated Net Income, (x) exchange or translation gains on
foreign currencies and (y) non-cash items (excluding such non-cash items to the
extent they represent an accrual for cash receipts reasonably expected to be
received prior to the Stated Maturity of the Notes), in each case for such
period. Notwithstanding the foregoing, the income tax expense, depreciation
expense and amortization expense of a Subsidiary of the Company shall be
included in Consolidated Cash Flow only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent two consecutive fiscal quarters ending prior to the date of such
determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such two fiscal quarters; PROVIDED, HOWEVER,
that (1) if the Company or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar
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arrangement) only that portion of such Indebtedness that constitutes the one
year projected average balance of such Indebtedness (as determined in good faith
by the Board of Directors of the Company) shall be deemed outstanding for
purposes of this calculation), and (B) the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period any Indebtedness of the
Company or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(3) if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (i) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of the Company or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary of the Company is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale) and (ii) increased
by interest income attributable to the assets which are the subject of such
Asset Disposition for such period, (4) if since the beginning of such period the
Company or any of its Restricted Subsidiaries (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary of the Company (or any
Person which becomes a Restricted Subsidiary of the Company as a result thereof)
or an acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (5) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (3) or (4) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in accordance
with GAAP, PLUS, to the extent not included in such interest expense (i)
interest expense attributable to Capitalized Lease Obligations, (ii)
amortization of
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debt discount, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) net payments (whether positive or
negative) pursuant to Interest Rate Agreements, (viii) the cash contributions to
any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by such
plan or trust and (ix) cash and Disqualified Stock dividends in respect of all
Preferred Stock of Subsidiaries and Disqualified Stock of the Company held by
Persons other than the Company or a Wholly-Owned Subsidiary and less (a) to the
extent included in such interest expense, the amortization of capitalized debt
issuance costs and (b) interest income. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary of the
Company, that was not a Wholly-Owned Subsidiary, shall be included only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net income
(loss) of the Company and its consolidated Restricted Subsidiaries determined in
accordance with GAAP; PROVIDED, HOWEVER, that there shall not be included in
such Consolidated Net Income: (i) any net income (loss) of any Person acquired
by the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company (other than restrictions in effect on the Issue Date
with respect to a Restricted Subsidiary of the Company and other than
restrictions that are created or exist in compliance with the "Limitation on
Restrictions on Distributions from Restricted Subsidiaries" covenant), (iii) any
gain or loss realized upon the sale or other disposition of any assets of the
Company or its consolidated Restricted Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) which are not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person, (iv) any extraordinary gain or
loss, (v) the cumulative effect of a change in accounting principles, (vi) the
net income of any Person, other than a Restricted Subsidiary, except to the
extent of the lesser of (A) cash dividends or distributions actually paid to the
Company or any of its Restricted Subsidiaries by such Person and (B) the net
income of such Person (but in no event less than zero), and the net loss of such
Person (other than an Unrestricted Subsidiary) shall be included only to the
extent of the aggregate Investment of the Company or any of its Restricted
Subsidiaries in such Person and (vii) any non-cash expenses attributable to
grants or exercises of employee stock options.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made and for which financial
statements are available (but in no event ending more than 135 days prior to the
taking of such action), as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Indenture; (ii) was nominated for election or elected to the Board
of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election; or (iii) was nominated or elected to
the Board of Directors in accordance with the provisions of the Stockholders
Agreement dated as of September 25, 1996, as amended by the First Amendment to
the Stockholders Agreement dated as of August 29, 1997, as such agreement may be
further amended or supplemented from time to time.
"Controlling Group" means Gerard Joyce, Thomas Pugliese or any Related
Party.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
Stated Maturity of the Notes, or (ii) is convertible into or exchangeable
(unless at the sole option of the issuer thereof) for (a) debt securities or (b)
any Capital Stock referred to in (i) above, in each case at any time prior to
the Stated Maturity of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued thereon,
after application of the net proceeds of the sale of the Units as described in
this Prospectus.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
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"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v) ) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such Person
of a demand for reimbursement following payment on the letter of credit, (iv)
all obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses Incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of the Company, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Notes (but excluding, in each case, accrued dividends) with the amount of
Indebtedness represented by such Disqualified Stock or Preferred Stock, as the
case may be, being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price; PROVIDED,
HOWEVER, that, for purposes hereof the "maximum fixed repurchase price" of any
Disqualified Stock or Preferred Stock, as the case may be, which does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock or Preferred Stock, as the case may be, as if such
Disqualified Stock or Preferred Stock, as the case may be, were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based on the fair market value of such
Disqualified Stock or Preferred Stock, as the case may be, such fair market
value shall be determined in good faith by the Board of Directors of the Company
and (ix) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. Unless specifically set
forth above, the amount of Indebtedness of any Person at any date shall be the
outstanding principal amount of all unconditional obligations as described
above, as such amount would be reflected on a balance sheet prepared in
accordance with GAAP, and the maximum liability of such Person, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts payable on the balance sheet of such Person) or other extension of
credit (including by way of Guarantee or similar arrangement, but excluding any
debt or extension of credit represented by a bank deposit other than a time
deposit) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person. For purposes of the "Limitation
on Restricted Payments" covenant, (i) "Investment" shall include the portion
(proportionate to the Company's equity interest in a Restricted Subsidiary to be
designated as an Unrestricted Subsidiary) of the fair market value of the net
assets of such Restricted Subsidiary of the Company at the time that such
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Restricted Subsidiary is designated an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"NGN Displays" means the Company's out-of-home electronic billboards which
display video-based information, entertainment and advertising.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to any Person owning a beneficial
interest in assets subject to sale or minority interest holders in Subsidiaries
or joint ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition, PROVIDED HOWEVER, that upon any reduction in such
reserves (other than to the extent resulting from payments of the respective
reserved liabilities), Net Available Cash shall be increased by the amount of
such reduction to reserves, and retained by the Company or any Restricted
Subsidiary of the Company after such Asset Disposition and (v) any portion of
the purchase price from an Asset Disposition placed in escrow (whether as a
reserve for adjustment of the purchase price, for satisfaction of indemnities in
respect of such Asset Disposition or otherwise in connection with such Asset
Disposition) PROVIDED, HOWEVER, that upon the termination of such escrow, Net
Available Cash shall be increased by any portion of funds therein released to
the Company or any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually Incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, any Vice-President, the Treasurer or the Secretary of
the Company.
"Officer's Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial or
accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Trustee, from legal counsel who is acceptable to the Trustee.
"Paying Agent" means United States Trust Company of New York, as paying
agent under the Indenture, or any successor thereto appointed pursuant to the
Indenture.
"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture, as reasonably determined
by the Company's Board of Directors.
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company;
PROVIDED, HOWEVER, that the primary business of such Wholly-Owned Subsidiary is
a Permitted Business; (ii) another Person if as a result of such Investment such
other Person becomes a Wholly-Owned Subsidiary of the Company or is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company; PROVIDED,
HOWEVER, that in each case such Person's primary business is a Permitted
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any of its Restricted Subsidiaries, created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary in an aggregate amount outstanding at any one time not to exceed
$100,000; (vii) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any of
its Restricted Subsidiaries or in satisfaction of judgments or claims; (viii) a
Person engaged in a Permitted Business or a loan or advance to the Company the
proceeds of which are used solely to make an investment in a Person engaged in a
Permitted Business or a Guarantee by the Company of Indebtedness of any Person
in which such Investment has been made; PROVIDED, HOWEVER, that no Permitted
Investments may be made pursuant to this clause (viii) to the extent the amount
thereof would, when taken together with all other Permitted Investments made
pursuant to this clause (viii), exceed $1 million in the aggregate (plus, to the
extent not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (viii), or any release or other
cancellation of any Guarantee constituting such Permitted Investment); PROVIDED,
FURTHER, that the aggregate amount of Permitted Investments made pursuant to
this clause (viii) that are not Investments in a joint venture, partnership or
similar arrangement in the out of home advertising industry shall not exceed
$250,000; (ix) Persons to the extent such Investment is received by the Company
or any Restricted Subsidiary as consideration for asset dispositions effected in
compliance with the covenant described under "Limitations on Sales of Assets and
Subsidiary Stock"; (x) prepayments and other credits to suppliers made in the
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ordinary course of business consistent with the past practices of the Company
and its Restricted Subsidiaries; and (xi) Investments in connection with
pledges, deposits, payments or performance bonds made or given in the ordinary
course of business in connection with or to secure statutory, regulatory or
similar obligations, including obligations under health, safety or environmental
obligations.
"Permitted Liens" means: (i) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens, in each case for sums not yet due from the
Company or any Restricted Subsidiary or being contested in good faith by
appropriate proceedings by the Company or any Restricted Subsidiary, as the case
may be, or other Liens arising out of judgments or awards against the Company or
any Restricted Subsidiary with respect to which the Company or such Restricted
Subsidiary, as the case may be, will then be prosecuting an appeal or other
proceedings for review; (ii) Liens for property taxes or other taxes,
assessments or governmental charges of the Company or any Restricted Subsidiary
not yet due or payable or subject to penalties for nonpayment or which are being
contested by the Company or such Restricted Subsidiary, as the case may be, in
good faith by appropriate proceedings; (iii) Liens in favor of issuers of
performance bonds and surety bonds issued pursuant to clause (vi) under
"--Certain Covenants--Limitation on Indebtedness"; (iv) survey exceptions,
encumbrances, easements or, reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone lines and other
similar purposes or zoning or other restrictions as to the use of real property
of the Company or any Restricted Subsidiary incidental to the ordinary course of
conduct of the business of the Company or such Restricted Subsidiary or as to
the ownership of properties of the Company or any Restricted Subsidiary, which,
in either case, were not incurred in connection with Indebtedness and which do
not in the aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of the Company or
any Restricted Subsidiary; (v) Liens outstanding immediately after the Issue
Date as set forth in a schedule to the Indenture; (vi) Liens on property, assets
or shares of stock of any Restricted Subsidiary at the time such Restricted
Subsidiary became a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) if
any such Lien has been Incurred in anticipation of such transaction, such
property, assets or shares of stock subject to such Lien will have a fair market
value at the date of the acquisition thereof not in excess of the lesser of (1)
the aggregate purchase price paid or owed by the Company in connection with the
acquisition of such Restricted Subsidiary and (2) the fair market value of all
property and assets of such Restricted Subsidiary and (B) any such Lien will not
extend to any other assets owned by the Company or any Restricted Subsidiary;
(vii) Liens on property or assets at the time the Company or any Restricted
Subsidiary acquired such assets, including any acquisition by means of a merger
or consolidation with or into the Company or such Restricted Subsidiary;
PROVIDED, HOWEVER, that (A) if any such Lien is Incurred in anticipation of such
transaction, such property or assets subject to such Lien will have a fair
market value at the date of the acquisition thereof not in excess of the lesser
of (1) the aggregate purchase price paid or owed by the Company or such
Restricted Subsidiary in connection with the acquisition thereof and of any
other property and assets acquired simultaneously therewith and (2) the fair
market value of all such property and assets acquired by the Company or such
Restricted Subsidiary and (B) any such Lien will not extend to any other
property or assets owned by the Company or any Restricted Subsidiary; (viii)
Liens securing Indebtedness or other obligations of a Restricted Subsidiary
owing to the Company or a Wholly Owned Subsidiary; (ix) Liens to secure any
extension, renewal, refinancing, replacement or refunding (or successive
extensions, renewals, refinancings, replacements or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in any of clauses (v),
(vi) and (vii); PROVIDED, HOWEVER, that any such Lien will be limited to all or
part of the same property or assets that secured the original Lien (plus
improvements on such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien will not be increased to an amount
greater than the sum of (A) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness described under clauses (v), (vi) and
(vii) at the time the original Lien became a Permitted Lien under the Indenture
and (B) an amount necessary to pay any premiums, fees and other expenses
Incurred by the Company in connection with such refinancing, refunding,
extension, renewal or replacement; (x) Liens on property or assets of the
Company securing Interest Rate Agreements and Currency Agreements so long as the
related Indebtedness is, and is
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permitted under "--Certain Covenants--Limitation on Indebtedness", secured by a
Lien on the same property securing the relevant Interest Rate Agreement or
Currency Agreement; (xi) Liens on property or assets of the Company or any
Restricted Subsidiary securing Indebtedness (1) under purchase money obligation
or Capital Lease Obligations permitted under "--Limitation on Indebtedness" or
(2) under Sale/Leaseback Transactions permitted under "--Limitation on
Sale/Leaseback Transactions"; PROVIDED, that (A) the amount of Indebtedness
Incurred in any specific case does not, at the time such Indebtedness is
Incurred, exceed the lesser of the cost or fair market value of the property or
asset acquired or constructed in connection with such purchase money obligation
or Capital Lease Obligation or subject to such Sale/Leaseback Transaction, as
the case may be, (B) such Lien will attach to such property or asset upon
acquisition of such property or asset and or upon commencement of such
Sale/Leaseback Transaction, as the case may be, and (C) no property or asset of
the Company or any Restricted Subsidiary (other than the property or asset
acquired or contracted in connection with such purchase money Obligation or
Capital Lease obligation or subject to such Sale/Leaseback Transaction, as the
case may be) are subject to any Lien securing such Indebtedness; (xii) Liens
granted to the Trustee on the assets of the Company securing the Company's
obligations under the Indenture; (xiii) Liens granted to the Trustee on the
assets of the Subsidiary Guarantors securing the Subsidiary Guarantors'
Obligations under the Guarantees; and (xiv) Liens on Receivables granted by the
Company and the Subsidiary Guarantors which secures Indebtedness to the extent
such Indebtedness is incurred pursuant to clause (i) of paragraph (b) under the
"Limitation on Indebtedness" covenant.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Pledged Equipment" means that certain equipment pledged pursuant to (i) the
Security Agreement dated as of January 1, 1997 between the Company and Adams
Outdoor Advertising, LLC and (ii) the Security Agreement dated as of August 18,
1997 between Morris Communications, Inc. and the Company.
"Pledged Equipment Notes" means those notes issued by the Company evidencing
the Company's obligations to the Pledged Equipment Sellers.
"Pledged Equipment Sellers" means Adams Outdoor Advertising, LLC and Morris
Communications, Inc.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Receivables" means any "account" as such term is defined in the Uniform
Commercial Code as in effect on the date hereof in the State of New York, now or
hereafter owned by the Company or any Restricted Subsidiary and, in any event,
shall include, but shall not be limited to, all of the Company's or any
Restricted Subsidiary's rights to payment for goods sold or leased or services
performed by the Company or any Restricted Subsidiary, whether now in existence
or arising from time to time hereafter, including, without limitation, rights
evidenced by an account, note, contract, security agreement, chattel paper, or
other evidence of indebtedness or security, together with (a) all security
pledged, assigned, hypothecated or granted to or held by the Company or any
Restricted Subsidiary to secure the foregoing, (b) all of the Company's or any
Restricted Subsidiary's right, title and interest in and to any goods, the sale
of which gave rise thereto, (c) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (d) all powers of attorney for
the execution of any evidence of indebtedness or security or other writing in
connection therewith, (e) all books, records, ledger cards, and invoices related
thereto, (f) all evidences of the filing of financing statements and other
statements and the registration of other instruments in connection therewith and
amendments thereto, notices to other creditors or secured
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parties, and certificates from filing or other registration officers, (g) all
credit information, reports and memoranda relating thereto and (h) all other
writings related in any way to the foregoing.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
PROVIDED, HOWEVER, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Notes and (B) Stated Maturity of the Indebtedness being refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the lesser of (A) the
Average Life of the Notes and (B) the Average Life of the Indebtedness being
refinanced and (iii) the Refinancing Indebtedness is in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to (or 101% of, in the case of a refinancing of the Notes in
connection with a Change of Control) or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the accreted value)
then outstanding of the Indebtedness being refinanced.
"Registrar" means United States Trust Company of New York, as registrar
under the Indenture, or any successor thereto appointed pursuant to the
Indenture.
"Related Party" means (A) the spouse or immediate family member of either
Gerard Joyce or Thomas Pugliese or (B) any trust, corporation, partnership or
other entity, the beneficiaries, shareholders, partners, members, owners or
Persons beneficially holding an 80% or more controlling interest of which
consist of either Gerard Joyce or Thomas Pugliese and/or such other Persons
referred to in the immediately preceding clause (A).
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"S&P" means Standard and Poor's Ratings Group.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means the Guarantee of the Notes by a Subsidiary
Guarantor.
"Subsidiary Guarantor" means each Subsidiary of the Company (other than
Unrestricted Subsidiaries) created or acquired by the Company after the Issue
Date.
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"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
(v) Investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's and
(vi) Investments in mutual funds whose investment guidelines restrict such
funds' investments to those satisfying the provisions of clauses (i) through (v)
above.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED,
HOWEVER, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise becomes liable with respect to any
Indebtedness other than Non-Recourse Indebtedness and either (A) the Subsidiary
to be so designated has total consolidated assets of $10,000 or less or (B) if
such Subsidiary has consolidated assets greater than $10,000, then such
designation would be permitted under "Limitation on Restricted Payments." The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary subject to the limitations contained in "Limitation on Designations
of Unrestricted Subsidiaries."
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Working Capital Facility" means any credit facility entered into during the
term of the Notes providing for working capital financing for the Company and
its Restricted Subsidiaries.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of counsel described below)
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice. There can be no assurance that the Internal Revenue
Service (the "Service") will not take a contrary view, and no ruling from the
Service has been or will be sought. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could alter or modify the
statements and conditions set forth herein. Any such changes or interpretations
may or may not be retroactive and could affect the tax consequences to holders.
Certain holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States) may be subject to special rules
not discussed below. The Company recommends that each holder consult such
holder's own tax adviser as to the particular tax consequences of exchanging
such holder's Series A Notes for Series B Notes, including the applicability and
effect of any state, local or foreign tax laws.
Cooperman Levitt Winikoff Lester & Newman, P.C., counsel to the Company, has
advised the Company that in its opinion, the exchange of the Series A Notes for
Series B Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes because the Series B Notes should not
be considered to differ materially in kind or extent from the Series A Notes.
Rather, the Series B Notes received by a holder should be treated as a
continuation of the Series A Notes in the hands of such holder. As a result,
there should be no federal income tax consequences to holders exchanging Series
A Notes for Series B Notes pursuant to the Exchange Offer.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Series A Notes were originally sold by the Company on February 18, 1998
to the Initial Purchaser pursuant to the Purchase Agreement. The Initial
Purchaser subsequently resold the Series A Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. As a condition to the
Purchase Agreement, the Company and the Initial Purchaser entered into the
Registration Rights Agreement pursuant to which the Company agreed, for the
benefit of the holders of the Series A Notes, that the Company will, at its own
expense, (i) file no later than the 45th day after the issue date of the Series
A Notes (the "Issue Date") an Exchange Offer Registration Statement with the
Commission with respect to the Exchange Offer for Series B Notes of the Company,
which will have terms substantially identical in all material respects to the
Series A Notes (except that the Series B Notes will not contain terms with
respect to transfer restrictions as described herein), (ii) use its best efforts
to cause the Exchange Offer Registration Statement to be declared effective by
the Commission under the Securities Act no later than the 150th day after the
Issue Date and (iii) use its best efforts to cause such Exchange Offer
Registration Statement to remain effective until the closing of the Exchange
Offer and (iv) use its best efforts to consummate the Exchange Offer no later
than 180 days after the Issue Date. Upon the Exchange Offer Registration
Statement being declared effective, the Company will commence the Exchange
Offer. The Company will keep the Exchange Offer open for not less than 30
business days (or longer if required by applicable law) after the date that
notice of the Exchange Offer is mailed to the holders of the Series A Notes. For
each Series A Note surrendered to the Company pursuant to the Exchange Offer,
the holder who surrendered such Series A Note will receive a Series B Note
having a principal amount equal to that of the surrendered Series A Note.
Interest on each Series B Note will accrue from the last date on which interest
was paid on the Series A Note surrendered in exchange therefor or, if no
interest has been paid on such Series A Note, from the Series A Note Issue Date.
Under existing interpretations of the staff to the Commission contained in
several no-action letters to third parties, the Series B Notes would generally
be freely transferable by holders thereof other than affiliates of the Company
after the Exchange Offer without further registration under the Securities Act
(subject to certain representations required to be made by each holder of Series
B Notes, as set forth below). In
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addition, in connection with any resales of the Series B Notes, any
broker-dealer (a "Participating Broker-Dealer") which acquired the Series B
Notes for its own account as a result of market making or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act. The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Series B
Notes (other than a resale of an unsold allotment from the original sale of the
Series A Notes) with the prospectus contained in the Exchange Offer Registration
Statement. The Company has agreed for a period of 180 days after consummation of
the Exchange Offer to make available a prospectus meeting requirements of the
Securities Act to Eligible Participating Broker-Dealers and other persons, if
any, with similar prospectus delivery requirements for use in connection with
any resale of such Series B Notes.
Each holder of the Series A Notes (other than certain specified holders) who
wishes to exchange Series A Notes for Series B Notes in the Exchange Offer will
be required to make certain representations, including representations that (i)
any Series B Notes to be received by it will be acquired in the ordinary course
of its business, (ii) at the time of the commencement of the Exchange Offer it
has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Series B Notes,
(iii) it is not an "affiliate" (as defined in Rule 405 under the Securities Act)
of the Company and (iv) it is not acting on behalf of any person who could not
truthfully make the foregoing representations.
In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit the Company to effect the Exchange
Offer, (ii) for any other reason the Exchange Offer is not consummated within
180 days after the Issue Date, (iii) under certain circumstances upon the
request of the Initial Purchaser or (iv) any holder of Series A Notes (other
than the Initial Purchaser) who is not eligible to participate in the Exchange
Offer, the Company will, at its expense, (a) as promptly as reasonably
practicable file a Shelf Registration Statement relating to the offer and sale
of the then outstanding Series A Notes, (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
by the 180th day after the Issue Date (or promptly in the event of a request by
the Initial Purchaser pursuant to clause (iii) above) and (c) use its best
efforts to keep effective the Shelf Registration Statement until the earlier of
two years from the Issue Date (or one year from the date the Shelf Registration
Statement is declared effective if such Shelf Registration Statement is filed
upon the request of the Initial Purchaser pursuant to clause (iii) above) or
such shorter period which will terminate when all of the Series A Notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement or when all the Series A Notes become eligible for resale
pursuant to Rule 144 under the Securities Act without volume restrictions (the
"Effectiveness Period"). The Company, will, in the event of the filing of the
Shelf Registration Statement, provide to each holder of the Series A Notes
copies of the Prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Series A Notes. A holder of Series A Notes that sells its Series
A Notes pursuant to the Shelf Registration Statement generally will be required
to be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification rights and
obligations thereunder).
If the Company fails to comply with the above provisions or if such
registration statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable with
respect to the Series A Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 45 days following the Issue Date, Additional
Interest shall accrue on the Series A Notes over and above the stated
interest at a rate of 0.50% per annum for the first 30 days commencing on
the
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46th day after the Issue Date, such Additional Interest rate increasing by
an additional 0.50% per annum at the beginning of each subsequent 30-day
period; or
(ii) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 150 days following the Issue
Date, Additional Interest shall accrue on the Series A Notes over and above
the stated interest at a rate of 0.50% per annum for the first 90 days
commencing on the 151st day after the Issue Date, such Additional Interest
rate increasing by an additional 0.50% per annum at the beginning of each
subsequent 30-day period; or
(iii) if (A) the Company has not exchanged all Series A Notes validly
tendered in accordance with the terms of the Exchange Offer on or prior to
180 days after the Issue Date or (B) the Exchange Offer Registration
Statement ceases to be effective at any time prior to the time that the
Exchange Offer is consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time prior to the second anniversary of the
Issue Date (unless all the Notes have been sold thereunder), then Additional
Interest shall accrue on the Series A Notes over and above the stated
interest at a rate of 0.50% per annum for the first 30 days commencing on
(x) the 181st day after the Issue Date with respect to the Series A Notes
validly tendered and not exchanged by the Company, in the case of (A) above,
or (y) the day the Exchange Offer Registration ceases to be effective or
usable for its intended purpose in the case of (B) above, or (z) the day
such Shelf Registration Statement ceases to be effective in the case of (C)
above, such Additional Interest rate increasing by an additional 0.50% per
annum at the beginning of each subsequent 30-day period; PROVIDED HOWEVER,
that the Additional Interest rate on the Series A Notes may not exceed in
the aggregate 2.0% per annum; and PROVIDED FURTHER, that (1) upon the filing
of the Exchange Offer Registration Statement or Shelf Registration Statement
(in the case of clause (i) above, (2) upon the effectiveness of the Exchange
Offer Registration Statement or Shelf Registration Statement (in the case of
(ii) above), or (3) upon the exchange of Series B Notes for all Series A
Notes tendered (in the case of clause (iii)(a) above), or upon the
effectiveness of the Exchange Offer Registration Statement which had ceased
to remain effective in the case of clause (iii)(B) above, or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii)(C) above), Additional Interest on the
Series A Notes as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable and will be determined by multiplying the applicable
Additional Interest rate by the principal amount of the Series A Notes
multiplied by a fraction, the numerator of which is the number of days such
Additional Interest rate was applicable during such period (determined on the
basis of a 360-day year comprised of twelve 30-day months), and the denominator
of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be made available upon request to the Company.
Following the consummation of the Exchange Offer, holders of Series A Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Series A Notes will not have any further registration rights and such
Series A Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A Notes could be
adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Series A
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount
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of Series B Notes in exchange for each $1,000 principal amount of outstanding
Series A Notes accepted in the Exchange Offer. Holders may tender some or all of
their Series A Notes pursuant to the Exchange Offer. However, Series A Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the Series B Notes are the same as the form and terms
of the Series A Notes except that (i) the Series B Notes bear a "Series B"
designation and a different CUSIP Number from the Series A Notes, (ii) the
Series B Notes have been registered under the Securities Act and hence will not
bear legends restricting the transfer thereof and (iii) the holders of the
Series B Notes will not be entitled to certain rights under the Registration
Rights Agreement, which rights will terminate when the exchange Offer is
terminated. The Series B Notes will evidence the same debt as the Series A Notes
and will be entitled to the benefits of the New Notes Indenture.
As of the date of this Prospectus, $45,000,000 aggregate principal amount of
Series A Notes were outstanding. The Company has fixed the close of business on
July 8, 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Series A Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Series B Notes from the Company.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender, the occurence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Series A Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Series A
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
August 19, 1998 unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Notwithstanding the foregoing, the
Company will not extend the Expiration Date beyond August 19, 1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Series A Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension
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or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
INTEREST ON THE SERIES B NOTES
The Series B Notes will bear interest from their date of issuance. Holders
of Series A Notes that are accepted for exchange will receive, in cash or
additional Series B Notes, at the option of the Company, accrued interest
thereon to, but not including, the date of issuance of the Series B Notes. Such
interest will be paid with the first interest payment on the Series B Notes on
August 1, 1998. Interest on the Series A Notes accepted for exchange will cease
to accrue upon issuance of the Series B Notes.
PROCEDURES FOR TENDERING
Only a holder of Series A Notes may tender such Series A Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
the Series A Notes and any other required documents, to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Series A Notes, Letter of Transmittal and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Series A Notes may be made by book-entry
transfer in accordance with the procedures described below. Conformation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Company
the representations set forth above in the second paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute the agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Series A Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Series A Notes tendered pursuant
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thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii)
for the account of an Eligible Institution. In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Series A Notes listed there, such Series A Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Series A Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Series A Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Series A Notes at the book-entry transfer facility. The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Series A Notes by causing such Book-Entry
Transfer Facility to transfer such Series A Notes into the Exchange Agent's
account with respect to the Series A Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Series A Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Series A Notes and withdrawal of tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Series A Notes not properly tendered or any Series A Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole discretion
to waive any defects, irregularities or conditions of tender as to particular
Series A Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Series A Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Series A Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Series A Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Series A Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A Notes
are not immediately available, (ii) who cannot deliver their Series A Notes, the
Letter of Transmittal or any other required
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documents to the Exchange Agent or (iii) who cannot complete the procedures for
book-entry transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Series A Notes and the principal amount of Series A Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Series A Notes (or a confirmation of
book-entry transfer of such Series A Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility), and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth below.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Series A Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Notes to be
withdrawn (the "Depositor"), (ii) identify the Series A Notes to be withdrawn
(including certificate number(s) and principal amount of such Series A Notes,
or, in the case of Series A Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Series A Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Series A Notes register the
transfer of such Series A Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any Series A Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Series A Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Series B Notes will
be issued with respect thereto unless the Series A Notes so withdrawn are
validly retendered. Any Series A Notes which have been tendered but which are
not accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Series A Notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Series B Notes for, any Series A
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Series A Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company; or
(b) any law, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer and contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Series A Notes and
return all tendered Series A Notes to the tendering holders, (ii) extend the
Exchange Offer an retain all Series A Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw such
Series A Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Series A Notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer, Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attn: Reorg
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
78
<PAGE>
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses includes fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Series B Notes will be recorded at the same carrying value as the Series
A Notes, as reflected in the Company's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses related to the issuance of the Notes and
of the Exchange Offer will be amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Series A Notes that are not exchanged for Series B Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) so long as the Series A Notes are eligible for resale pursuant
to Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant
to another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel reasonable acceptable to the Company),
(iii) outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE SERIES B NOTES
With respect to resales of Series B Notes, based on no-action letters issued
by the staff of the Commission to third parties, the Company believes that a
holder or other person who receives Series B Notes, whether or not such person
is the holder (other than a person that is an "Affiliate" of the Company within
the meaning of Rule 405 under the Securities Act), who receives Series B Notes
in exchange for Series A Notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the Series
B Notes, will be allowed to resell the Series B Notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the Series B Notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act. However, if any holder acquires Series B Notes
in the Exchange Offer for the purpose of distributing or participating in a
distribution of the Series B Notes, such holder cannot rely on the position of
the staff of the Commission enunciated in such no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating
Broker-Dealer that receives Series B Notes for its own account in exchange for
Series A Notes, where such Series A Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Series B Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Series B Notes are to be
acquired by the holder or the person receiving such Series B Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) that at
the time of the consummation of the understanding with any person to participate
in the distribution of the Series B Notes in violation of the provisions of the
Securities Act, (iii) that such holder is not an "Affiliate" (as defined) of the
Company within the meaning of the Securities Act and (iv) that such holder is
not acting on behalf of
79
<PAGE>
any person who could not truthfully make the foregoing representations. As
indicated above, each Participating Broker-Dealer that receives a Series B Note
for its own account in exchange for Series A Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such Series B Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
See "Plan of Distribution."
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Series B Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Series B Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
in connection with resales of Series B Notes received in exchange for Series A
Notes only by Participating Broker-Dealers ("Eligible Participating
Broker-Dealers") who acquired such Series A Notes as a result of market-making
activities or other trading activities and not by Participating Broker-Dealers
who acquired such Series A Notes directly from the Company. The Company has
agreed that for a period of 180 days after the date of this Prospectus, it will
make this Prospectus, as amended or supplemented, available to any Eligible
Participating Broker-Dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sales of the Series B
Notes by Participating Broker-Dealers. Series B Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Series B Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Series B Notes. Any Participating Broker-Dealer that resells the Series
B Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Series B Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Series B Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
Prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Eligible Participating Broker-Dealer that
requests such documents in the Letter of Transmittal.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the Series B Notes initially will
be in the form of one or more registered global book-entry Notes, in global
form, (the "Global Note"). The Global Note will be deposited on the Issue Date
with, or on behalf of, DTC and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to "foreign purchasers" or
Accredited Investors who are not QIBs or (ii) held by QIBs who elected to take
physical delivery of their certificates instead of holding their interest
through the Global Note (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers") will be issued
in registered form (the "Certificated Notes"). Upon the transfer to a QIB of any
Certificated Note initially issued to a Non-Global Purchaser, such Certificated
Security will, unless the transferee requests otherwise or such Global Note has
previously been exchanged in whole for Certificated Securities, be exchanged for
an interest in such Global Note. For a description of the restrictions on the
transfer of Certificated Securities and any interest in a Global Note, see
"Transfer Restrictions."
80
<PAGE>
GLOBAL SECURITIES
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of Series B Notes of the individual
beneficial interest represented by such Global Note to the respective accounts
for persons who have accounts with DTC and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of persons who have accounts with DTC
("participants")) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated by
or on behalf of the Initial Purchaser, and ownership of beneficial interests in
the Global Note will be limited to participants or persons who hold interests
through participants. QIBs may hold their interests in the Global Note directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Series B Notes represented by the Global Note for
all purposes under the Indenture. No beneficial owner of an interest in any of
the Global Note will be able to transfer that interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture.
Payments on the Global Series B Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in a Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment in
respect of a Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the applicable
Global Note as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell such note to persons in states which require physical delivery
of Certificated Notes, or to pledge such securities, such holder must transfer
its interest in the Global Note, in accordance with the normal procedures of
DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Series B Notes as the case may be, (including the
presentation of Notes for exchange as described below) only at the direction of
one or more participants to whose account the DTC interests in the Global Note
are credited and only in respect of such portion of the Series B Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Note representing Series B Notes for Certificated Notes, which it
will distribute to its participants and which will be legended as set forth
under the heading "Transfer Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic
81
<PAGE>
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchaser or the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, Certificated Notes will be issued in exchange for the Global
Note.
LEGAL MATTERS
Certain legal matters with respect to the Series B Notes offered hereby will
be passed upon for the Company by Cooperman Levitt Winikoff Lester & Newman,
P.C., New York, New York. As of April 30, 1998 Robert L. Winikoff, a partner of
Cooperman Levitt Winikoff Lester & Newman, P.C., is the beneficial owner of
1,300 shares of Series C Preferred Stock.
EXPERTS
The audited Financial Statements as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus and Registration Statement have been audited by McGladrey & Pullen,
LLP, independent public accountants, to the extent indicated in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon their authority as experts in accounting and auditing.
ADDITIONAL AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Series B
Notes offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit to the Registration Statement for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Registration Statement can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20459, and at the Commission's regional offices at Seven World
Trade Center, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement can be obtained from the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20459, at prescribed rates.
The Company is filing the Registration Statement with the Commission
electronically. The Commission maintains a web site that contains reports, proxy
and
82
<PAGE>
information statements and other information regarding registrants that file
electronically with the Commission. The address of that web site is
http://www.sec.gov.
As a result of the Exchange Offer, the Company will be subject to the
information reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). So long as the Company is subject to such periodic
reporting requirements under the Exchange Act, it will continue to furnish the
information required thereby to the Commission. The Company will be required to
file periodic reports with the Commission pursuant to the Exchange Act during
the Company's current fiscal year and thereafter so long as the Series B Notes
are held by at least 300 registered holders. The Company does not anticipate
that, for periods following December 31, 1998, the Series B Notes will be held
of record by more than 300 holders. Accordingly, after such date, the Company
does not expect to be required to comply with the periodic reporting obligations
imposed under the Exchange Act. However, the Company intends, and is required by
the terms of the Indenture as long as the Series B Notes are outstanding, to
continue to furnish the holders of the Series B Notes with annual reports
containing financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed financial
statements for each of the first three quarters of each fiscal year.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MENTUS MEDIA CORP.
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report.......................................................... F-2
Balance Sheets as of December 31, 1996 and 1997 and as of March 31, 1998
(unaudited)......................................................................... F-3
Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997 and for the Three Months Ended March 31, 1997 and 1998 (unaudited).... F-4
Statements of Changes in Stockholders' Deficit for the Years Ended
December 31, 1995, 1996 and 1997 and for the Three Months Ended March 31, 1998
(unaudited)......................................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996,
and 1997 and for the Three Months Ended March 31, 1997 and 1998 (unaudited)......... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mentus Media Corp.
Eden Prairie, Minnesota
We have audited the accompanying balance sheets of Mentus Media Corp. as of
December 31, 1996 and 1997, and the related statements of operations, changes in
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mentus Media Corp. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 2, 1998
F-2
<PAGE>
MENTUS MEDIA CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTES 2 AND 10)
Current Assets
Cash and cash equivalents.............................................. $ 3,821,195 $ 2,789,142 $40,394,626
Trade accounts receivable, less allowance of $45,000 in 1997........... 163,140 382,108 220,795
Other current assets................................................... -- 120,886 55,778
----------- ----------- -----------
Total current assets............................................. 3,984,335 3,292,136 40,671,199
----------- ----------- -----------
Equipment and Furnishings, at cost (Notes 3 and 7)
Equipment.............................................................. 2,632,909 4,719,812 5,290,106
Office furniture and equipment......................................... 209,499 381,493 408,234
Equipment under capitalized lease...................................... 247,182 276,546 276,546
----------- ----------- -----------
3,089,590 5,377,851 5,974,886
Less accumulated depreciation.......................................... 688,269 1,387,665 1,628,954
----------- ----------- -----------
2,401,321 3,990,186 4,345,932
----------- ----------- -----------
Other Assets
Deposits............................................................... 13,645 44,052 44,638
Noncurrent trade accounts receivable................................... -- 51,562 56,948
Deferred financing costs (Note 10)..................................... -- 78,603 2,615,552
Other.................................................................. -- 79,109 86,683
----------- ----------- -----------
13,645 253,326 2,803,821
----------- ----------- -----------
$ 6,399,301 $ 7,535,648 $47,820,952
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current maturities of long-term debt................................... $ 52,174 $ 48,302 $ 38,945
Accounts payable....................................................... 517,553 319,405 993,308
Accrued expenses (Note 9).............................................. 212,599 1,663,453 1,325,567
----------- ----------- -----------
Total current liabilities........................................ 782,326 2,031,160 2,357,820
----------- ----------- -----------
Noncurrent Accrued Site Lease Expense.................................... -- 92,253 --
----------- ----------- -----------
Long-Term Debt, including capital leases, less current maturities (Notes
2, 3
and 10)................................................................ 2,453,618 3,015,208 38,612,691
----------- ----------- -----------
Commitments (Notes 3, 4, and 5)
Mandatory Redeemable Preferred Stock (Note 5)
14.8% Series B, nonvoting; authorized 91,100 shares; issued and
outstanding 91,059 shares; stated at liquidation value plus accrued
dividends............................................................ 7,304,845 8,429,915 8,737,549
14.8% Series C, nonvoting; authorized 90,000 shares; issued and
outstanding 75,310 and 75,540, respectively shares; stated at
liquidation value plus accrued dividends............................. -- 6,057,115 6,295,868
----------- ----------- -----------
7,304,845 14,487,030 15,033,417
----------- ----------- -----------
Stockholders' Deficit (Notes 5 and 6)
8.25% Series A cumulative preferred stock, nonvoting; authorized 20,000
shares; issued and outstanding 6,000 shares, stated at liquidation
value, excluding cumulative unpaid dividends (aggregate liquidation
value of $4,237,500 in 1996 and $4,485,000 in 1997 and 1998) (Note
5)................................................................... 3,000,000 3,000,000 3,000,000
Common stock, $0.01 par value; authorized 1,000,000 shares; issued and
outstanding 266,268 shares........................................... 2,663 2,663 2,663
Additional paid-in capital............................................. 5,464,920 3,904,889 11,076,212
Accumulated deficit.................................................... (12,609,071) (18,997,555) (22,261,851)
----------- ----------- -----------
(4,141,488) (12,090,003) (8,182,976)
----------- ----------- -----------
$ 6,399,301 $ 7,535,648 $47,820,952
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
MENTUS MEDIA CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
------------- ------------- ------------- --------------- --------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 7):
Advertising revenues............. $ -- $ -- $ 1,243,868 $ 12,973 $ 400,077
Less agency commissions.......... -- -- 39,325 233 3,124
------------- ------------- ------------- --------------- --------------
NET ADVERTISING REVENUES....... -- -- 1,204,543 12,740 396,953
Network equipment and territorial
rights sales................... -- 2,688,455 137,279 12,379 26,309
Network operating revenues....... -- 489,512 485,299 189,230 150
------------- ------------- ------------- --------------- --------------
TOTAL REVENUES................. -- 3,177,967 1,827,121 214,349 423,412
------------- ------------- ------------- --------------- --------------
Costs and expenses:
Cost of network equipment
sales.......................... -- 2,213,772 60,893 11,907 9,996
Network operating expenses....... -- 362,889 2,799,498 601,443 844,079
Selling expenses................. -- -- 1,757,523 265,844 956,919
General and administrative
expenses....................... 2,103,220 2,507,134 3,428,649 816,044 1,295,653
------------- ------------- ------------- --------------- --------------
TOTAL COSTS AND EXPENSES....... 2,103,220 5,083,795 8,046,563 1,695,238 3,106,647
------------- ------------- ------------- --------------- --------------
OPERATING LOSS................. (2,103,220) (1,905,828) (6,219,442) (1,480,889) (2,683,235)
Nonoperating income (expense):
Interest expense................. (239,859) (231,355) (280,806) (65,120) (843,774)
Interest income.................. 8,503 81,679 113,037 37,099 262,713
Other expense.................... -- -- (1,273) -- --
------------- ------------- ------------- --------------- --------------
NET LOSS....................... (2,334,576) (2,055,504) (6,388,484) (1,508,910) (3,264,296)
Preferred stock dividends.......... 247,500 540,802 1,630,836 266,023 528,677
------------- ------------- ------------- --------------- --------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS................. $ (2,582,076) $ (2,596,306) $ (8,019,320) $ (1,774,933) $ (3,792,973)
------------- ------------- ------------- --------------- --------------
BASIC AND DILUTED NET LOSS PER
COMMON SHARE................. $ (11.20) $ (10.16) $ (30.12) $ (6.67) $ (14.24)
------------- ------------- ------------- --------------- --------------
------------- ------------- ------------- --------------- --------------
Weighted-average number of common
shares outstanding................. 230,521 255,538 266,268 266,268 266,268
------------- ------------- ------------- --------------- --------------
------------- ------------- ------------- --------------- --------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
MENTUS MEDIA CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A CUMULATIVE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ----------- -------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............. 6,000 $ 3,000,000 219,900 $2,199 $ 2,358,661 $ (8,218,991) $ (2,858,131)
Issuance of common stock at $40 per
share............................... -- -- 3,750 38 149,962 -- 150,000
Issuance of common stock at $71 per
share (Notes 2 and 6)............... -- -- 15,000 150 1,071,204 -- 1,071,354
Issuance of common stock at $91 per
share............................... -- -- 11,042 110 999,890 -- 1,000,000
Exercise of stock options............. -- -- 1,200 12 1,188 -- 1,200
Compensation element of stock options
granted (Note 6).................... -- -- -- -- 68,669 -- 68,669
Net loss.............................. -- -- -- -- -- (2,334,576) (2,334,576)
------ ----------- -------- ------- ------------ ------------- -------------
Balance, December 31, 1995.............. 6,000 3,000,000 250,892 2,509 4,649,574 (10,553,567) (2,901,484)
Issuance of common stock at $71 per
share (Note 2)...................... -- -- 1,562 16 111,547 -- 111,563
Contribution of deferred compensation
to additional paid-in capital and
subsequent issuance of common stock
(Note 4)............................ -- -- 13,814 138 1,063,518 -- 1,063,656
Compensation element of stock options
granted (Note 6).................... -- -- -- -- 70,430 -- 70,430
Accrued dividends on mandatory
redeemable preferred stock.......... -- -- -- -- (293,302) -- (293,302)
Series B mandatory redeemable
preferred stock issuance costs...... -- -- -- -- (136,847) -- (136,847)
Net loss.............................. -- -- -- -- -- (2,055,504) (2,055,504)
------ ----------- -------- ------- ------------ ------------- -------------
Balance, December 31, 1996.............. 6,000 3,000,000 266,268 2,663 5,464,920 (12,609,071) (4,141,488)
Accrued dividends on mandatory
redeemable preferred stock.......... -- -- -- -- (1,383,336) -- (1,383,336)
Series C mandatory redeemable
preferred stock issuance costs...... -- -- -- -- (155,566) -- (155,566)
Compensation element of stock options
forfeited (Note 6).................. -- -- -- -- (21,129) -- (21,129)
Net loss.............................. -- -- -- -- -- (6,388,484) (6,388,484)
------ ----------- -------- ------- ------------ ------------- -------------
Balance, December 31, 1997.............. 6,000 3,000,000 266,268 2,663 3,904,889 (18,997,555) (12,090,003)
Accrued dividends on mandatory
redeemable preferred stock.......... -- -- -- -- (528,677) -- (528,677)
Issuance of Warrants in connection
with PIK Notes (Note 10)............ -- -- -- -- 7,700,000 -- 7,700,000
Net loss.............................. -- -- -- -- -- (3,264,296) (3,264,296)
------ ----------- -------- ------- ------------ ------------- -------------
Balance March 31, 1998 (unaudited)...... 6,000 $ 3,000,000 266,268 $2,663 $ 11,076,212 $(22,261,851) $ (8,182,976)
------ ----------- -------- ------- ------------ ------------- -------------
------ ----------- -------- ------- ------------ ------------- -------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
MENTUS MEDIA CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31
------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss...................................................... $(2,334,576) $(2,055,504) $(6,388,484) $(1,508,910) $ (3,264,296)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 191,767 211,368 713,892 121,607 241,289
Deferred compensation and stock issued for compensation..... 191,707 -- -- -- 17,710
Compensation element of stock options granted (forfeited)... 68,669 70,430 (21,129) -- --
Loss on disposal of equipment and furnishings............... -- -- 1,896 -- --
Interest amortization and accretion on long-term debt....... -- -- 88,027 13,750 220,926
Changes in assets and liabilities:
Receivables............................................. -- (163,140) (270,530) (64,953) 197,440
Other current assets.................................... 49,191 -- (120,886) (22,167) 23,595
Accounts payable........................................ 115,632 339,815 (198,148) (178,433) 673,903
Accrued expenses........................................ 61,137 145,451 1,543,107 296,956 (430,139)
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities................. (1,656,473) (1,451,580) (4,652,255) (1,342,150) (2,319,572)
----------- ----------- ----------- ----------- ------------
Cash Flows From Investing Activities
Purchase of equipment and furnishings......................... (91,756) (2,140,886) (1,278,775) (562,172) (597,035)
Deposits and other assets..................................... 453 (2,113) (109,516) (2,341) (8,160)
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities................. (91,303) (2,142,999) (1,388,291) (564,513) (605,195)
----------- ----------- ----------- ----------- ------------
Cash Flows From Financing Activities
Borrowings under bridge loans, PIK Notes and other long-term
debt........................................................ 781,618 450,000 -- -- 37,300,000
Payments on bridge loans and other long-term debt............. (17,191) (174,936) (56,149) (12,562) (1,889,878)
Net decrease in short-term shareholder debt................... (1,096) (126,663) -- -- --
Net proceeds from issuance of preferred stock................. -- 6,374,696 5,143,245 -- --
Net proceeds from issuance of common stock and warrants....... 1,222,554 -- -- -- 7,700,000
Payment received on stock subscription receivable............. -- 500,000 -- -- --
Deferred financing costs...................................... -- -- (78,603) -- (2,579,871)
----------- ----------- ----------- ----------- ------------
Net cash provided by financing activities............. 1,985,885 7,023,097 5,008,493 (12,562) 40,530,251
----------- ----------- ----------- ----------- ------------
Increase (decrease) in cash and cash equivalents...... 238,109 3,428,518 (1,032,053) (1,919,225) 37,605,484
Cash and Cash Equivalents
Beginning..................................................... 154,568 392,677 3,821,195 3,821,195 2,789,142
----------- ----------- ----------- ----------- ------------
Ending........................................................ $ 392,677 $ 3,821,195 $ 2,789,142 $ 1,901,970 $ 40,394,626
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Supplemental Cash Flow Information
Cash payments for interest.................................... $ 215,943 $ 219,479 $ 192,779 $ 51,370 $ 23,369
Noncash activities:
Equipment acquired under capital leases..................... 100,438 73,245 29,364 -- --
Common stock issued for stock subscription receivable....... 500,000 -- -- -- --
Bridge loan converted to common stock....................... 500,000 111,563 -- -- --
Bridge loan converted to Series B mandatory redeemable
preferred stock........................................... -- 500,000 -- -- --
Deferred compensation contributed to capital................ -- 1,063,656 -- -- --
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends........ -- 293,302 1,383,336 280,986 528,677
Reduction in paid-in capital from issuance costs on
mandatory redeemable preferred stock...................... -- 136,847 155,566 -- --
Stockholder note converted to Series C mandatory redeemable
preferred stock (Note 5).................................. -- -- 500,038 -- --
Equipment repurchased through issuance of notes payable
(Note 7).................................................. -- -- 996,514 348,023 --
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Mentus Media Corp. (the Company) sells advertising
space and provides programming through an electronic out-of-home advertising
network known as the Next Generation Network (NGN). The Company was founded in
1990 and thereafter focused its efforts, among other things, on the development
of the NGN by developing and improving the NGN technology. At the same time, the
Company concentrated its efforts on securing site agreements for the placement
of NGN Displays as well as recruiting local sales personnel and opening local
sales offices in designated market areas.
Prior to 1996 the Company was in the development stage. During 1996, the
Company commenced operations and has entered into agreements for the placement
of its monitors with convenience store chains representing over 8,000 stores. In
1996, the Company began the installation of NGN in these stores. As of December
31, 1997, the NGN displays have been installed in approximately 1,800 sites in
nine market areas, principally in the states of Florida, Maryland, Texas, and
Virginia and the District of Columbia. The Company currently generates revenue
principally through the sale of advertising on the NGN and previously by selling
equipment and exclusive territorial rights to NGN within certain markets
(owner-operator networks). During 1997, the Company repurchased all NGN
equipment from the owner-operators who, in turn, forfeited their territorial
rights (see Note 7).
A summary of the Company's significant accounting policies follows:
REVENUE RECOGNITION: Revenue from network equipment and territorial rights
sales was recognized upon installation of the equipment in the territory.
Network operating revenues, which consist of network operating fees and
advertising revenue for owner-operator networks, and advertising revenues for
Company networks are recognized in the period the service is provided. A full
month's advertising revenue is recognized in the first month of each advertising
service or contract period. Costs incurred for the production of media
advertising are recognized in the initial month of the advertising service or
contract period or as incurred during the advertising service period.
Advertising revenues are reduced by agency commissions on the statements of
operations. In addition, the Company provides allowances for uncollectible
revenues receivable based on Management's periodic assessment of the need for
such allowances. Such allowances charged to expense amounted to $45,363 in 1997.
No similar allowances were necessary in 1995 or 1996.
BARTER TRANSACTIONS: Barter transactions, which represent the exchange of
NGN advertising for goods or services, are recorded at the estimated fair value
of the products or services received, not to exceed the estimated fair value of
the NGN advertising provided. The Company has valued all bartered advertising
credits received at a substantial discount from both the outside advertising
media's and the Company's standard rates. Barter revenues are recognized as
barter credit on the balance sheet when NGN advertising services are rendered,
and barter expense is recognized when the related products or services are
received or used. Barter revenues were $158,076 for the year ended December 31,
1997, of which $104,407 is included in other current assets on the balance sheet
at December 31, 1997. There were no barter revenues prior to 1997.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers any Treasury bills, commercial paper, certificates of deposit,
and money market funds with a maturity of three months or less to be cash
equivalents. The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
F-7
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION OF PATENT: It was the policy of the Company to provide
amortization based on the patent's remaining life using the straight-line
method. During 1996, the Company determined that its patent had no remaining
value, and the unamortized balance was written off.
RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
activities performed by the Company are charged to operations as incurred.
Research and development expense was approximately $282,000, $222,000 and
$363,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
SOFTWARE DEVELOPMENT COSTS: The majority of the Company's software
development costs are associated with the internal development and enhancement
of the NGN technology and software. The Company's policy is to expense these
costs as incurred and has included them with the aforementioned research and
development costs.
DEPRECIATION: It is the policy of the Company to provide depreciation based
on estimated useful lives of five to seven years for its equipment and
furnishings using the straight-line method.
ACCOUNTING FOR LONG-LIVED ASSETS: The Company began generating operating
revenue with its long-lived assets in 1996 and is in the process of building up
an acceptable revenue base and related cash flows. Management has and will
continue, on a periodic basis, to closely evaluate its equipment to determine
potential impairment by comparing its carrying value with the estimated future
net undiscounted cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future net
cash flows be less than the carrying value, the Company would recognize an
impairment loss at that date. An impairment loss would be measured by comparing
the amount by which the carrying value exceeds the fair value (estimated
discounted future cash flows or appraisal of assets) of the long-lived assets.
To date, management has determined that no impairment of long-lived assets
exists.
NET LOSS PER SHARE: The FASB has issued Statement No. 128, EARNINGS PER
SHARE, which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per share amounts.
Basic per share amounts are computed, generally, by dividing net income or loss
by the weighted-average number of common shares outstanding. All other entities
are required to present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless their effect is antidilutive, thereby reducing the loss
or increasing the income per common share.
The Company initially applied Statement No. 128 for the year ended December
31, 1997, and as required by the statement, retroactively applied it to all
periods presented. Loss per share has been adjusted for undeclared, cumulative
dividends on the Company's Series A cumulative preferred stock which totaled
$247,500 for each of the years ended December 31, 1995, 1996, and 1997, and the
dividends accrued on the Series B and C mandatory redeemable preferred stock of
$293,302 and $1,383,336 for the years ended December 31, 1996 and 1997,
respectively. As described in Note 6, the Company has options and warrants
outstanding to purchase shares of common stock, and the Series A, B, and C
preferred stock is convertible into common stock. However, because the Company
has incurred losses in all periods presented, the inclusion of those potential
common shares in the calculation of diluted loss per share
F-8
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
would have an antidilutive effect. Therefore, basic and diluted loss per share
amounts are the same in each period presented.
INCOME TAXES: The Company accounts for deferred taxes on an asset and
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying amount
is fair value; for trade accounts receivable and accounts payable, the carrying
amounts approximate their fair values due to the short term nature of these
instruments; and for the fixed rate notes payable fair value has been estimated
based on discounted cash flows using interest rates being offered for similar
borrowings. No separate comparison of fair values versus carrying values is
presented for the aforementioned financial instruments since their fair values
are not significantly different than their balance sheet carrying amounts. In
addition, the aggregate fair values of the financial instruments would not
represent the underlying value of the Company.
NOTE 2. SHORT- AND LONG-TERM DEBT
SHORT-TERM DEBT: During 1995, the Company obtained $775,000 of financing
through 12.5% unsecured bridge loans. The note holders were also issued warrants
for the purchase of 3,100 shares of common stock at an exercise price of $71.43
per share which the Company had determined to be the fair value of its common
stock at that time. Since the exercise price approximated the estimated fair
value of the common stock and since the scheduled interest over the term of the
bridge loans was not significantly different than interest computed using the
Company's incremental borrowing rate, no separate value was ascribed to the
warrants as it was determined to be immaterial. In September 1995, $500,000 of
the bridge loans and accrued interest thereon of $21,354 plus an additional
investment of $500,000 were exchanged for 14,300 shares of common stock at a
price of $71.43 per share. During 1996, bridge loans of $100,000 and accrued
interest thereon of $11,563 were exchanged for 1,562 shares of common stock at a
price of $71.43 per share. Of the remaining balance of the bridge loans, $50,000
was converted into Series B Preferred Stock and $125,000 was paid in full.
During 1996, the Company obtained $450,000 of financing through 9.25%
unsecured bridge loans. These loans were converted into Series B Preferred Stock
in 1996 at a price of $77 per share.
F-9
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 2. SHORT- AND LONG-TERM DEBT (CONTINUED)
The number of shares of common and preferred stock into which the
aforementioned bridge loans were converted was based on the Company's estimate
of the per share values of the respective classes of stock based on redemption
prices or significant private stock sales near the conversion dates.
LONG-TERM DEBT: A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- -------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
12% Senior Secured PIK Notes due February 2003
(net of discount attributed to Warrants issued
in connection with Notes, see Note 10) -- -- $ 37,438,678
8% note payable to shareholder, due November 2003,
secured by substantially all assets of the
Company (1)..................................... $ 2,375,500 $ 1,875,462 --
10.1% to 18.8% capital leases, due in varying
monthly installments to August 2001, secured by
equipment and bank letters of credit up to
$35,000 (see Note 3)............................ 130,292 103,507 89,090
Noninterest-bearing note payable, discounted at
15%, total of $700,000 payable based on certain
cash flows, if any, with balance due December
2001, secured by equipment (see Note 7)......... -- 400,226 415,235
Noninterest-bearing note payable, discounted at
15%, total of $1,500,000 payable August 2003,
plus 10% of certain net revenues, if any,
secured by equipment (see Note 7)............... -- 684,315 708,633
------------ ------------ -------------
2,505,792 3,063,510 38,651,636
Less current maturities........................... 52,174 48,302 38,945
------------ ------------ -------------
$ 2,453,618 $ 3,015,208 $ 38,612,691
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The long term debt (excluding capital lease obligations) matures as follows:
$415,235 in 2001 and $38,147,311 in 2003.
- ------------------------
(1) During 1997, $500,038 of this debt was converted to 6,494 shares of Series C
preferred stock using a conversion price of $77 per share which is the same
price at which the Series C preferred stock was sold to private investors
(see Note 5). Also, interest expense on this note was approximately $190,000
and $176,000 for the years ended December 31, 1996 and 1997, respectively.
This note was repaid in full on February 18, 1998, with a portion of the
proceeds from the sale of Senior Secured PIK Notes (see Note 10).
F-10
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 3. LEASE COMMITMENTS
CAPITAL LEASES: The Company leases various equipment under capital leases.
Approximate future minimum lease payments under capital leases and the aggregate
present value of the net minimum lease payments at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Years ending December 31:
1998............................................................ $ 60,000
1999............................................................ 28,000
2000............................................................ 28,000
2001............................................................ 9,000
---------
$ 125,000
Less amounts representing interest 22,000
---------
$ 103,000
---------
---------
</TABLE>
The following is a summary of equipment under capital lease as of December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Cost.............................................................. $ 276,546
Accumulated depreciation.......................................... 135,959
---------
$ 140,587
---------
---------
</TABLE>
OPERATING LEASES: The Company leases its offices and warehouse facilities
under noncancelable operating leases, which require various monthly payments
including operating costs. The approximate future minimum lease payments under
operating leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Years ending December 31:
1998............................................................ $ 357,000
1999............................................................ 246,000
2000............................................................ 197,000
2001............................................................ 57,000
2002............................................................ 49,000
---------
$ 906,000
---------
---------
</TABLE>
Rent expense amounted to approximately $150,000, $184,000, and $303,000 for
the years ended December 31, 1995, 1996, and 1997, respectively.
SITE LEASES: In connection with NGN, the Company enters into site leases
that provide for revenue-sharing arrangements (based on percentage of net
advertising revenues) with the operators of the sites in which its NGN displays
are located. The Company accrues monthly as site lease expense the greater of
computed amount based on a percent of revenue or, where applicable, the
appropriate portion of an annual minimum.
At December 31, 1997, in connection with the aforementioned arrangements,
the Company was committed to certain minimum site lease fees of approximately
$1,451,000 annually through the year 2000 (extended through year 2003 subsequent
to year end), based on monitors installed as of December 31,
F-11
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 3. LEASE COMMITMENTS (CONTINUED)
1997. NGN displays installed under a site lease contract with one multistore
operator accounted for approximately 82% of the total installed NGN displays at
both December 31, 1996 and 1997. This operator's sites also accounted for
approximately 82% of installed displays at March 31, 1998.
Site lease expenses included in the statements of operations were $7,917 and
$1,120,431 for the years ended December 31, 1996 and 1997, respectively, and
$186,447 and $366,733 for the three month periods ended March 31, 1997 and 1998,
respectively. There were no site lease expenses in 1995.
NOTE 4. EMPLOYMENT AGREEMENTS AND DEFERRED COMPENSATION AGREEMENT
The Company has employment agreements with two officers of the Company.
These agreements, which extend to 1999, provide for an annual base salary which
is not subject to annual increases.
The agreement with one officer, who is a major shareholder, provides for an
annual bonus of $60,000 to be paid to the officer if certain established revenue
goals are met. The agreement with the other officer provides that one-third of
each installment of his base salary payable on or after January 1, 1998, shall
be paid in the form of Series C Preferred Stock, subject to forfeiture
provisions similar to those applicable to the restricted stock as described
below. The portion of this compensation paid in Series C Preferred Stock is
being accrued as compensation expense until the stock is issued at which time
the obligation is transferred to Mandatory Redeemable Stock on the balance
sheet. The number of shares of Series C Preferred Stock to be issued is based on
its $77 redemption value which the Company believes is its fair value per share.
In March 1998 the Company issued 230 of such shares.
The Company previously had agreements with the two officers to defer a
portion of their compensation under prior employment agreements. The accrued
balance outstanding under these agreements at December 31, 1995, was $1,063,656.
In conjunction with the 1996 Series B preferred stock transaction, the officers
agreed to terminate these agreements and to contribute the accrued balance
outstanding to paid-in capital of the Company, and the Company simultaneously
issued 8,831 shares of restricted common stock to one officer and 4,983 shares
of restricted common stock to the other officer, effectively in exchange (at $77
per share) for the deferred compensation obligations to them, in connection with
the aforementioned amended employment agreements. The shares become unrestricted
in years 2006 and 2017, respectively, or upon the occurrence of death,
disability, or a qualifying public offering.
NOTE 5. COMMON AND PREFERRED STOCK
PREEMPTIVE RIGHTS: As of December 31, 1997, holders of 154,204 shares of
Common Stock (including shares issuable upon exercise of outstanding warrants or
upon conversion of Preferred Stock), or their transferees, are entitled to
certain rights permitting them to maintain their percentage common equity
interest in the Company (on a fully diluted basis).
PREFERRED STOCK: The Company's Board of Directors has authorized 500,000
shares of preferred stock for designation and issuance, of which 298,900 were
not designated as of December 31, 1997.
SERIES A CUMULATIVE PREFERRED STOCK: The Company's 8.25% Series A
cumulative preferred stock is convertible at the option of the holder into
common stock, at any time prior to the close of business on the tenth day prior
to the date fixed for a redemption or exchange by the Company, at a conversion
price of
F-12
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 5. COMMON AND PREFERRED STOCK (CONTINUED)
$135.27 per common share (equivalent to a conversion rate of 3.696 shares of
common stock for each share of preferred stock).
The preferred stock is redeemable at the option of the Company, if not
previously converted into common stock, in whole or in part, at $500 per share,
plus accrued and unpaid dividends to the redemption date.
Dividends of $247,500 for each of the years ended December 31, 1995, 1996,
and 1997, were not declared nor paid. Dividends in arrears totaled $1,237,500
and $1,485,000 at December 31, 1996 and 1997, respectively. The dividends in
arrears are also convertible into common stock at a conversion price of $135.27
per common share.
SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: During 1996, the Company's
Board of Directors created and designated for issuance 91,100 shares of $1 par
Series B Senior Cumulative Compounding Convertible Redeemable Preferred Stock.
On September 25, 1996, the Company issued 91,059 shares of its Series B
preferred stock to private investors at $77 per share. Proceeds upon the
issuance of this stock, net of issuance costs of approximately $137,000, totaled
approximately $6,875,000, which consisted of approximately $6,375,000 in cash
and conversion of bridge loans totaling $500,000.
The Series B Preferred Stock is equal in all respective rights with the
Series C Preferred Stock and senior to all other classes of capital stock with
respect to dividend and liquidation rights. Dividends, which accrue at 14.8% on
an initial liquidation value of $77 per share, are to be paid quarterly on March
1, June 1, September 1, and December 1. On each dividend payment date, accrued
dividends, to the extent unpaid, are compounded upon the stock's liquidation
value. For the years ended December 31, 1996 and 1997, dividends of $293,302 and
$1,125,070, respectively, have been accrued and are unpaid.
The Series B Preferred Stock and all accrued unpaid dividends are
convertible, in whole or in part, at the option of the holder into common stock
at a conversion price of $77 (representing 94,671 and 109,479 shares of common
stock at December 31, 1996 and 1997, respectively). The stock is convertible at
the option of the Company in the event of a qualifying public offering. The
stock is also redeemable in whole, but not in part, at the option of the Company
at a redemption price of $308 per share at any time prior to the mandatory
redemption date, which is September 2003. At that time, the Company is required
to redeem all outstanding shares of the Series B preferred stock at a redemption
price of $77, adjusted for cumulative compounded unpaid dividends.
In addition, upon a qualifying change in ownership control or reorganization
event, the majority Series B preferred stockholders may require the Company to
redeem all outstanding Series B preferred stock at certain redemption prices.
The Company is also required to and has reserved from its authorized but
unissued shares of common stock, solely for the conversion of Series B preferred
stock, the full number of shares of common stock issuable if all outstanding
Series B shares were to be converted in full.
SERIES C MANDATORY REDEEMABLE PREFERRED STOCK: During 1997, the Company's
Board of Directors created and designated for issuance 90,000 shares of $1 par
Series C senior cumulative compounding convertible redeemable preferred stock.
This preferred stock contains terms and provisions that are virtually identical
to the Series B mandatory redeemable preferred stock, except for the mandatory
redemption date, which is March 2003 for Series C.
F-13
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 5. COMMON AND PREFERRED STOCK (CONTINUED)
During 1997, the Company issued 75,310 shares of Series C preferred stock to
private investors at $77 per share. Proceeds upon issuance of this stock, net of
issuance costs of approximately $156,000, totaled approximately $5,643,000,
which consisted of approximately $5,143,000 in cash and conversion of a
stockholder note of $500,038. For the year ended December 31, 1997, dividends of
$258,266 have been accrued and are unpaid on this preferred stock.
STOCKHOLDERS AGREEMENT: The company is party to a stockholders agreement
among certain holders of Common Stock and Series B and Series C Preferred Stock,
which requires the approval of a majority of the preferred stockholders party to
the Agreement, for certain significant corporate transactions. In addition, the
holders of preferred stock are entitled to elect up to three directors as set
forth in the Series B and Series C Certificates of Designation.
NOTE 6. STOCK OPTIONS AND WARRANTS
The Company has a 1993 Stock Option Plan effective January 1, 1994, and a
1994 Stock Option Plan effective December 15, 1994 (the Plans). The Plans permit
the granting of incentive stock options and nonqualified options. A total of
4,000 and 8,000 shares of the Company's common stock have been reserved for
issuance pursuant to options granted under the 1993 and 1994 Plans,
respectively.
Grants under the Plans are accounted for following APB Opinion No. 25 and
related interpretations. Compensation cost charged to operations for stock
option grants was $68,669 and $70,430 for the years ended December 31, 1995 and
1996, respectively. During 1997, certain compensatory options were forfeited,
resulting in the reversal of $21,129 of compensation expense. Had compensation
cost for the options been determined using the fair value method required by
FASB Statement No. 123, the Company's basic and diluted net loss and net loss
per common share on a pro forma basis would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------- -------------
Net loss:
As reported.................................... $ (2,334,576) $ (2,055,504) $ (6,388,484)
Pro forma...................................... (2,334,700) (2,080,100) (6,457,367)
Basic and diluted net loss per common share:
As reported.................................... (11.20) (10.16) (30.12)
Pro forma...................................... (11.20) (10.26) (30.38)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants: risk-free interest rates of 6.37%, 5.98%, and 6.16%
in 1995, 1996, and 1997, respectively; expected lives of 5 years; and expected
volatility of 10%.
F-14
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 6. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
GRANT DATE EXERCISE
FAIR VALUE SHARES PRICE
----------- --------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1994......................... -- 3,631 $ 1.00
Granted................................................ $ 71.43 975 1.00
Exercised.............................................. -- (1,200) 1.00
---------
Outstanding at December 31, 1995......................... -- 3,406 1.00
Granted................................................ 71.43 1,000 1.00
Granted................................................ 71.43 500 90.56
Granted................................................ 77.00 1,000 77.00
---------
Outstanding at December 31, 1996......................... -- 5,906 21.45
Granted................................................ 77.00 1,000 77.00
Canceled............................................... -- (300) 1.00
---------
Outstanding at December 31, 1997......................... -- 6,606 30.79
---------
---------
</TABLE>
There were 3,308 options exercisable at December 31, 1997 at a
weighted-average exercise price of $3.71.
The following table summarizes additional information about stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING NUMBER
NUMBER CONTRACTUAL OF OPTIONS
RANGE OF OF OPTIONS LIVES EXERCISABLE AT
EXERCISE PRICES OUTSTANDING (IN YEARS) DECEMBER 31, 1997
- ------------------------------------------------ ------------- --------------- -------------------
<S> <C> <C> <C>
$ 1.00.......................................... 4,106 6.0 3,208
77.00.......................................... 2,000 6.0 --
90.56.......................................... 500 6.0 100
----- -----
6,606 3,308
----- -----
----- -----
</TABLE>
OTHER STOCK OPTIONS: During 1994, the Company granted, outside of the above
plans, an option for the purchase of 700 shares of common stock at an exercise
price of $71.43. This option was exercised in 1995.
WARRANTS: During 1995, the Company issued warrants to purchase 3,100 shares
of common stock at a price of $71.43 per share, exercisable any time prior to
May 1, 2000.
In February, 1998 in connection with the Company's sale of 12% Senior
Secured PIK Notes the Company issued warrants to purchase 125,240 shares of
Common Stock at a price of $.01 per share, exercisable at any time prior to
February 1, 2008 (See Note 10).
F-15
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 7. TERRITORIAL AGREEMENTS AND REPURCHASE OF NETWORK EQUIPMENT
During 1996, the Company entered into territorial agreements with two
separate unrelated owner-operators. Each agreement granted exclusive territorial
rights to NGN within certain designated markets for a period of ten years. In
the aggregate, the Company received initial payments of approximately $2,688,000
for the purchase of hardware, software, and exclusive territorial rights
(approximately $366,000, applied to territorial rights), all of which was fully
paid. One owner-operator purchased 245 displays for an aggregate of
approximately $661,000 and the other owner-operator purchased 559 displays for
an aggregate of approximately $1,661,000 exclusive of amounts applied to
territorial rights. The agreements also provided for royalties on all
advertising revenue and reimbursement of certain network operating expenses. The
original equipment sales and territorial rights agreements did not provide for
any continuing involvement or obligations by the Company other than the
aforementioned payments to the Company for royalties and costs relative to
operating the network. One of the agreements also provided the grantee with the
option to purchase the exclusive rights to certain additional designated NGN
Network territories.
In January 1997, the Company entered into an agreement with one of its NGN
owner-operators whereby the Company repurchased equipment originally sold by the
Company in 1996 in exchange for a $700,000 note payable. The repurchased
equipment was left in place and continues to be used in the same store locations
as originally installed. In addition, the owner-operator forfeited its
territorial rights. This equipment repurchase was not a condition of or done in
connection with the terms of the original territorial agreement and equipment
sales contract. The note is noninterest-bearing and is payable annually at an
amount equal to 40% of operating cash flows generated by the former
owner-operator's territory with the unpaid balance of the note due December 31,
2001. The note is secured by the equipment being repurchased. The Company
recorded the note and the repurchased equipment at $348,023, the present value
of the note using a discount rate of 15% and no assumed payments until maturity.
No periodic payments were assumed since the former owner-operator's territory
was not generating positive operating cash flow at the time of the equipment
repurchase and there is no assurance that such positive cash flow will be
achieved and in what amount.
In April 1997, the other owner-operator gave notice of forfeiture of its
territorial rights and its option to purchase the exclusive rights to certain
additional designated NGN territories, effective as of August 18, 1997. The
Company subsequently entered into an agreement with the owner-operator whereby,
in August 1997, the Company repurchased equipment originally sold in 1996 in
exchange for $25,000 cash and a $1,500,000 note payable. The repurchased
equipment was left in place and continues to be used in the same store locations
as originally installed. This equipment repurchase was not a condition of or
done in connection with the terms of the original territorial agreement and
equipment sales contract. The note is noninterest-bearing and is payable in full
on August 18, 2003. The note is secured by the equipment being repurchased. The
Company has also agreed to pay the former owner-operator 10 percent of the net
revenues generated by the forfeited Florida territory for the term of the note.
The Company recorded the repurchased equipment at $25,000 plus $648,491, the
present value of the note using a discount rate of 15%.
In the aforementioned purchase transactions the entire recorded present
value repurchase price approximated less than fifty percent of the original
aggregate installed cost of the NGN Displays (monitor equipment). The Company
believes this equipment has a five year useful life and at time of repurchase
had been used an average approximately six months to one year. The Company
allocated all of the repurchase price to the NGN Displays in place since it
believed their fair value was significantly greater than the fair
F-16
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 7. TERRITORIAL AGREEMENTS AND REPURCHASE OF NETWORK EQUIPMENT (CONTINUED)
value of such equipment in place. No value was allocated to the territorial
rights since they were forfeited, not repurchased and since the estimated fair
value of the tangible assets repurchased more than exceeded their repurchase
cost as noted above. The repurchased NGN Displays are being depreciated over
their approximate remaining useful lives.
NOTE 8. INCOME TAXES
Deferred income taxes consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards.............................. $ 4,274,000 $ 6,711,000
Tax credit carryforwards...................................... 113,000 147,000
Nondeductible compensation.................................... 556,000 541,000
Allowance for uncollectible accounts and other................ -- 34,000
------------- -------------
4,943,000 7,433,000
Deferred tax liabilities:
Depreciation and amortization................................. 48,000 78,000
------------- -------------
Net deferred tax assets......................................... 4,895,000 7,355,000
Less valuation allowance........................................ (4,895,000) (7,355,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company had valuation allowances of $4,895,000 and $7,355,000 against
its deferred tax assets to reduce those assets to amounts that management
believes are appropriate at December 31, 1996 and 1997, respectively.
The Company's income tax expense differed from the statutory federal rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1995 1996 1997
----------- ----------- -------------
Statutory rate applied to loss before income taxes... $ (817,000) $ (719,000) $ (2,172,000)
State income tax benefit net of federal tax effect
and other.......................................... (131,000) (121,000) (288,000)
Change in deferred tax valuation allowance........... 948,000 840,000 2,460,000
----------- ----------- -------------
$ -- $ -- $ --
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
The Company has tax net operating loss and tax credit carryforwards which
are available to reduce income taxes payable in future years. Future utilization
of these loss and credit carryforwards are subject to certain limitations under
provisions of the Internal Revenue Code including limitations subject to Section
382, which relates to a 50 percent change in control over a three-year period,
and are further dependent upon the Company attaining profitable operations. The
Company believes that the issuance of warrants
F-17
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 8. INCOME TAXES (CONTINUED)
subsequent to year end (see Note 10) will result in an "ownership change" under
Section 382. Accordingly, the Company's ability to use net operating loss
carryforwards generated prior to February 1998 may be limited to approximately
$1.3 million per year. These carryforwards and credits will expire as follows:
<TABLE>
<CAPTION>
OPERATING LOSS TAX CREDIT
YEAR CARRYFORWARDS CARRYFORWARDS
- -------------------------------------------------------------- -------------- -------------
<S> <C> <C>
2005.......................................................... $ 1,536,000 $ --
2006.......................................................... 1,532,000 26,000
2007.......................................................... 626,000 15,000
2008.......................................................... 1,400,000 30,000
2009.......................................................... 1,450,000 23,000
2010.......................................................... 2,161,000 16,000
2011.......................................................... 1,985,000 3,000
2012.......................................................... 6,372,000 34,000
-------------- -------------
$ 17,062,000 $ 147,000
-------------- -------------
-------------- -------------
</TABLE>
NOTE 9. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Site-lease fees (Note 3).............................. $ 61,765 $ 1,272,017 $ 465,615
Interest (Note 10).................................... -- -- 599,478
Compensation.......................................... 16,487 119,468 155,319
Legal fees............................................ 92,437 196,217 49,637
Other................................................. 41,910 75,751 55,518
---------- ------------ ------------
$ 212,599 $ 1,663,453 $ 1,325,567
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
NOTE 10. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
On February 18, 1998, the Company sold 45,000 units representing $45 million
of 12% Series A Senior Secured PIK Notes (the Notes) and Warrants to purchase
125,240 shares of common stock. The Notes mature on February 1, 2003. Interest
on the Notes is payable semiannually in arrears on February 1 and August 1 of
each year commencing August 1, 1998. Interest on the Notes is payable either in
cash or in additional Notes, at the option of the Company, until August 1, 2000,
and thereafter is payable in cash. Each Warrant entitles the holder to purchase
one share of common stock at an exercise price of $0.01 per share. The Warrants
are detachable and are exercisable to February 1, 2008. For financial reporting
purposes the aforementioned Notes have subsequently been recorded net of the
value ascribed to the Warrants which is in effect an original issuance discount
on the notes. This discount is being amortized as additional interest expense
over the five year term of the Notes using the interest method. The value
ascribed to the Warrants is $7.7 million, which was recorded as additional paid
in capital. The Warrant value was determined based on the total estimated
potential market capitalization of the Company's
F-18
<PAGE>
MENTUS MEDIA CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION APPLICABLE TO THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998
IS UNAUDITED)
NOTE 10. EVENTS SUBSEQUENT TO DECEMBER 31, 1997 (CONTINUED)
common stock, on a fully diluted basis before the Warrant issuance, using an
estimated per share value of $77 per share and the percentage of such value that
the Warrants represent, if exercised.
The Notes are secured by a first priority lien on substantially all assets
of the Company except for certain equipment collateralizing noninterest-bearing
notes included in long-term debt. The Notes contain certain restrictive
covenants that among other things prohibit the payment of dividends on; and the
redemption of the Company's capital stock.
On April 2, 1998, the Company filed a Registration Statement on Form S-4
with the Securities and Exchange Commission relative to its pending Exchange
Offer of Series B 12% Senior Secured PIK Notes due 2003 for all outstanding
Series A 12% Senior Secured PIK Notes. Generally, the form and terms of the
Series B Notes will be the same as the Series A Notes except that they will not
bear legends restricting their transfer. If the aforementioned Exchange Offer
Registration Statement is not declared effective by July 18, 1998, additional
interest shall accrue on the Series A Notes over and above the stated rate at a
rate of 0.5% per annum for the first 90 days, increasing thereafter by 0.5% per
annum per month to a maximum of 2.0%, until effective. In addition, if the
Company has not exchanged all Series A Notes validly tendered in accordance with
an effective Exchange Offer by August 17, 1998 or if the Exchange offer ceases
to be effective before consummation, additional interest will accrue at 0.5% for
the first 30 days from that date on the validly tendered Series A Notes,
increasing by 0.5% per month a maximum of 2.0%.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED HEREIN 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. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN
OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON 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. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................ 1
Risk Factors.............................. 11
Use of Proceeds........................... 16
Capitalization............................ 17
Selected Financial Data................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 20
Business.................................. 26
Management................................ 34
Certain Transactions...................... 37
Principal Stockholders.................... 38
Description of Capital Stock.............. 39
Description of Notes...................... 44
Certain Federal Income Tax Consequences... 71
The Exchange Offer........................ 71
Plan of Distribution...................... 80
Book-Entry, Delivery and Form............. 80
Legal Matters............................. 82
Experts................................... 82
Additional Available Information.......... 82
Index to Financial Statements............. F-1
</TABLE>
UNTIL OCTOBER 6, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
PROSPECTUS
---------------------
$45,000,000
MENTUS MEDIA CORP.
OFFER TO EXCHANGE
SERIES B 12% SENIOR
SECURED PIK NOTES DUE 2003
FOR ALL OUTSTANDING SERIES A
12% SENIOR SECURED PIK
NOTES DUE 2003
JULY 8, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
