Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
RENO AIR, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0259913
(State of Incorporation) (I.R.S. Employer
Identification Number)
220 Edison Way
Reno, Nevada 89502
(702) 686-3835
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
ROBERT M. ROWEN, ESQ.
Reno Air, Inc.
220 Edison Way
Reno, Nevada 89502
(702) 686-3835
(Name, address, including zip code, and telephone number, including area code
of agent for service)
--------------------------
It is requested that copies of communications be sent to:
GERALD ADLER, ESQ.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10017
(212) 758-9500
---------------------------
Approximate date of commencement of proposed
sale to the public: As soon as practicable after the
effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: o
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: X
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. o
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Title of Proposed Proposed Maximum
Shares to Amount to Maximum Offering Aggregate Amount of
be Registered be Registered Price Per Share(1) Offering Price(1) Registration Fee
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Series A Cumulative 1,436,000 shares $25.00 $35,900,000 $10,878.79
Convertible
Exchangeable Preferred
Stock, $0.001 par value
Common Stock, $0.01 up to 4,162,318
par value shares (2)
- ------------------------ ---------------------- ---------------------- ---------------------- ======================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Plus any additional shares issued pursuant to the anti-dilution provisions
of the Preferred Stock.
-----------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1997
PROSPECTUS
1,436,000 Shares
RENO AIR, INC.
Series A Cumulative Convertible Exchangeable Preferred Stock
(Liquidation Preference $25.00 per share)
and 4,162,318 shares of Common Stock
This Prospectus relates to the offer and sale (the "Offering") by the
holders thereof (the "Selling Stockholders") of an aggregate of up to 1,436,000
shares of Series A Cumulative Convertible Exchangeable Preferred Stock, par
value $0.001 per share (the "Preferred Stock"), of Reno Air, Inc. (the
"Company") and up to 4,162,318 shares of the Company's Common Stock, par value
$0.01 per share (the "Common Stock", and together with the Preferred Stock, the
"Shares"), initially issuable upon conversion of the Preferred Stock plus an
undeterminable number of shares of Common Stock as may become issuable upon
conversion of the Preferred Stock as a result of adjustment to the conversion
price thereunder. The shares of Preferred Stock are convertible at any time at
the option of the holder thereof, unless previously redeemed, into shares of the
Company's Common Stock at the initial conversion price of $8.625 per share of
Common Stock (equivalent to a rate of approximately 2.9 shares of Common Stock
per share) (the "Conversion Price"), subject to adjustment in certain events,
including a Corporate Change or an Ownership Change (as defined herein). See
"Description of Preferred Stock." The Common Stock is quoted on the Nasdaq
National Market ("Nasdaq") under the symbol RENO. The Company has applied to
have the Preferred Stock listed on Nasdaq. On November ___, 1997, the last
reported sales price of the Common Stock on Nasdaq was $____ per share.
The Preferred Stock is redeemable, in whole or in part, at the option of the
Company on and after December 20, 2000 initially at a price of $26.125 per share
and thereafter at prices declining to $25.00 per share on or after December 15,
2003 plus accrued and unpaid dividends, if any, to the redemption date.
The Preferred Stock is also exchangeable, in whole but not in part, at the
option of the Company on any dividend payment date, beginning on December 15,
1999, for the Company's 9% Convertible Subordinated Debentures due December 15,
2004 (the "Debentures") at the rate of $25.00 principal amount of Debentures per
share. The Debentures contain conversion and optional redemption provisions
similar to those of the Preferred Stock. See "Description of Preferred Stock"
and "Description of Debentures." The Preferred Stock is, and the Debentures are
expected to be, eligible for trading in the Private Offering, Resales and
Trading through Automated Linkages ("PORTAL") Market.
The Shares may be sold from time to time by the Selling Stockholders directly,
or through agents designated from time to time through dealers or underwriters
also to be designated, on terms to be determined at the time of sale. To the
extent required, the specific Shares to be sold, the names of the Selling
Stockholders, the purchase price, the public offering price, the names of any
such agents, dealers or underwriters and any applicable commission or discount
with respect to a particular offer will be set forth in an accompanying
Prospectus supplement (or, if required, a post-effective amendment to the
Registration Statement (as defined herein) of which this Prospectus forms a
part). The distribution of the Shares may be effected in one or more
transactions that may take place on Nasdaq or the over-the-counter market,
including ordinary broker's transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees, commissions or discounts may be paid by
the Selling Stockholders in connection with such sales.
The Selling Stockholders and intermediaries through whom the Shares are sold may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Act"), with respect to the Shares, and any profits realized or
commissions received may be deemed underwriting compensation. The Company has
agreed to indemnify the Selling Stockholders against certain liabilities,
including liabilities under the Act.
<PAGE>
The Company will not receive any of the proceeds from the sale of the Shares
offered hereby. Expenses of this Offering, estimated at $50,000, are payable by
the Company. The aggregate proceeds to the Selling Stockholders from the sale of
the Shares will be the purchase price of the Shares sold, less the aggregate
underwriting fees, discounts and commissions, if any. See "Plan of
Distribution."
The Shares offered hereby involve a high degree of risk. Prospective investors
should carefully read the factors set forth under "Risk Factors" on page ____.
-------------------------------------
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 November ____, 1997
--------------------------------------------------
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
periodic reports, proxy statements and other information filed by the Company
can be inspected and copied at the public reference facilities maintained by the
Commission at the principal offices of the Commission: 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at the Commission's regional offices: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a web site that contains reports, proxy statements and other
information regarding issuers, such as the Company, that file electronically
with the Commission. The address of such site is http://www.sec.gov.
The Common Stock is quoted on Nasdaq and listed on the Pacific
Exchange. Periodic reports, proxy statements and other information concerning
the Company can be inspected at the offices of the National Association of
Securities Dealers, Inc. at 1735 "K" Street, N.W., Washington, D.C. 20006 and at
the offices of the Pacific Exchange at 301 Pine Street, San Francisco,
California 94104.
The Company has filed with the Commission a registration statement on
Form S-3 (herein together with all amendments thereto, if any, called the
"Registration Statement") under the Act, with respect to the securities offered
by this Prospectus. This Prospectus does not contain all the information set
forth or incorporated by reference in the Registration Statement and the
exhibits and schedules relating thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits and
schedules thereto which are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the offices of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other documents
referred to are not necessarily complete, and are qualified in all respects by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
2. The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
3. The Company's Proxy Statement for annual meeting of stockholders
held on May 22, 1997.
4. The Company's Registration Statements on Form 8-A, dated
November 13, 1997 with respect to the Preferred Stock and dated July 12,
1993 with respect to the Common Stock.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
Offering shall be deemed to be incorporated by reference in this Prospectus and
to be a part of this Prospectus from the date of filing thereof. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits). Requests for
such copies should be directed to: Reno Air, Inc., 220 Edison Way, Reno, Nevada
89502, Attention: Corporate Secretary, telephone (702) 686-3835.
Unless the context indicates otherwise, all references herein to the
"Company" refer to Reno Air, Inc.
The Company's principal executive offices are located at 220 Edison Way,
Reno, Nevada 89502, telephone (702) 686-3835.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements including the notes thereto
contained or incorporated by reference in this Prospectus. Prospective investors
in the Preferred Stock should consider carefully the factors discussed in detail
elsewhere in this Prospectus under the caption "Risk Factors." See "Glossary" on
page __ for definitions of certain terms used in this Prospectus.
This Prospectus, including any documents that are incorporated by
reference as set forth in "Incorporation of Certain Documents by Reference,"
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Generally, such statements are indicated by words
or phrases such as "anticipate," "expect," "intend," "management believes" and
similar words or phrases. Such statements are based on current expectations and
are subject to risks, uncertainties and assumptions. Certain of these risks are
described under "Risk Factors" beginning on page __ of this Prospectus. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, expected, intended or believed.
THE COMPANY
Reno Air, Inc. (the "Company") operates a full-service, low-cost,
low-fare passenger airline providing all-jet scheduled service primarily in the
western United States. The Company operates a modern fleet of 30 Stage III
McDonnell Douglas MD-80 and MD-90 aircraft that have an average age of less than
seven years. The Company offers approximately 208 daily flights primarily to and
from its two hubs in Reno/Tahoe and Las Vegas and in high-frequency service
between San Jose and Southern California. In addition to these cities, the
Company serves Albuquerque, Anchorage, Chicago (O'Hare), Colorado Springs,
Detroit, Fairbanks, Los Angeles, Oklahoma City, Orange County (California),
Ontario (California), Portland, San Diego, San Francisco, Seattle, Tucson and
Vancouver (British Columbia). The Company also operates revenue-guaranteed
scheduled service from Gulfport/Biloxi (Mississippi) to Atlanta, Sanford/Orlando
(Florida) and St. Petersburg/Tampa. The Company conducts charter operations and
operates a tour program called QQuick Escapes, which offers vacation packages
including airfare, lodging and other services, primarily to Reno/Tahoe, Las
Vegas and Southern California. In addition to offering its own frequent flyer
program (QQuick Miles(TM)), the Company participates in the American Airlines
AAdvantage(R) frequent flyer program, offering passengers on most of the
Company's routes the ability to earn and redeem AAdvantage(R) travel awards.
The Company's principal executive offices are located at 220 Edison
Way, Reno, Nevada, 89502. Its telephone number is (702) 686-3835.
<PAGE>
THE OFFERING
Securities Offered Up to 1,436,000 shares of Series A
Cumulative Convertible Exchangeable
Preferred Stock, par value $0.001
per share, of the Company and up to
4,162,318 shares of the Company's
Common Stock, par value $0.01 per
share, issuable upon conversion of
the Preferred Stock plus an
undeterminable number of shares of
Common Stock as may become issuable
upon conversion of the Preferred
Stock as a result of adjustment to
the Conversion Price.
Preferred Stock Outstanding 1,436,000 shares
Common Stock Outstanding 10,542,075 shares (1)
Nasdaq Common Stock Symbol "RENO"
Pacific Exchange
Common Stock Symbol "RNO"
Preferred Stock Listing The Company has applied to have the
Preferred Stock listed on Nasdaq.
TERMS OF THE PREFERRED STOCK:
Dividends Cumulative preferential dividends
from the issue date of the Preferred
Stock accruing at the rate of
$0.5625 per quarter ($2.25 per annum)
payable in arrears on March 15, June
15, September 15 and December 15,
commencing December 15, 1997.
Dividends will be payable in cash,
except under certain circumstances
related to conversion of the
Preferred Stock, in which case
dividends may be issued in additional
shares of Common Stock. See
"Description of Preferred Stock--
Dividends."
Liquidation Preference $25 per share, plus accrued and
unpaid dividends. See "Description
of Preferred Stock--Liquidation
Rights."
Conversion Rights The shares of Preferred Stock are
convertible at the option of the
holder thereof, unless previously
redeemed, into shares of Common
Stock, at the Conversion Price,
subject to adjustment in certain
events. See "Description of Preferred
Stock--Conversion Rights."
Special Conversion Rights The Conversion Price will be reduced
for a limited period in the event a
Corporate Change or an Ownership
Change occurs at a time when the
current market price of the Common
Stock is less than the Conversion
Price then in effect. Upon such an
occurrence, the Conversion Price
will be reduced for a period of 45
days to the market price of the
Common Stock immediately prior to
such occurrence, but to not less than
$5.04 (66 2/3% of the last reported
sales price of the Common Stock on
the day preceding the date of this
Prospectus). The special conversion
right is subject to important
limitations and qualifications as
described at "Description of
Preferred Stock--Special Conversion
Rights Upon Corporate Change or
Ownership Change."
Redemption The Preferred Stock is redeemable,
in whole or in part, at the option
of the Company on or after December
20, 2000 at the redemption prices
set forth herein together with
accrued interest. See "Description
of Preferred Stock--Company's Right
of Redemption."
- --------------------------
(1) Based on the number of shares outstanding at September 30,
1997. Does not include (i) 5,264,731 shares issuable upon
exercise of outstanding options (including unvested options),
warrants and convertible notes or (ii) the shares of Common
Stock issuable upon conversion of the Preferred Stock.
<PAGE>
Voting Rights The holders of Preferred Stock
("Holders"), as a class, may vote on
certain matters adversely affecting
the Preferred Stock, including,
without limitation, the creation
and/or issuance of any capital stock
ranking senior to the Preferred
Stock. See "Description of Preferred
Stock--Voting Rights."
Special Voting Rights In the event that the Company misses
payments on six successive
quarterly dividends payable on the
Preferred Stock, or if any holders
of any future class of pari passu
preferred stock are entitled to elect
directors based on unpaid dividends,
the number of directors of the
Company shall be increased to enable
the Holders of such preferred
stock, voting as a single class,
to elect two directors of the
Company. Such right will be subject
to certain limitations. See
"Description of Preferred Stock--
Voting Rights."
Priority The Preferred Stock ranks senior
to the Common Stock in right of
payment of dividends and upon
liquidation. The Preferred Stock
ranks pari passu in right of payment
of dividends and upon liquidation
with any preferred stock hereafter
issued unless such preferred stock
ranks junior to the Preferred Stock.
See "Description of Preferred
Stock--Ranking."
Exchange Provisions The Preferred Stock is exchangeable,
in whole but not in part, at the
option of the Company on any
dividend payment date beginning on
December 15, 1999, for the Company's
9% Convertible Subordinated
Debentures due December 15, 2004 at
the rate of $25.00 principal amount
of Debentures for each share of
Preferred Stock, provided that all
accrued and unpaid dividends, if any,
on the Preferred Stock have been
paid.
Debentures The Debentures will mature on
December 15, 2004, and will bear
interest at a rate of 9% per annum,
payable semiannually on each June 15
and December 15. The Debentures will
be redeemable for cash at the option
of the Company, at any time after
December 20, 2000, in whole or in
part, initially at 104.5% of par and
declining to par on and after
December 15, 2003, in each case plus
accrued and unpaid interest, if any,
to the date fixed for redemption. The
Debentures are redeemable at the
option of the holder for a limited
period upon certain events
involving a Corporate Change or an
Ownership Change at a redemption
price, payable at the option of the
Company in cash or Marketable Stock
(as defined herein), equal to par
plus accrued and unpaid interest, if
any, to the date fixed for
redemption. The Debentures are not
entitled to the benefit of any
mandatory sinking fund payments. The
unpaid principal amount of the
Debentures will be convertible, at
the option of the holder at any time
prior to redemption or maturity, into
shares of Common Stock at the same
Conversion Price that would have
been applicable to the Preferred
Stock if the Preferred Stock were
then outstanding. The Debentures
will be subordinated to Senior
Indebtedness, as defined in the
indenture governing the Debentures
(the "Indenture"). The Indenture will
not limit the amount of additional
indebtedness, including Senior
Indebtedness (as defined), which the
Company can create, incur, assume or
guarantee, nor will the Indenture
limit the amount of indebtedness
which any subsidiary of the Company
may incur. As a result of the
subordination provisions in the
Indenture, in the event of
insolvency, holders of the Debentures
may recover less ratably than holders
of Senior Indebtedness and general
creditors of the Company.
Use of Proceeds The Company will not receive any
of the proceeds from the sale of
shares of Preferred Stock by the
Selling Stockholders.
RISK FACTORS
An investment in the Preferred Stock offered hereby involves a high
degree of risk. For a discussion of certain risks relating to such an
investment, see "Risk Factors" on page __.
<PAGE>
RISK FACTORS
In addition to the other information included in, or incorporated by
reference into, this Prospectus, prospective investors should carefully consider
the following risks before making an investment in the Preferred Stock.
Risks Related to the Company
Competition and Competitive Reaction
The airline industry is highly competitive and slight changes in fare
levels or load factors can have a substantial financial impact on the Company.
Generally, approximately one-half of the Company's tickets are sold within the
two weeks preceding the date of travel. Accordingly, any changes in the
Company's competitive environment (for instance, changes in fares or service
offered by its competitors) can have an immediate and significant financial
impact on the Company. In addition, the airline industry is highly sensitive to
general economic conditions. Any reduction in airline passenger traffic (whether
general or specific to the Company) may materially and adversely affect the
Company. A shortfall from expected revenue levels could have a material adverse
effect on the Company's growth or viability.
Airlines compete primarily with respect to fare levels, schedule
convenience, frequency of service and number of markets served. The Company
competes on many of its routes with Southwest Airlines, Inc. ("Southwest") and,
to a lesser extent, with United Air Lines, Inc. ("United"), Alaska Airlines,
Inc. ("Alaska"), America West Airlines, Inc. ("America West") and Northwest
Airlines, Inc. ("Northwest"), each of which is larger and has greater name
recognition and substantially greater resources than the Company. The Company
may at any time also face competition from other existing airlines which may
begin service to any of the Company's markets or from potential new low-cost
airlines. The Company's results are highly sensitive to changes in fare levels.
Fare levels can change rapidly, and are subject to action by the Company's
competitors. As a result, the Company cannot predict future fare levels or the
effect changes in such fare levels will have on the Company's performance.
Limited Size and Markets
The Company commenced commercial flight operations on July 1, 1992 and
is substantially smaller than many of its competitors, with significantly less
financial and operating resources. Any interruption of service as a result of
maintenance requirements or other unavailability of aircraft could materially
and adversely affect the Company's service, reputation and profitability. The
Company's ability to compete with larger carriers may be materially and
adversely affected because it is smaller and has less resources than many of its
competitors.
As of October 1, 1997, the Company operated 30 aircraft and served 24
cities with scheduled service. The Company's results are largely dependent on
traffic levels at its hubs in Reno/Tahoe and Las Vegas, Nevada, its routes
between San Jose (in the San Francisco Bay area) and Southern California and its
focus markets in Los Angeles and Seattle. Traffic levels in San Jose are
dependent in substantial part on the state of the California economy. Traffic
levels at Reno/Tahoe and Las Vegas are based largely on tourist and recreational
travel and could be materially and adversely affected, for instance, by declines
in traffic to these cities as gaming destinations or to Reno/Tahoe as a ski
resort. Many factors can impact such levels of traffic, including competition
from other gaming destinations and ski resorts or unfavorable weather
conditions.
Seasonality
The Company's operating results and its profitability are sensitive to
and substantially affected by seasonal variations in traffic. The Company
generally realizes its highest levels of traffic and revenue in the third
quarter and the lowest levels of traffic and revenue in the fourth quarter.
<PAGE>
Limited Liquidity
Compared to many of its competitors, the Company has limited liquidity.
Such limited liquidity may make the Company more vulnerable to prolonged fare
wars or downturns in its financial results and may limit the Company's ability
to take advantage of opportunities that may arise, such as entering new markets,
expanding operations or acquiring equipment.
Leverage
The Company is significantly leveraged. The Company's ability to meet
its obligations is largely dependent upon its future performance, which is
subject to financial, industry and other factors. Many of these factors, such as
economic conditions, competitive actions by other airlines and other factors
relating to the airline industry generally, are beyond the Company's control.
The Company's leverage could make it more vulnerable to changes in general
economic conditions and may impair the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions or general
corporate purposes.
Limitations on Airport Access
The availability of terminal gates and other facilities is limited at
many airports served by the Company. The Company from time to time has
experienced difficulty obtaining suitable gate space at certain congested
airports. At Chicago (O'Hare) and Orange County (California), landing rights are
strictly controlled. Some of the slots operated by the Company at Orange County,
are available to the Company pursuant to an agreement among the Company, the
John Wayne International Airport and American and may be recalled by American on
short notice, and some of the other slots operated by the Company at Orange
County are subject to annual reallocation. The Company operates daily flights to
O'Hare from Reno using special purpose slots available to new entrant carriers
and awarded to it by the United States Department of Transportation ("DOT"). The
Company's slots at O'Hare may be used only for service to Reno and will expire
upon issuance of final rules regarding special slot allocations unless renewed
by the DOT. The DOT has not yet proposed final rules. A loss of slots at Orange
County or O'Hare would have a material adverse impact on the Company.
Ability to Manage Growth
Since the Company commenced commercial flight operations in July 1992,
the Company has experienced rapid growth in its operations. Management intends
to continue to expand the Company's fleet and add new destinations and flights
to its schedule, although at a moderate rate of growth. Further expansion will
require additional skilled personnel, equipment and facilities. Any inability to
hire necessary skilled personnel or to secure the required equipment and
facilities may adversely affect the Company's ability to achieve its growth
plans. An inability to manage growth effectively also could have a material
adverse effect on the Company and on its ability to execute its expansion plans.
Possible Future Increases in Aircraft Costs
Approximately half of the Company's aircraft are leased pursuant to
agreements with remaining terms (as of September 30, 1997) of less than five
years. Accordingly, in order to maintain its current size, the Company will need
to renew certain of its leases, or lease or purchase additional aircraft. There
can be no assurance that lease renewals or additional aircraft will be available
on terms that allow the Company to maintain its size or expand at current
aircraft cost levels. Any significant increases in costs of renewed leases, or
unavailability of lease renewals or alternate aircraft, could materially and
adversely affect the Company.
Agreements with American Airlines and Others
The Company has agreements with American including participation in the
AAdvantage(R) frequent flyer program, use of landing rights at Orange County,
ground handling and rental of terminal space in San Jose. These agreements are
subject to termination, in some cases on short notice. The AAdvantage(R)
agreement, which originally had an expiration date of December 31, 1997, has
been extended through June 30, 1998, while the Company and American negotiate
the terms of a longer extension. Such negotiations are continuing. Absent a
longer term extension, the AAdvantage(R) agreement may be terminated by either
American or the Company on June 30, 1998. The failure to renew, termination of
or material changes in the terms of the AAdvantage(R) agreement could have a
material adverse effect on the Company.
The Company also has entered into agreements with American (as well as
others) to provide certain facilities and services required for its operations,
including reservations, data processing, aircraft maintenance, ground facilities
and aircraft ground handling. Any termination or significant interruption in
such services could have a material adverse effect on the Company. The Company's
reliance upon others to provide essential services also may result in a more
limited ability to control the cost or quality of such services.
Reliance on Travel Agencies
A significant portion of the Company's tickets are sold by travel
agencies. Generally, travel agencies can recommend one or more airlines when
booking a customer's flight. Accordingly, any effort by travel agencies to favor
another airline or to disfavor the Company could have a significant adverse
effect on the Company. The Company's relations with travel agencies could be
affected, for instance, by override commissions offered by other airlines, by an
increase in the Company's arrangements with other distributors of its tickets
(such as tour wholesalers) or by the introduction of alternative methods of
selling tickets. On October 6, 1997, the Company reduced the normal commission
it pays travel agencies from 10% to 8% matching similar reductions implemented
by most major airlines in September 1997. There can be no assurance that travel
agencies will not disfavor the Company or favor airlines other than the Company
in the future.
Employee Relations
Management believes it operates with lower personnel costs than many
established airlines, principally due to a relatively junior work force and
greater flexibility in the utilization of personnel. There can be no assurance
that these advantages will continue to exist. Management anticipates that the
Company's personnel costs will increase as the Company's work force gains
seniority and the Company's salary structure matures in response to
profitability. On April 23, 1997, the Company's flight attendants elected the
International Brotherhood of Teamsters ("IBT") as their collective bargaining
representative and, on September 22, 1997, the Company's pilots elected the Air
Line Pilots Association ("ALPA") as their collective bargaining representative.
As of November 15, 1997, the Company is negotiating a contract with the IBT, and
management anticipates negotiating a contract with ALPA; management cannot
predict when contracts might be entered into or the extent to which such
contracts would contain terms different from the Company's current work and pay
rules. Any changes may result in increased costs and reduced flexibility for the
Company. Labor unions have from time to time inquired of the Company's other
employee groups as to their interest in joining a union. Unionization of the
Company's employees restricts the Company's flexibility in dealing with such
employees, which could result in a material increase in its labor costs.
The Company has historically experienced significant attrition in its
personnel, many of whom require specialized training. Any increase in the rate
of attrition would increase the Company's costs. In addition, as the size of the
Company's workforce increases, the cost of attrition may become relatively
greater as it may become more difficult for the Company to attract and train
sufficient numbers of qualified personnel.
Reliance on Third Party Suppliers
The Company operates two aircraft types, the MD-80 series and the MD-90
series, each of which has a single engine type. Pratt & Whitney JT8D engines are
used on the MD80 aircraft and International Aero Engines V2500 engines are used
on the MD-90 aircraft. The manufacture and overhaul of aircraft, aircraft
engines and component parts is tightly regulated by the Federal Aviation
Administration ("FAA"). Accordingly, the Company's operational performance is
subject to the continued performance of third parties manufacturing and
overhauling the Company's flight equipment. Any disruption in the availability
of parts or overhaul services (such as the disruption in obtaining engine parts
and overhauls realized in the second quarter of 1997) can adversely impact the
Company's operations and results.
Anti-Takeover Provisions
Certain provisions of Nevada law and of the Company's Articles of
Incorporation and Bylaws could have the effect of making more difficult or
discouraging an acquisition of the Company or a change in control of the
Company. These provisions, among other things, authorize the issuance of up to
10,000,000 shares of preferred stock (including the Preferred Stock offered
hereby) with such rights and preferences as may be determined from time to time
by the Board of Directors without stockholder approval, eliminate the ability of
the stockholders to call a special meeting or act by written consent and require
advance notice of proposals (including nominations to the Board of Directors) to
be acted upon at meetings of stockholders. The issuance of additional series of
preferred stock could adversely affect the rights of the holders of Preferred
Stock. As of November 15, 1997, the Company does not have commitments to issue
any shares of its preferred stock other than the Preferred Stock; however, there
can be no assurance that the Company will not do so.
The Preferred Stock contains special conversion rights which will be
triggered in the event of a Corporate Change or an Ownership Change. See
"Description of Preferred Stock--Special Conversion Rights Upon Corporate Change
or Ownership Change."
Risks Related to the Airline Industry
Fixed Costs
In the airline industry, revenues generally are substantially more
volatile than costs. The costs of operating each flight do not vary
significantly with the number of passengers carried and, therefore, a relatively
small change in the number of passengers or in fare pricing or traffic mix can,
in the aggregate, have a significant effect on financial results. A shortfall
from expected revenue levels could have a material adverse effect on the
Company.
Increase in Excise Taxes on Short Haul Flights
Historically, airlines have remitted to the United States government an
excise tax on airline ticket sales (currently 10% of a ticket's fare). In
October 1996, the United States Congress ("Congress") established a National
Civil Aviation Review Commission in part to review financing of the FAA,
including the possibility of establishing a "cost-based" user fee system. In
July 1997, Congress adopted changes to the federal excise ticket tax. The new
legislation reduces the excise tax to 9%, and eventually to 7.5%, but imposes an
additional surcharge of $1.00, which eventually increases to $3.00, for each
trip segment flown. This initial structure is effective on October 1, 1997, with
the full changes being phased in through the year 2002. This new structure will
increase the excise taxes on low-fare short-haul transportation. The impact to
the Company will depend on the extent to which the tax increase is passed on to
passengers and the extent to which any such increase in the cost of travel
decreases the demand for air travel. As of November 15, 1997, management
believes there will be an impact to the Company, but cannot predict whether such
impact will be material.
Fuel Prices
Aircraft fuel constituted approximately 19% of the Company's operating
expenses in 1996. The Company's average cost of fuel (including taxes and fuel
servicing fees) increased from $0.69 per gallon in 1995 to $0.79 per gallon in
1996 and averaged $0.75 in the first nine months of 1997. Both the cost and
availability of fuel are subject to many factors and events occurring throughout
the world and, therefore, fuel prices can fluctuate significantly. A fuel supply
shortage resulting from a disruption of oil imports or other reasons could
result in higher fuel prices or curtailment of scheduled service. The future
cost and availability of fuel to the Company cannot be predicted. Substantial
price increases or the unavailability of adequate supplies could have a material
adverse effect on the Company. Based on levels of fuel consumption during the
first six months of 1997, each one cent increase in the price of a gallon of
fuel (by taxes or otherwise) adds approximately $1 million to the Company's
annual operating costs.
Consolidation of Aircraft Manufacturing Industry
The McDonnell Douglas Corporation merged with The Boeing Company in
August 1997. As a result, there may in the future be less competition by
manufacturers of aircraft to place their aircraft with airline owners or
lessees. This consolidation of the airline manufacturing industry may lead to
shortages in the supply of aircraft and/or higher aircraft prices. The price or
availability of spare parts and services for the Company's aircraft also may be
adversely affected.
Cyclical Nature of Airline Industry
The airline industry is highly sensitive to general economic
conditions. Because a substantial portion of airline travel (both business and
leisure) is discretionary, the industry tends to experience adverse financial
results during general economic downturns. Any general reduction in airline
passenger traffic may materially and adversely affect the Company, particularly
since current industry traffic levels are based in part on price stimulation of
discretionary air travel.
Foreign Ownership
Pursuant to law and DOT regulation, the Company must be effectively
controlled by United States citizens. In this regard, the Company's President
and at least two-thirds of the Company's Board of Directors must be United
States citizens and not more than 25% of the Company's voting stock can be owned
by foreign nationals (although subject to DOT approval the percent of foreign
economic ownership may be as high as 49%). Effective in early September 1997,
the Common Stock was listed on both the Berlin and Frankfurt Stock Exchanges.
The Company's amended By-laws contain a provision designed to ensure that the
amount of voting stock beneficially owned by foreign nationals will not exceed
25% of the total outstanding stock of the Company. Under such By-law provision,
(i) transfers of shares of the Company to foreign nationals may not be made if
the transfer would result in the ownership of stock by foreign nationals
exceeding 25% of the total outstanding stock of the Company and (ii) if the
stock of the Company is in fact transferred to a foreign national in such
circumstances, the holder of such stock shall not be entitled to vote or to have
any other rights except the right to transfer the stock to a citizen of the
United States. Although the Company has adopted procedures to ensure that not
more than 25% of the Company's voting stock will be owned by foreign nationals
and will make every effort to ensure that it will not forfeit any of its
operating rights by virtue of foreign ownership, there can be no assurance that
foreign ownership will not exceed such 25% threshold.
Government Regulation
The Company has a Certificate of Public Convenience and Necessity from
the DOT (a "DOT Certificate") and an operating certificate from the FAA.
Retention of each such certificate is subject to continued compliance with
applicable statutes, rules and regulations pertaining to the airline industry,
including any new rules and regulations that may be adopted by any governmental
authority in the future. Additionally, the Company is subject to federal, state
and local laws and regulations relating to protection of the environment, radio
communications, labor relations, equal employment opportunities and other
matters.
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things, collision
avoidance systems, airborne windshear avoidance systems, noise abatement and
increased inspection requirements. The costs of compliance with applicable
statutes, rules and regulations may increase over time and no assurance can be
given with respect to such costs or the effect of compliance on the Company's
profitability. In addition, management believes that smaller and newer airlines
are subject to proportionately greater scrutiny by FAA officials, making them
susceptible to regulatory demands that can negatively affect their operations.
Any prolonged inspection activity by the FAA, whether arising from concerns
general to the industry or specific to the Company, could have a material
adverse impact on the Company.
On June 18, 1996, the FAA announced a set of changes in its inspection
policies, including requirements for airlines to demonstrate the regulatory
compliance of each of their major contract maintenance and training programs and
to conduct an audit of, and receive FAA approval of, any new contractors
performing substantial maintenance or training. As is the case with other
airlines, the Company is required to obtain FAA approval of any new contract
maintenance organizations or contract training organizations engaged by it.
There can be no assurance that Congress or the FAA will not pass legislation or
establish additional rules and regulations that impose further constraints and
obligations on flight operations, maintenance, training or other operations.
Such additional legislation or regulations may cause an increase in operating
costs or otherwise adversely affect the Company.
Risks Related to this Offering
Absence of Public Market
There is no existing trading market for the Preferred Stock or the
Debentures, and there can be no assurance regarding the future development of an
active trading market for the Preferred Stock or a market for the Debentures,
the ability of holders of Preferred Stock or Debentures to sell such security or
the price at which such security may be sold. If such a market were to develop,
the Preferred Stock or Debentures could trade at prices that may be higher or
lower than the initial offering price depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Preferred Stock is, and management expects that the
Debentures, if issued, would be, eligible for trading in the PORTAL Market. The
Company has applied to have the Preferred Stock listed on Nasdaq.
Unsecured Indebtedness
The Debentures, if issued, will be unsecured obligations of the
Company, and will be subordinated to all existing and future Senior Indebtedness
(as defined) of the Company. See "Description of Debentures--Subordination." In
the event of a bankruptcy, reorganization or liquidation of the Company, or in
the event of a required redemption of the Debentures, there may not be
sufficient assets to satisfy the claims of the holders of the Debentures.
Fluctuations of Stock Prices
The market prices of the Preferred Stock and Common Stock may be
subject to significant fluctuations in response to variations in operating
results and other factors. Government regulations, future announcements
concerning the Company or its competitors, general economic and business
conditions, the level of interest rates, the Company's operating results and
similar matters may have a significant impact on the market prices of the
Preferred Stock and Common Stock. In addition, the volatility of the Preferred
Stock and Common Stock may be larger or greater by virtue of the Company being
in the airline industry.
Tax Consequences of Exchange for Debentures
An exchange of the Preferred Stock for the Debentures generally will be
a taxable event for federal income tax purposes, which may result in a tax
liability to the Holders, without any corresponding receipt of cash by the
Holders. See "Certain Federal Income Tax Considerations--Redemption, Sale and
Exchange of Preferred Stock."
Subordination of Debentures to Senior Indebtedness
The payment of the principal of, premium, if any, and interest on the
Debentures will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. In the
event and during the continuation of any default in the payment of principal of,
premium, if any, or interest on any Senior Indebtedness, no payment with respect
to the principal of, premium, if any, or interest on the Debentures may be made
by the Company unless and until such default has been cured or waived or shall
have ceased to exist. Upon any payment or distribution of assets to creditors
upon any dissolution, winding up, liquidation or reorganization, the holders of
all Senior Indebtedness will be first entitled to receive payment in full of all
amounts due or to become due thereon before the holders of Debentures will be
entitled to receive any payment in respect of the principal, premium, if any, or
interest on the Debentures. Because of these subordination provisions, in the
event of an insolvency of the Company, holders of Debentures may recover less,
ratably, than holders of Senior Indebtedness. The Company is also subject to
contractual restrictions on the payment of principal, premium, if any, and
interest on indebtedness.
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
offered hereby. This Offering is intended to satisfy certain of the Company's
obligations under a Registration Rights Agreement.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does
not anticipate the payment of cash dividends on the Common Stock in the
foreseeable future. However, the shares of the Preferred Stock will accrue
cumulative quarterly dividends at the rate of 9% per annum on the liquidation
preference thereof (equivalent to $2.25 per annum per share of Preferred Stock).
Other than payments of dividends on the Preferred Stock, the Company currently
intends to retain all earnings to finance the further development of its
business. The payment of any cash dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's financial condition, results of operations, business conditions,
capital requirements, restrictions contained in agreements, restrictions under
Nevada law, future prospects and other factors deemed relevant by the Company's
Board of Directors. No dividends are permitted to be paid on the Common Stock
unless the Company is then current in the payment of dividends on the Preferred
Stock. In addition, certain of the Company's debt instruments contain
limitations on the Company's ability to pay dividends including, without
limitation, that the Company's consolidated net worth after such payment must
exceed $8.1 million and such payment, together with certain other payments made
by the Company, must be less than the sum of (i) 50% of the aggregate
consolidated net income of the Company (or if a deficit, 100% of the deficit)
since October 1, 1995, plus (ii) 100% of the aggregate net cash proceeds
received from the issue or sale of certain equity interests of the Company or of
certain debt securities that have been converted into such equity interests.
SELLING STOCKHOLDERS
This Prospectus covers the sale of up to 1,436,000 shares of Preferred
Stock and up to 4,162,318 shares of Common Stock issuable upon conversion of the
Preferred Stock, plus an indeterminable number of shaes of Common Stock as may
become issuable upon conversion of the Preferred Stock as a result of
adjustments to the Conversion Price. All of the Shares offered by the Selling
Shareholders and may be sold in the open market, in privately negotiated
transactions or otherwise by the holders thereof.
The number of shares reflected in the table below has been provided by
each Selling Shareholder. Under Rule 13d-3 promulgated under the Exchange Act,
each Selling Shareholder is deemed to be the beneficial owner of a Share if that
person has the right to acquire beneficial ownership of such Share within sixty
days, including but not limited to any right to acquire through the exercise of
any option, warrant or right or through the conversion of a Share.
Beneficial Ownership Beneficial Ownership of
Prior to Offering Common Stock After Offering
Preferred Stock Common Stock
--------------- ------------
Stockholder Number Percent Number Percent Number Percent
------ ------- ------ ------- ------ -------
[Information to be provided by amendment or supplement.]
Total: 1,436,000 100%
DESCRIPTION OF CAPITAL STOCK
General
The following description of the capital stock of the Company is
qualified in its entirety by and subject to the Nevada General Corporation Law
and the Company's Articles of Incorporation and Bylaws. Copies of the Company's
Articles of Incorporation and Bylaws have been filed or incorporated by
reference as exhibits to the public filings of the Company.
The authorized capital stock of the Company consists of 30 million shares
of Common Stock, $0.01 par value, and ten million shares of Preferred Stock,
$0.001 par value, with the Preferred Stock to be issued upon such terms and
conditions as the Board of Directors of the Company shall determine, without any
further action by the stockholders. As of September 30, 1997, 10,542,075 shares
of Common Stock and, as of November 15, 1997, 1,436,000 shares of Preferred
Stock were outstanding.
Preferred
The Company is authorized to issue ten million shares of preferred
stock, including the Preferred Stock offered hereby. The Board of Directors has
the power to fix by resolution, without stockholder consent, any designation,
power, preference, right, qualification, limitation or restriction with respect
to such shares. Any such shares may be senior to the Common Stock with respect
to any dividend or distribution or in the event of a liquidation or dissolution
of the Company if so designated by the Board of Directors. The issuance of any
preferred stock, including the Preferred Stock offered hereby, would adversely
affect the rights of the holders of the Common Stock. See "Risk Factors."
Common Stock
The holders of the Common Stock are entitled to receive dividends when
and as directed by the Board of Directors, out of funds legally available
therefor, subject to the rights of the holders of shares of preferred stock. The
Company has not paid cash dividends on the Common Stock in the past and does not
expect to pay any cash dividends on the Common Stock within the foreseeable
future since earnings are expected to be reinvested in the Company.
Each outstanding share of the Common Stock is entitled to equal voting
rights, consisting of one vote per share. The Company's Bylaws provide for a
Board of Directors consisting of not less than three nor more than eleven
members. The Company's Board of Directors currently consists of eight members.
The holders of Common Stock are not entitled to cumulative voting in the
election of directors. Accordingly, the holders of more than 50% of the shares
voting in the election of directors can elect 100% of the directors if they
choose to do so; and, in such event, the holders of the remaining shares voting
for the election of directors will be unable to elect any person(s) to the Board
of Directors. In the event of liquidation, dissolution or winding up of the
Company, either voluntarily or involuntarily, each outstanding share of the
Common Stock is entitled to share equally, subject to any preferential
liquidation rights of any shares of the Preferred Stock. No share of the Common
Stock is liable to calls or assessment by the Company. There are no preemptive
rights to acquire or subscribe for any Common Stock or other securities of the
Company. See "Risk Factors" for a discussion of provisions in the Company's
Articles of Incorporation and Bylaws that may discourage a change in control of
the Company.
Common Stock Warrants
As of October 1, 1997, the Company has outstanding warrants to purchase
an aggregate of 86,000 shares of Common Stock at $8.63 per share, which are
exercisable through November 29, 1997 and warrants to purchase an aggregate of
65,431 shares of Common Stock at $8.44 per share, which are exercisable through
April 28, 1999 or in each case, such later dates as the Company may in its sole
discretion determine. All of the warrants contain anti-dilution provisions
regarding certain events, including but not limited to stock subdivisions,
combinations and reclassifications. In addition, all of the warrants provide
that upon a merger or consolidation of the Company with or into another
corporation, or the sale of all or substantially all of the Company's assets as
an entirety to any other person, the holder of the warrants will be entitled to
receive upon exercise of the warrant, the number of shares of stock or other
securities of the Company or of the successor corporation resulting from such
merger or consolidation.
Control Share Acquisitions
Section 78.3791 of the Nevada Revised Statutes applies to any
acquisition of outstanding voting securities of a Nevada corporation which has
200 stockholders, at least 100 of which are Nevada residents, and conducts
business in Nevada (an "Issuing Corporation"), with certain exceptions,
resulting in ownership of one of the following categories of an Issuing
Corporation's then outstanding voting securities: (i) 20% or more but less than
33%; (ii) 33% or more but less than 50%; or (iii) 50% or more. The securities
acquired in such acquisition are denied voting rights unless a majority of the
security holders approve the granting of such voting rights. Unless an Issuing
Corporation's Articles of Incorporation or Bylaws then in effect provide
otherwise, (i) voting securities acquired are also redeemable in whole or in
part by an Issuing Corporation at the average price paid for the securities
within 30 days if the acquiring person has not given a timely information
statement to an Issuing Corporation or if the stockholders voted not to grant
voting rights to the acquiring person's securities and (ii) if the acquiring
person acquired securities with 50% or more of the voting power of an Issuing
Corporation's outstanding securities and the security holders granted voting
rights to such acquiring person, then any security holder who voted against
granting voting rights to the acquiring person may demand the purchase from an
Issuing Corporation, for fair value, all or any portion of his or her
securities.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, New York 10004.
Limitation of Liability and Indemnification of Directors
The right of the stockholders to sue any director for misconduct in
conducting the affairs of the Company is limited by Article VII of the Company's
Articles of Incorporation and Nevada statutory law to cases for damages
resulting from breaches of fiduciary duties involving acts or omissions
involving intentional misconduct, fraud, knowing violations of the law or the
unlawful payment of dividends. Ordinary negligence is not a ground for such a
suit. The statute does not limit the liability of directors or officers for
monetary damages under federal securities laws.
The Company also has the obligation, pursuant to Article VIII of the
Company's Articles of Incorporation and Article VII of the Company's Bylaws, to
indemnify any director or officer of the Company for all expenses incurred by
them in connection with any legal action brought or threatened against such
person for or on account of any action or omission alleged to have been
committed while acting in the course and scope of the person's duties, if the
person acted in good faith and in a manner which the person reasonably believed
to be in or not opposed to the best interests of the Company, and with respect
to criminal actions, had no reasonable cause to believe the person's conduct was
unlawful, provided that such indemnification is made pursuant to then existing
provisions of Nevada statutes at the time of any such indemnification.
DESCRIPTION OF PREFERRED STOCK
General
The following is a summary of the terms of the Preferred Stock offered
hereby. This summary is not intended to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Company's
Articles of Incorporation, as amended (the "Articles of Incorporation"), and the
Certificate of Designations of the Preferred Stock (the "Certificate of
Designations"), copies of which are available from the Company upon request.
The Board of Directors of the Company authorized the issuance of a
series of preferred stock consisting of up to 1,600,000 shares of Preferred
Stock, and authorized a committee of the Board of Directors to establish, among
other things, the final terms of the Preferred Stock set forth in the
Certificate of Designations. All of the outstanding shares of the Preferred
Stock are duly and validly issued, fully paid and nonassessable. The holders of
the Preferred Stock have no preemptive rights with respect to any shares of
capital stock of the Company or any other securities of the Company convertible
into or carrying rights or options to purchase any such shares. The Preferred
Stock are not subject to any sinking fund or other obligation of the Company to
redeem or retire the Preferred Stock.
Ranking
The Preferred Stock ranks senior to the Common Stock with respect to
the payment of dividends and upon liquidation, dissolution or winding up of the
Company. The Company may not, without the consent of the holders of at least
two-thirds of the outstanding shares of the Preferred Stock and all other
outstanding shares of preferred stock ranking on a parity with the Preferred
Stock either as to dividends or upon liquidation, dissolution or winding up,
voting together as a single class, create, authorize or issue, or reclassify any
authorized stock of the Company into, or create, authorize or issue any
obligation or security convertible into or evidencing a right to purchase, any
shares of any class of stock of the Company ranking prior to the Preferred
Stock. The Company may, however, create additional classes of stock or issue
series of preferred stock ranking on a parity with the Preferred Stock with
respect to the payment of dividends or upon liquidation, dissolution and winding
up without the consent of any holder of Preferred Stock.
Dividends
Holders of the Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of the funds of the
Company legally available therefor, an annual cash dividend at the rate of 9%,
payable quarterly in arrears on March 15, June 15, September 15 and December 15
of each year, commencing December 15, 1997. Dividends on the Preferred Stock are
cumulative from the date of original issuance, and are payable to holders of
record as they appear on the stock books of the Company on such record dates,
which shall be not more than 60 days nor less than 10 days preceding the payment
dates, as shall be fixed by the Board of Directors, provided that holders of
shares of Preferred Stock called for redemption on a redemption date falling
between a dividend payment record date and the dividend payment date shall, in
lieu of receiving such dividend on the dividend payment date fixed therefor,
receive all accrued and unpaid dividends to the date fixed for redemption
(unless such holders convert such shares in accordance with the Certificate of
Designations). Dividends payable per share of Preferred Stock for each quarterly
dividend period will be computed by dividing the annual dividend amount by four.
The amount of dividends payable for the initial dividend period and for any
period shorter than a full quarterly dividend period are computed on the basis
of a 360-day year of twelve 30-day months. The Preferred Stock are not entitled
to any dividend, whether payable in cash, property or securities, in excess of
the full cumulative dividends. No interest, or sum of money in lieu of interest,
are payable in respect of any accrued and unpaid dividends.
If dividends are not paid in full, or declared in full and sums set
apart for the payment thereof, upon the Preferred Stock and upon any other
preferred stock ranking on a parity as to dividends with the Preferred Stock,
all dividends declared upon shares of Preferred Stock and such other parity
preferred stock will be declared pro rata so that in all cases the amount of
dividends declared per share on the Preferred Stock and such other parity
preferred stock will bear to each other the same ratio that accrued and unpaid
dividends per share on the shares of Preferred Stock and such other parity
preferred stock bear to each other. Except as set forth in the preceding
sentence, unless full cumulative dividends on all outstanding shares of the
Preferred Stock have been paid, or declared and sums set aside for the payment
thereof, dividends (other than dividends paid solely in Common Stock, other
stock ranking junior to the Preferred Stock as to dividends and upon
liquidation, dissolution or winding up, and rights to acquire the foregoing) may
not be paid, or declared and set aside for payment, and other distributions may
not be made upon the Common Stock or on any other stock of the Company ranking
junior to or on a parity with the Preferred Stock as to dividends, nor may any
Common Stock or any other stock of the Company ranking junior to or on a parity
with the Preferred Stock as to dividends or upon liquidation, dissolution or
winding up be redeemed, purchased or otherwise acquired for any consideration by
the Company (except by conversion into or exchange for stock of the Company
ranking junior to the Preferred Stock as to dividends and upon liquidation,
dissolution or winding up).
Under the Nevada General Corporation Law, the Company may declare and
pay dividends or make other distributions on its capital stock except if, after
giving effect to such dividend or distribution payment, the Company would not be
able to pay its debts as they become due in the usual course of business, or,
the Company's total assets (determined by the Board of Directors) would be less
than the sum of its total liabilities plus the amount that would be needed, if
the Company were to be dissolved at the time of such payment, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
are superior to the rights of the holders of the Preferred Stock. The Loan
Agreement and the indenture governing the Senior Notes require the Company to be
in compliance with certain financial tests and contain other covenants that
would restrict the payment of dividends under certain conditions.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of shares of Preferred
Stock are entitled to receive, out of assets of the Company available for
distribution to stockholders, the liquidation preference of $25.00 per share
plus an amount equal to all dividends (whether or not earned or declared),
accrued and unpaid to the payment date, before any distribution of assets is
made to holders of Common Stock or of any other class of stock of the Company
ranking junior to the Preferred Stock as to liquidation rights. If upon any
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to the Preferred Stock and any other preferred stock ranking as to any
such distribution on a parity with the Preferred Stock are not paid in full, the
holders of the Preferred Stock and of such other parity preferred stock are to
share ratably in any such distribution of assets in proportion to the full
respective preferential amounts to which they are entitled. After payment of the
full amount of the liquidation preference to which they are entitled, the
holders of shares of Preferred Stock are not entitled to any further
participation in any distribution of assets by the Company. A consolidation or
merger of the Company with another corporation, a sale or transfer of all or
part of the Company's assets or a statutory share exchange is not considered a
liquidation, dissolution or winding up of the Company for these purposes.
Conversion Rights
Shares of the Preferred Stock are convertible at any time at the option
of the holder thereof into a number of shares of Common Stock equal to the
aggregate liquidation preference amount of the shares of Preferred Stock
surrendered for conversion divided by the Conversion Price set forth on the
cover page of this Offering Memorandum (subject to adjustment as described
below), except that, if shares of Preferred Stock are called for redemption or
exchange, the conversion right will terminate at the close of business on the
date fixed for redemption or exchange. No fractional shares or securities
representing fractional shares of Common Stock are to be issued upon conversion;
in lieu of fractional shares of Common Stock, the Company will pay in cash the
value of such fraction based upon the closing price of the Common Stock at the
close of business on the first business day preceding the date of conversion.
The initial conversion price per share of Common Stock is subject to
adjustment (under formulae set forth in the Certificate of Designations) upon
certain events, including: (i) the issuance of Common Stock as a dividend or
other distribution on any class of capital stock of the Company (excluding
Common Stock issued in payment of dividends on preferred stock in accordance
with the terms of such preferred stock); (ii) a subdivision or combination of
outstanding shares of Common Stock; (iii) the issuance or distribution of
capital stock of the Company or the issuance or distribution of options, rights,
warrants or convertible or exchangeable securities entitling the holder thereof
to subscribe for, purchase, convert into or exchange for capital stock of the
Company at less than 85% of the then current market price of such capital stock
on the date of issuance or distribution (provided that (A) the issuance of
capital stock upon the exercise of such options, rights or warrants or the
conversion or exchange of convertible or exchangeable securities will not cause
an adjustment in the Conversion Price if no such adjustment would have been
required at the time such option, right or warrant or convertible or
exchangeable security was issued and (B) the issuance of a security as a
dividend on the same security will not cause an adjustment in the Conversion
Price under this clause (iii) if no such adjustment would have been required at
the time such security was originally issued and the provisions of such security
so issued as a dividend are the same as in such originally issued security);
(iv) the dividend or other distribution to holders of Common Stock, or of a
class or series of capital stock convertible into or exchangeable or exercisable
for Common Stock, generally of assets, property or rights of the Company (other
than cash or de minimis promotional items); and (v) distributions of cash (other
than in connection with the liquidation of the Company) to the holders of Common
Stock, or of a class or series of capital stock convertible into or exchangeable
or exercisable for Common Stock, generally to the extent the amount of such
cash, combined with all such cash distributions made within the preceding 12
months with respect to which no adjustment has been made exceeds 10% of the
Company's market capitalization (being the product of the current market price
multiplied by the number of shares of Common Stock then outstanding) (the
"Market Capitalization").
Except as described in the preceding paragraph, no adjustment of the
Conversion Price will be made for cash dividends. In addition, no adjustment in
the Conversion Price is required to be made in any case until cumulative
adjustments amount to 1% or more of the Conversion Price, but any such
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. The Company reserves the
right, to the extent permitted by law, to make such reductions in the Conversion
Price in addition to those required in the foregoing provisions as it, in its
sole discretion, shall determine.
Holders of shares of Preferred Stock at the close of business on a
dividend payment record date are entitled to receive the dividend payable on
such shares on the corresponding dividend payment date notwithstanding the
conversion thereof following such dividend payment record date and on or prior
to such dividend payment date. However, shares of Preferred Stock surrendered
for conversion during the period between the close of business on any dividend
payment record date and the close of business on the corresponding dividend
payment date (except shares of Preferred Stock called for redemption or exchange
on a redemption date or exchange date during such period) must be accompanied by
payment of an amount equal to the dividend payment with respect to such shares
of Preferred Stock presented for conversion on such dividend payment date;
provided, however, that no such payment need be made if, at the time of
conversion, dividends payable on the shares of Preferred Stock outstanding are
in arrears. The dividend payment with respect to shares called for redemption on
a redemption date during the period between the close of business on a dividend
payment record date and the close of business on the corresponding dividend
payment date are payable on that dividend payment date to the holder of such
shares at the close of business on the dividend payment record date
notwithstanding the conversion of such shares after the close of business on
such dividend payment record date and on or prior to the close of business on
such dividend payment date, and the holder of such shares need not make a
payment equal to the dividend payment amount upon surrender of such shares for
conversion. A holder of shares of Preferred Stock on a dividend payment record
date who converts such shares on or after the corresponding dividend payment
date will receive the dividend payable by the Company on such shares of
Preferred Stock on such date and need not include payment in the amount of such
dividend upon surrender of such shares of Preferred Stock for conversion. Except
as provided above, the Company shall make no payment or allowance for unpaid
dividends, whether or not in arrears, on converted shares or for dividends on
the shares of Common Stock issued upon such conversion. The Company will not
issue fractional shares of Common Stock upon conversion of shares of Preferred
Stock and, in lieu thereof, will pay a cash adjustment based upon the market
value of the Common Stock (determined as set forth in the Certificate of
Designations) on the last business day prior to the date of conversion.
In case of any reclassification or change of outstanding shares of
Common Stock (with certain exceptions) or the Company's consolidation with, or
merger with or into, any other entity that results in a reclassification,
change, conversion, exchange or cancellation of outstanding shares of Common
Stock (with certain exceptions) or any sale or transfer of all or substantially
all the assets of the Company, the holder of any shares of Preferred Stock after
such reclassification, change, consolidation, merger, sale or transfer will have
the right to convert such shares only into the kind and amount of securities,
cash and other property which the holder would have been entitled to receive
upon such reclassification, change, conversion, exchange, cancellation, merger,
sale or transfer if the holder had held the Common Stock issuable upon the
conversion of such shares of Preferred Stock immediately prior to such
reclassification, change, conversion, exchange, cancellation, merger, sale or
transfer.
The Company will endeavor to comply with all federal and state
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of the Preferred Stock and will endeavor to have approved for listing
on Nasdaq, or listed upon any national securities exchange upon which its Common
Stock is listed, the shares of Common Stock deliverable upon conversion of the
Preferred Stock.
Company's Right of Redemption
Shares of the Preferred Stock are not redeemable prior to December 20,
2000. The shares of Preferred Stock are redeemable at the option of the Company,
in whole or in part, at any time or from time to time, out of funds legally
available therefor, on or after December 20, 2000, on not less than 30 nor more
than 60 days' prior notice at the redemption prices set forth below during the
period from December 20, 2000 through December 14, 2001 and the 12-month periods
beginning on December 15 of the other years shown below, plus in each case an
amount equal to accrued and unpaid dividends, if any, to (and including) the
redemption date, whether or not earned or declared.
Redemption Price
(As a Percentage of
Year Liquidation Preference)
---- -----------------------
2000 104.5%
2001 103.0%
2002 101.5%
2003 and thereafter 100.0%
If fewer than all of the shares of Preferred Stock are to be redeemed,
the shares to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the Company in its sole discretion. There is no
mandatory redemption or sinking fund obligation with respect to the Preferred
Stock. In the event that the Company has failed to pay accrued and unpaid
dividends on the Preferred Stock, it may not redeem any of the then outstanding
shares of the Preferred Stock until all such accrued and unpaid dividends have
been paid in full. On and after the date fixed for redemption, provided that the
redemption price (including any accrued and unpaid dividends to (and including)
the date fixed for redemption) has been duly paid or provided for, dividends
shall cease to accrue on the Preferred Stock called for redemption, such shares
shall no longer be deemed to be outstanding and all rights of the holders of
such shares as stockholders of the Company shall cease, except the right to
receive the moneys payable upon such redemption, without interest thereon, upon
surrender of the certificates evidencing such shares.
Exchange Provisions
The Preferred Stock may be exchanged, in whole but not in part, at the
option of the Company, for Debentures on any dividend payment date beginning on
December 15, 1999 at the rate of $25.00 principal amount of Debentures for each
share of Preferred Stock outstanding at the time of exchange; provided that all
accrued and unpaid dividends on the Preferred Stock through the date of exchange
have been paid or set aside for payment and certain other conditions have been
met. See "Description of Debentures." The Debentures will be issuable in
denominations of $1,000 and integral multiples thereof. If the exchange of
Preferred Stock for Debentures results in an amount of Debentures that is not an
integral multiple of $1,000, the amount in excess of the closest integral
multiple of $1,000 will be paid in cash by the Company. The Company will mail
written notice of its intention to exchange Preferred Stock for Debentures to
each holder of record of the Preferred Stock not less than 30 nor more than 60
days prior to the date fixed for exchange.
Upon the date fixed for exchange of Preferred Stock for Debentures (the
"Exchange Date"), the rights of holders of Preferred Stock as stockholders of
the Company shall cease (except the right to receive accrued and unpaid
dividends to the Exchange Date) and their shares of Preferred Stock no longer
will be deemed outstanding and will represent only the right to receive the
Debentures and any accrued interest thereon. The exchange of Preferred Stock for
Debentures will be a taxable transaction and, therefore, may result in tax
liability for the holder exchanging such stock without any correlative cash
payment to such holder. See "Certain Federal Income Tax
Considerations--Redemption, Sale and Exchange of Preferred Stock."
The Company will endeavor to comply with all federal and state
securities laws regulating the offer and delivery of the Debentures upon
exchange of the Preferred Stock and will endeavor to make eligible for trading
in the PORTAL Market the Debentures deliverable upon exchange of the Preferred
Stock.
Voting Rights
The holders of the Preferred Stock have no voting rights, except as
described below or as required by law. In exercising any such vote, each
outstanding share of Preferred Stock will be entitled to one vote, excluding
shares held by the Company or any entity controlled by the Company, which shares
shall have no voting rights.
Whenever dividends on the Preferred Stock or any outstanding shares of
stock on a parity as to dividends with the Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two, and the holders of the Preferred Stock (voting separately as a
class with the holders of any parity dividend stock on which like voting rights
have been conferred and are exercisable) will be entitled to elect such two
additional directors to the Board of Directors at any meeting of stockholders of
the Company at which directors are to be elected until all such dividends
accrued and in default have been paid in full or set apart for payment in full.
The term of office of all directors so elected will terminate immediately upon
such payment or setting apart for payment.
In addition, without the vote or consent of the holders of at least
66-2/3% of shares of the Preferred Stock then outstanding, the Company may not
(i) authorize, create, issue or increase the authorized number of shares of any
class or classes or series of stock, or any security convertible into stock of
such class or series, ranking prior to the Preferred Stock either as to
dividends or upon liquidation, dissolution or winding up, (ii) amend, alter or
repeal (whether by merger, consolidation or otherwise) any of the provisions of
the Articles of Incorporation (including the Certificate of Designations) or
Bylaws of the Company so as to affect adversely the relative rights, privileges
or voting power of the Preferred Stock or the holders thereof or (iii) authorize
any reclassification of the Preferred Stock. Except as provided above or as
required by law, the holders of Preferred Stock have no voting rights with
respect to the rights of holders of Common Stock.
Special Conversion Rights Upon Corporate Change or Ownership Change
The Preferred Stock has a Special Right (as defined below) that becomes
effective upon the occurrence of certain types of significant transactions
affecting corporate control or ownership of the Company or the market for the
Common Stock. The purpose of the Special Right is to provide, as applicable,
partial loss protection to holders of Preferred Stock upon the occurrence of a
Corporate Change or an Ownership Change (as respectively defined below) at a
time when the Market Value (as defined below) of the Common Stock is less than
the then prevailing Conversion Price. In such situations, the Special Right
would, for a limited period, reduce the then prevailing Conversion Price to the
Market Value of the Common Stock, except that the Conversion Price will not be
reduced to less than a minimum Conversion Price of $5.04 per share of Common
Stock (which is 66-2/3% of the closing price of the Common Stock as set forth on
the cover page of this Offering Memorandum, and which is subject to adjustment
as described below). Consequently, to the extent that the Market Value of the
Common Stock is less than the minimum Conversion Price, a holder will not be
fully protected from loss upon exercise of the Special Right.
If a Corporate Change should occur with respect to the Company, each
holder of Preferred Stock will have the right, at the holder's option, for a
period of 45 days after the mailing of a notice by the Company that a Corporate
Change has occurred, to convert all, but not less than all, of such holder's
Preferred Stock into the kind and amount of cash, securities, property, or other
assets receivable upon such Corporate Change by a holder of the number of shares
of Common Stock into which such shares of Preferred Stock would have been
convertible immediately prior to the Corporate Change at an adjusted Conversion
Price equal to the Special Conversion Price (as defined below). The Company or
the successor corporation, as the case may be, at its option, in lieu of
providing such consideration upon any such conversion, may provide the holder
with cash equal to the Market Value of the Common Stock multiplied by the number
of shares of Common Stock into which such holder's Preferred Stock would have
been convertible immediately prior to such Corporate Change at an adjusted
Conversion Price equal to the Special Conversion Price, but only if the Company,
in its notice to the holder that a Corporate Change has occurred, has notified
such holder of the Company's election to provide such holder with cash in lieu
of such consideration. Preferred Stock that becomes convertible pursuant to this
special conversion right will, unless so converted, remain convertible into the
kind and amount of cash, securities, property or other assets that the holders
of the Preferred Stock would have owned immediately after the Corporate Change
if the holders had converted the Preferred Stock immediately before the
effective date of the Corporate Change at the Conversion Price on the day
immediately before the effective date of the Corporate Change. In addition to
providing notice that a Corporate Change has occurred as described above, the
Company will also notify the registered holders of Preferred Stock of any
pending Corporate Change as soon as practicable and in any event at least 30
days in advance of the effective date of any such Corporate Change in order to
allow such holders an opportunity to exercise their other conversion rights
prior to the effective date of such Corporate Change and before this special
conversion right commences.
If an Ownership Change should occur with respect to the Company, each
holder of Preferred Stock will have the right, at the holder's option, for a
period of 45 days after the mailing of a notice by the Company that an Ownership
Change has occurred, to convert all, but not less than all, of such holder's
Preferred Stock into Common Stock at an adjusted Conversion Price equal to the
Special Conversion Price for which conversion is elected. The Company may, at
its option, in lieu of providing Common Stock upon any such conversion, provide
the holder with cash equal to the Market Value of the Common Stock multiplied by
the number of shares of Common Stock into which such shares of Preferred Stock
would have been convertible immediately prior to such Ownership Change at an
adjusted Conversion Price equal to the Special Conversion Price, but only if the
Company, in its notice to the holder that an Ownership Change has occurred, has
notified such holder of the Company's election to provide such holder with cash
in lieu of such Common Stock. This special conversion right (together with the
special right arising upon a Corporate Change described in the preceding
paragraph, the "Special Right") arising upon an Ownership Change will only be
applicable with respect to the first Ownership Change that occurs after the date
of issuance of the Preferred Stock.
If a Corporate Change or an Ownership Change occurs with respect to the
Company, then, as soon as practicable and in any event within 30 days after the
occurrence of such Corporate Change or Ownership Change, the Company will mail
to each registered holder of Preferred Stock a notice setting forth the details
regarding the Special Right of such holders to convert their Preferred Stock as
a result of such Corporate Change or Ownership Change, as the case may be,
including, if applicable, notice of the Company's or the successor corporation's
election to provide such holder with cash in lieu of Common Stock or other
consideration. A holder of Preferred Stock must exercise the Special Right
within the 45-day period after the mailing of such notice by the Company or such
Special Right will expire. Exercise of such Special Right to the extent
permitted by law (including, if applicable, Rule 13d-3 under the Exchange Act)
will be irrevocable and dividends on Preferred Stock tendered for conversion
will cease to accrue from and after the conversion date. The conversion date
with respect to the exercise of a Special Right arising upon a Corporate Change
or Ownership Change will be the 45th day after the mailing of the notice by the
Company that a Corporate Change or an Ownership Change, as the case may be, has
occurred.
As used herein, "Capital Stock" means, with respect to any Person, any
and all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of such Person's capital stock,
whether now outstanding or issued after August 15, 1995, including, without
limitation, all common stock and preferred stock.
As used herein, "Consolidated Net Worth" means, with respect to any
Person at any date of determination, shareholders' equity as set forth on the
most recently available consolidated balance sheet of such Person and its
consolidated Subsidiaries (which shall be as of a date not more than 90 days
prior to the date of such computation), less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable, at
the option of the holder, for Indebtedness, the cost of treasury stock and the
principal amount of any promissory notes receivable from the sale of Capital
Stock of such Person or any Subsidiary of such Person, each item to be
determined in accordance with GAAP.
As used herein, a "Continuing Director" means at any date a member of
the Company's Board of Directors who (A) is a member of such board on the date
of issuance of Preferred Stock or (B) was nominated or elected by at least 60%
of the directors who were Continuing Directors at the time of such nomination or
election or whose election to the Company's Board of Directors was recommended
or endorsed by at least 60% of the directors who were Continuing Directors at
the time of such election. Under this definition, if the present Board of
Directors were to approve a new director or directors and then resign, no
Corporate Change would occur even though the present Board of Directors would
thereafter cease to be in office.
As used herein, a "Corporate Change" with respect to the Company will
be deemed to have occurred at such time as there occurs any consolidation of the
Company with, or merger of the Company into, any other Person, any merger of
another Person into the Company, or any sales or transfers of all or
substantially all of the assets of the Company to another Person (other than a
merger (x) which does not result in any reclassification, conversion, exchange
or cancellation of outstanding shares of Common Stock or (y) which is effected
solely to change the jurisdiction of incorporation of the Company and results in
a reclassification, conversion or exchange of outstanding shares of Common Stock
into solely shares of Common Stock).
As used herein, "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, in each case, at the option of the holder thereof), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the Stated Maturity unless
such redemption obligations can be satisfied with Capital Stock that is not
Disqualified Stock.
As used herein, "GAAP" means generally accepted accounting principles
in the United States of America as in effect as of August 15, 1995 and as such
principles may be amended from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
As used herein, "Indebtedness" means, with respect to any Person at any
date of determination (without duplication), (i) all indebtedness of such Person
for borrowed money, (ii) all obligations of such Person evidenced by bonds,
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), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except trade payables, (v) all obligations of such Person as
lessee under capitalized leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person, (vii) all Indebtedness of other Persons guaranteed by
such Person, and (viii) to the extent not otherwise included in this definition,
obligations under currency agreements, interest rate agreements and commodity
agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
As used herein, "Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, or any agreement to give any security interest).
As used herein, "Market Value" of a share of the Common Stock, or a
share of any other Marketable Stock, will be the average of the closing prices
of the Common Stock or such other Marketable Stock for the five trading days
ending on the last trading day preceding the date of the Corporate Change or
Ownership Change, as the case may be.
As used herein, the term "Marketable Stock" means Common Stock or
common stock of any corporation that is the successor to all or substantially
all of the business or assets of the Company as a result of a Corporate Change,
that is (or will, upon distribution thereof, be) listed on the New York Stock
Exchange or the American Stock Exchange, or approved for quotation on Nasdaq.
As used herein, an "Ownership Change" with respect to the Company will
be deemed to have occurred at such time as any Person (including any syndicate
or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act,
other than the Company, any subsidiary of the Company or any employee benefit
plan of the Company) is or becomes the beneficial owner, directly or indirectly,
through a purchase, merger or other acquisition transaction or series of
transactions, of shares of capital stock of the Company entitling such Person to
exercise 50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in the election of the directors;
provided, however, that an Ownership Change shall not be deemed to have occurred
if (A) at least 80% of the consideration (excluding cash payments for fractional
shares) to be paid for the Common Stock in the transaction or transactions
consists of shares of common stock traded on a national securities exchange or
quoted on Nasdaq and, as a result of such transaction or transactions such
Preferred Stock becomes convertible solely into such common stock and other
consideration and (B) immediately after giving effect to such transaction or
transactions on a pro forma basis, the Company (or any Person that becomes the
successor to the Company) shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately prior to such
transaction or transactions. "Beneficial owner" shall be determined in
accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission
("Commission") under the Exchange Act, as in effect on the date of the indenture
governing the Senior Notes.
As used herein, "Person" means an individual, a corporation, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
As used herein, "Special Conversion Price" will mean the higher of the
Market Value of the Common Stock or $5.04 per share (which amount will, each
time the Conversion Price is adjusted, be adjusted so that the ratio of such
amount to the Conversion Price, after giving effect to such adjustment, shall
always be the same as the ratio of $5.04 to the initial Conversion Price without
giving effect to any such adjustment).
As used herein, "Stated Maturity" means, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
As used herein, "Subsidiary" means, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock 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
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
The Company will comply with all applicable tender offer rules under
the Exchange Act, including but not limited to Rules 13e-4 and 14e-1, as then in
effect, with respect to any offer by the Company to convert or repurchase its
Preferred Stock upon the occurrence of a Corporate Change or Ownership Change.
The Company will take all action necessary to provide, in the event of
a pending Corporate Change, for sufficient cash, securities, property or other
assets for the conversion of the Preferred Stock then outstanding on the basis
set forth in the Certificate of Designations. The Special Right may render more
difficult or tend to discourage attempts to acquire the Company. The Special
Right may be triggered in the event of a recapitalization or a leveraged buyout
or similar transaction and any such transaction may diminish the value of the
Preferred Stock. The Special Right, however, may not be triggered by every
Corporate Change or recapitalization. Accordingly, the Special Right may not
afford holders of the Preferred Stock protection in the event of such a
transaction involving the Company that may adversely affect such holders.
Transfer Agent, Registrar and Dividend Disbursing Agent
The transfer agent, registrar and dividend disbursing agent for the
Preferred Stock is Continental Stock Transfer & Trust Company, New York, New
York.
DESCRIPTION OF DEBENTURES
If the Company elects to exchange the Preferred Stock for the
Debentures, the Company will issue the Debentures under the Indenture to be
entered into between the Company and a national banking association to be
selected by the Company having net assets in excess of $50 million, as trustee
(together with any successor trustee, the "Trustee"), at a rate of $25.00
principal amount of Debentures for each share of Preferred Stock so exchanged.
The following description of certain provisions of the Indenture is intended as
a summary only and is qualified in its entirety by reference to the Indenture
and the Debentures, including the definitions in those documents of certain
terms, a copy of which will be available for inspection at the office of the
Company. Whenever particular articles, sections or defined terms of the
Indenture or the Debentures are referred to, it is intended that those articles,
sections or defined terms are to be incorporated by reference into this Offering
Memorandum.
General
The Debentures will be unsecured subordinated obligations of the
Company and will mature on December 15, 2004. The Debentures will bear interest
at the same annual rate as the annual rate shown on the front cover of this
Offering Memorandum for the dividends payable on Preferred Stock, from the date
of issuance, or from the most recent interest payment date to which interest has
been paid or provided for, payable semiannually on June 15 and December 15 each
year to the person in whose name the Debenture (or any predecessor Debenture) is
registered at the close of business on the preceding June 1 and December 1, as
the case may be. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. Principal of, premium, if any, and interest on the
Debentures will be payable, and the transfer of Debentures will be registrable,
at the principal corporate trust office of the Trustee. In addition, payment of
interest may, at the option of the Company, be made by check mailed to the
address of the person entitled thereto as it appears in the register of Holders
of Debentures.
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples of $1,000. No service
charge will be made for any registration of transfer or exchange of the
Debentures, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection with any such
transaction.
The Company will endeavor to have the Debentures approved for listing
on the Portal Market. However, a substantial portion of the trading of the
Debentures is expected to take place in the over-the-counter market. No
assurance can be given to the liquidity of, or trading markets for, the
Debentures.
The Indenture does not contain any restrictions on the payment of
dividends or the repurchase of securities of the Company or any financial
covenants.
Conversion Rights
The Debentures will be convertible into Common Stock at the option of
the Holder at any time prior to redemption or maturity at the Conversion Price
then in effect . The right to convert Debentures called for redemption will
terminate at the close of business on the date fixed for redemption.
The initial Conversion Price per share of Common Stock is subject to
adjustment (under formulae set forth in the Indenture) upon the occurrence of
certain events which are substantially identical to those contained in the
Certificate of Designations, including: (i) the issuance of Common Stock as a
dividend or other distribution on any class of capital stock of the Company
(excluding Common Stock issued in payment of dividends on preferred stock in
accordance with the terms of such preferred stock); (ii) a subdivision or
combination of outstanding shares of Common Stock; (iii) the issuance or
distribution of capital stock of the Company or the issuance or distribution of
options, rights, warrants or convertible or exchangeable securities entitling
the holder thereof to subscribe for, purchase, convert into or exchange for
capital stock of the Company at less than 85% of the then current market price
of such capital stock (provided that (A) the issuance of capital stock upon the
exercise of such options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities will not cause an adjustment in the
Conversion Price if no such adjustment would have been required at the time such
option, right or warrant or convertible or exchangeable security was issued and
(B) the issuance of a security as a dividend on the same security will not cause
an adjustment in the Conversion Price if no such adjustment would have been
required at the time such security was originally issued and the provisions of
such security so issued as a dividend are the same as in such originally issued
security); (iv) the dividend or other distribution to holders of Common Stock,
or of a class or series of capital stock convertible into or exchangeable or
exercisable for Common Stock, generally of assets, property or rights of the
Company (other than cash or de minimis promotional items); and (v) distributions
of cash (other than in connection with the liquidation of the Company) to the
holders of Common Stock, or of a class or series of capital stock convertible
into or exchangeable or exercisable for Common Stock, generally to the extent
the amount of such cash, combined with all such cash distributions made within
the preceding 12 months with respect to which no adjustment has been made
exceeds 10% of the Company's market capitalization (being the product of the
then current market price of the Common Stock multiplied by the number of shares
of Common Stock then outstanding) on the record date for such distribution.
Except as described in the preceding paragraph, no adjustment in the
Conversion Price will be made for cash dividends. In addition, no adjustment in
the Conversion Price will be required to be made in any case until cumulative
adjustments amount to 1% or more of the Conversion Price, but any such
adjustment that would otherwise be required to be made shall be carried froward
and taken into account in any subsequent adjustment. The Company reserves the
right, to the extent permitted by law, to make such reductions in the Conversion
Price in addition to those required in the foregoing provisions as it, in its
sole discretion, shall determine.
The registered Holders of Debentures at the close of business on an
interest payment record date will be entitled to receive the interest payable on
such Debentures on the corresponding interest payment date notwithstanding the
conversion of the Debentures after the record date and on or prior to the
interest payment date or, subject to certain provisions applicable to defaulted
interest, the Company's default in payment of the interest due on the interest
payment date. However, Debentures surrendered for conversion during the period
between the close of business on any record date for the payment of interest and
the close of business on the corresponding interest payment date (except
Debentures called for redemption on a redemption date during such period) must
be accompanied by payment of an amount equal to the interest payable on that
interest payment date on the principal amount being converted; provided,
however, that no such payment need be made if there shall exist at the time of
conversion a default in the payment of interest on the Debentures. The interest
payment with respect to a Debenture called for redemption on a redemption date
during the period between the close of business on an interest payment record
date and the close of business on the corresponding interest payment date will
be payable on that interest payment date to the registered Holder at the close
of business on that interest payment record date notwithstanding the conversion
of such Debenture after the close of business on such interest payment record
date and on prior to the close of business on such interest payment date, and
the Holder converting the Debenture need not make a payment equal to the
interest payment amount upon surrender of the Debenture for conversion. Holders
on an interest payment record date who convert Debentures on or after the
corresponding interest payment date will receive the interest payable by the
Company on that date and need not include payment of the amount of such interest
upon surrender of those Debentures for conversion. Except as described above, no
payment or adjustment is to be made on conversion for interest accrued on the
Debentures or for dividends on the Common Stock issued on conversion.
The Company will not issue fractional shares of Common Stock upon
conversion of Debentures and, in lieu thereof, will pay a cash adjustment based
upon the market value of the Common Stock (determined as set forth in the
Indenture) on the last business day prior to the date of conversion.
In the event of (i) any reclassification or change of outstanding
Common Stock (other than a subdivision or combination of outstanding Common
Stock or a change in par value, (ii) any consolidation or merger of the Company
with another entity as a result of which holders of Common Stock shall be
entitled to receive securities or other assets (including cash) with respect to
or in exchange for Common Stock or (iii) any sale, conveyance, transfer or other
disposition of the collective assets of the Company and its subsidiaries, if
any, as, or substantially as, an entirety to any other entity as a result of
which holders of Common Stock shall be entitled to receive securities or other
assets (including cash) with respect to or in exchange for Common Stock, each
Holder of Debentures will have the right thereafter to convert such Holder's
Debentures into the kind and amount of shares of stock, other securities, cash
or other property or assets which the Holder would have owned or have been
entitled to receive immediately upon such reclassification, change,
consolidation, merger, combination, sale, transfer, conveyance or disposition
had such Debentures been converted into Common Stock immediately prior to the
effective date of such reclassification, change, consolidation, merger, sale or
transfer.
Exchange
Whenever the Company shall elect to exchange all of the shares of
Preferred Stock for Debentures, it shall give the Trustee not less than 45 days'
prior written notice of the date of such proposed exchange of Preferred Stock.
On the date of such exchange, provided that (i) the Company shall then have
issued and deposited with the Trustee the Debentures for the Preferred Stock to
be exchanged, (ii) no arrearage shall exist in the payment of dividends on the
Preferred Stock, (iii) after giving effect to the exchange, there shall be no
default or Event of Default (as defined herein) under the Indenture and (iv) the
Company's ability to effect the exchange and the effecting of the exchange will
not violate the terms of the indenture governing the Senior Notes or any of the
terms of documents governing the Company's other indebtedness, then the Trustee
shall effect the exchange of the Preferred Stock for the Debentures. The Company
shall mail notice of such exchange first class prepaid, not less than 30 and not
more than 60-days prior to the date fixed for exchange for such Preferred Stock,
to the record holders on the record date for such exchange.
Subordination
The payment of the principal of, premium, if any, and interest on the
Debentures will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness (as
defined below) in accordance with the terms thereof. In the event and during the
continuation of any default in the payment of principal of, premium, if any, or
interest on any Senior Indebtedness, no payment with respect to the principal
of, premium, if any, or interest on the Debentures may be made by the Company
unless and until such default has been cured or waived or shall have ceased to
exist. Upon any payment or distribution of assets to creditors upon any
dissolution, winding up, liquidation or reorganization, the holders of all
Senior Indebtedness will first be entitled to receive payment in full of all
amounts due or to become due thereon before the Holders will be entitled to
receive any payment in respect of the principal of, premium, if any, or interest
on the Debentures.
Because of these subordination provision, in the event of an insolvency
of the Company, Holders of Debentures may recover less, ratably, than holders of
Senior Indebtedness.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on (a) the Senior Notes; (b) indebtedness of the Company for money
borrowed or in respect of letters of credit issued for its own account, whether
outstanding on the date of execution of the Indenture or thereafter created,
incurred or assumed; (c) guarantees by the Company of indebtedness for money
borrowed by, payment or performance obligations due from, or reimbursement
obligations under letters of credit of any Person, whether outstanding on the
date of execution of the Indenture or thereafter created, incurred, or assumed;
(d) purchase money indebtedness evidenced by notes, lease-purchase agreements,
purchase contracts or agreements or similar instruments for the payment of which
the Company is responsible or liable, by guarantees or otherwise, whether
outstanding on the date of execution of the Indenture or thereafter created,
incurred or assumed; (e) obligations of the Company under any agreement to
lease, or any lease of, any real or personal property which are required to be
capitalized in accordance with generally accepted accounting principles, which
by the terms thereof are expressly designated as Senior Indebtedness, whether
outstanding on the date of execution of the Indenture or thereafter created,
incurred or assumed; and (f) modifications, renewals, extensions and refundings
of any such indebtedness , guarantees or obligations; unless, in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such indebtedness, guarantees or obligations, or such
modifications, renewals, extensions or refundings thereof, or the obligations of
the Company pursuant to such a guarantee, are either (i) not superior in right
of payment to the Debentures or (ii) subordinate in the right of payment to all
other indebtedness of the Company.
At June 30, 1997, Senior Indebtedness aggregated approximately $59.5
million. The Company expects from time to time to incur additional indebtedness
constituting Senior Indebtedness. The Indenture does not prohibit or limit the
incurrence of additional Senior Indebtedness.
Optional Redemption
The Debentures will not be redeemable prior to December 20, 2000. The
Debentures will be redeemable, at the option of the Company, in whole or in
part, at any time or from time to time, on or after December 20, 2000, on not
less that 30 or more than 60 days' prior notice at the redemption prices set
forth below during the period from December 20, 2000 through December 14, 2001
and the 12-month periods beginning on December 15, of the other years shown
below plus in each case an amount equal to accrued and unpaid interest, if any,
to (and including) the redemption date:
Redemption Price
(As a Percentage of
Year Principal Amount)
____ _________________
2000 104.5%
2001 103.0%
2002 101.5%
2003 and thereafter 100.0%
Debentures in any denomination equal to or greater than $1,000 may be
redeemed in whole or in part in multiples of $1,000. On or after the redemption
date, interest will cease to accrue on the Debentures or portions thereof called
for redemption.
If less than all of the outstanding Debentures are to be redeemed, the
Trustee will select the Debentures (or portions thereof) to be redeemed by lot
or such other method as the Trustee shall deem fair and appropriate.
Redemption Right
The Debentures have a redemption right that becomes effective upon the
occurrence of certain types of significant transactions affecting ownership or
control of the Company or the market for the Common Stock, which is similar to
the special conversion right provided for in the Preferred Stock.
Each Holder will have the option to require the Company to redeem all,
but not less than all, of the Debentures owned by such Holder (the "Redemption
Right") at a redemption price, payable in cash or Marketable Stock, at the
option of the Company, equal in value to 100% of their principal amount plus
accrued and unpaid interest, if any, to the date fixed for redemption upon the
occurrence of a Corporate Change or an Ownership Change.
In the event of a Corporate Change or an Ownership Change, each Holder
shall have the Redemption Right for a period of 45 days after the mailing of a
notice to the Holders by the Company that a Corporate Change or Ownership Change
has occurred. A Holder must exercise such Redemption Right within the 45-day
period after the mailing of such notice by the Company or such Redemption Right
will expire upon the last day of such period (the "Redemption Date"). Exercise
of such Redemption Right to the extent permitted by law (including, if
applicable, Rule 13e-4 under the Exchange Act) will be irrevocable and interest
on the Debentures tendered for redemption will cease to accrue from and after
the Redemption Date. Each Holder's exercise of such Redemption Right shall be
made by submitting to the Trustee not later than the close of business on the
Redemption Date a completed Demand Form (as defined below) relating to the
Debentures to be redeemed, together with the Debentures with respect to which
the right is being exercised, duly endorsed for transfer to the Company.
If a Corporate Change or an Ownership Change occurs with respect to the
Company, then within 30 days after the occurrence of such change, the Company
shall mail to each Holder and the Trustee a form of written demand to be used by
the Holder to exercise its Redemption Right (a "Demand Form") and a notice which
shall disclose the occurrence of the Corporate Change or Ownership Change and
the right of the Holder to require the Company to redeem all, but not less than
all, of such Holder's Debentures and shall state the Redemption Date, the
redemption price, whether such redemption price shall be paid in cash or
Marketable Stock, the name and address of the paying agent, the continuing
conversion rights, if any, the conversion price then in effect, and that the
Debentures to be redeemed must be surrendered to the paying agent to collect the
redemption price.
The Company shall notify the Holders of any pending Corporate Change or
Ownership Change as soon as practicable and in any event within 30 days in
advance of the effective date of any such change in order to allow such Holders
an opportunity to exercise their conversion rights with respect to the
Debentures prior to the effective date of such change and before their
Redemption Right with respect to their Debentures commences.
The Redemption Right arising upon an Ownership Change will only be
applicable with respect to the first Ownership Change that occurs after the
issuance of the Debentures.
The Company will comply with all applicable tender offer rules under
the Exchange Act, including, but not limited to, Rules 13e-4 and 14e-1, as then
in effect, with respect to any offer by the Company to repurchase the Debentures
upon a Corporate Change or an Ownership Change.
Because the holders of Debentures may, under the Redemption Right,
cause the Company to redeem their Debentures at par, plus accrued and unpaid
interest, upon a Corporate Change or an Ownership Change, the Redemption Right
may have anti-takeover effects. The Redemption Right could cause substantial
dilution or additional expense to a person or group that attempts to acquire the
Company, and may render more difficult or discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of the
Company's securities or the removal of incumbent members of the Board of
Directors.
Events of Default
The following will be Events of Default under the Indenture: (a)
failure to pay principal of or premium, if any, on the Debentures when due at
maturity, upon redemption or otherwise, including failure by the Company to
redeem the Debentures when required as described under "Redemption Right"
(whether or not such payment shall be prohibited by the subordination provisions
of the Indenture); (b) failure to pay any interest on any Debenture when due,
continuing for 30 days (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture); (c) failure to perform any other
covenant or agreement of the Company in the Debentures or the Indenture,
continued for 60 days after written notice as provided in the Indenture; (d)
failure to pay when due any amounts payable with respect to any indebtedness for
borrowed money by the Company in excess of $10,000,000 and such default has
resulted in the acceleration of such indebtedness, which acceleration is not
rescinded or annulled within 30 days after notice of it; and (e) certain events
of bankruptcy, insolvency or reorganization relating to the Company. Subject to
the provisions of the Indenture relating to the duties of the Trustee, in case
an Event of Default shall occur and be continuing, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable security or indemnity. The Holders of a
majority in aggregate principal amount of the outstanding Debentures will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee (subject to certain exceptions).
If an Event of Default (other than an Event of Default arising out of
certain events of bankruptcy, insolvency or reorganization) occurs and is
continuing, either the Trustee or the Holders of at least 25% in aggregate
principal amount of the outstanding Debentures may accelerate the maturity of
all Debentures. The maturity of the Debentures automatically accelerates upon
the occurrence of an Event of Default arising out of certain events of
bankruptcy, insolvency or reorganization relating to the Company. After such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of outstanding Debentures may, under
certain circumstances rescind and annul the acceleration if all Events in
Default, other than the nonpayment of amounts which became due by acceleration,
have been cured or waived as provided in the Indenture. In the event of the
acceleration of the maturity of any Debentures, the holders of all Senior
Indebtedness will be first entitled to receive payment in full of all amounts
due or to become due thereon before the Holders of the Debentures will be
entitled to receive any payment upon the principal of, premium, if any, or
interest on, the Debentures.
No Holder of any Debenture will have any right to institute any
proceeding with respect to the Indenture or for any remedy under the Indenture
unless such Holder previously has given to the Trustee written notice of a
continuing Event of Default and unless also the Holders of at least 25% in
aggregate principal amount of the outstanding Debentures have made written
request of and offered reasonable indemnity to, the Trustee to institute
proceedings as trustee, and the Trustee has not received from the Holders of a
majority in aggregate principal amount of the outstanding Debentures a direction
inconsistent with the request and has failed to institute such proceedings
within 60 days. However, these limitations do not apply to a suit instituted by
a Holder of a Debenture for the enforcement of payment of the principal of or
premium, if any, or interest on such Debenture on or after the respective due
date expressed in such Debenture or of the right to convert the Debenture in
accordance with the Indenture.
The Company will be required to furnish to the Trustee annually a
statement of the performance by the Company of certain of its obligations under
the Indenture and as to any default in the performance of the obligations.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of default, mail to all Holders notice of all defaults known to it,
but, except in the case of a default in the payment of the principal of or
premium, if any, or interest on any of the Debentures, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of such Holders.
The Holders of a majority in aggregate principal amount of outstanding
Debentures may on behalf of the Holders of all the Debentures waive certain past
defaults, not including a default in payment of the principal of or premium, if
any, or interest on any Debenture or a failure by the Company to convert any
Debentures into Common Stock.
Modifications
Supplemental indentures modifying or amending the Indenture may be made
by the Company and the Trustee with the consent (and in certain circumstances
without such consent) of the Holders of a majority in aggregate principal amount
of the outstanding Debentures; provided, however, that no such modification or
amendment may, without the consent of the Holders of all the Debentures then
outstanding, (i) extend the fixed maturity of any Debenture, reduce the rate or
extend the time of payment of interest thereon, or reduce the principal amount
thereof or premium, if any, thereon, impair the right of a Holder to institute
suit for payment thereof, change the currency in which the Debentures are
payable or impair the right to convert Debentures into Stock, securities or
other property or assets (including cash) subject to the terms set forth in the
Indenture, or change the subordination provisions in a way that adversely
affects a Holder, without the consent of the Holder of such Debenture so
affected; or (ii) reduce the percentage of Debentures, the consent of the
Holders of which is required for any such modification.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain of the United States
federal income tax consequences of the purchase, ownership and disposition of
the Preferred Stock, the Debentures for which the Preferred Stock is
exchangeable, and the Common Stock into which the Preferred Stock or Debentures
are convertible by investors who hold the Preferred Stock, the Common Stock, and
the Debentures as capital assets. This discussion does not purport to be a
complete analysis of the purchase, ownership and disposition of the Preferred
Stock, the Common Stock, and the Debentures and does not address all of the tax
considerations that may be relevant to particular investors in light of their
individual circumstances or to holders subject to special treatment under United
States federal income tax laws, such as dealers in securities, insurance
companies, foreign persons, tax-exempt organizations and financial institutions
or to persons in special situations, such as those who hold the Preferred Stock,
Common Stock and/or the Debentures as part of a hedging or conversion
transaction or straddle. In addition, this discussion does not address the
application or effect of any state, local, foreign or other tax laws. This
discussion is based on the Code, Treasury regulations promulgated thereunder,
and Internal Revenue Service ("IRS") rulings and judicial decisions, all of
which are subject to change, possibly with retroactive effect. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED STOCK, THE COMMON STOCK AND THE DEBENTURES.
Dividends on the Preferred Stock or the Common Stock
Dividends paid on the Preferred Stock or the Common Stock will be
taxable as ordinary income to the extent of current and accumulated "earnings
and profits" (as defined in the Code). Dividends paid to corporate holders of
the Preferred Stock or the Common Stock out of such earnings and profits
generally will qualify, subject to the limitations under Sections 246(c) and
246A of the Code, for the 70% dividends received deduction allowable to
corporations (although the benefits of such deduction may be reduced or
eliminated by the corporate alternative minimum tax). Under Section 246(c) of
the Code, to be eligible for the dividends received deduction with respect to a
dividend received on the Preferred Stock or Common Stock, a corporate holder
must hold its shares of the Preferred Stock or the Common Stock for at least 46
days during the 90-day period that begins 45 days before the Preferred Stock or
Common Stock becomes ex-dividend with respect to such dividend. The applicable
holding period is increased to 91 days during the 180-day period that begins 90
days before the Preferred Stock becomes ex-dividend with respect to such
dividend in the case of a dividend on the Preferred Stock attributable to a
period or periods aggregating more than 366 days. In determining holding
periods, the day of disposition is counted, but the day of acquisition is not. A
taxpayer's holding period for these purposes is suspended during any period in
which the taxpayer has an option to sell, is under a contractual obligation to
sell, has made (and not closed) a short sale of, or has granted an option to
buy, substantially identical stock or securities or holds one or more other
positions with respect to substantially similar or related property that
diminish the risk of loss from holding such stock. Under Section 246A of the
Code, the dividends received deduction may be reduced or eliminated if a
holder's shares of the Preferred Stock or the Common Stock are debt financed.
Section 1059 of the Code requires a corporate stockholder to reduce its
basis (but not below zero) in the Preferred Stock or Common Stock (as of the
beginning of the applicable ex-dividend date) by the nontaxed portion (generally
the portion eligible for the dividends received deduction described above) of
any "extraordinary dividend" if the Preferred Stock or the Common Stock has not
been held for more than two years before the date of announcement or agreement
with respect to such dividend. In addition, a holder must recognize additional
gain, if any, in an amount equal to nontaxed portions of any extraordinary
dividends that would have reduced such holder's basis but for the limitation on
reducing basis below zero. Such gain is treated as gain from the sale or
exchange of Preferred Stock or Common Stock for the tax year in which the
extraordinary dividend is received. An "extraordinary dividend" generally is a
dividend that (a) equals or exceeds 5% in the case of Preferred Stock, or 10% in
the case of Common Stock, of the holder's basis in such stock, treating all
dividends having ex-dividend dates within an 85-day period as one dividend or
(b) exceeds 20% of the holder's basis in such stock, treating all dividends
having ex-dividend dates within a 365-day period as one dividend, provided that
in either case fair market value, if it can be established by the holder, may be
substituted for stock basis. In addition, an amount treated as a dividend in the
case of a redemption of the Preferred Stock that is either non-pro rata as to
all stockholders, is in partial liquidation, or is treated as a dividend solely
as a result of the application of Code Section 304(a) (dealing with purchases of
stock by related parties) or certain constructive stock ownership rules which
treat rights to acquire stock as stock (see "-- Redemption, Sale and Exchange of
Preferred Stock") would also constitute an extraordinary dividend without regard
to the length of time the Preferred Stock has been held. Application of the
extraordinary dividend rule is limited somewhat if the redemption proceeds that
are treated as dividends constitute "qualified preferred dividends." See
"--Redemption, Sale and Exchange of Preferred Stock." The length of time that a
taxpayer is deemed to have held stock for purposes of Section 1059 is determined
under principles comparable to those described in the preceding paragraph with
respect to the dividends received deduction.
To the extent, if any, that a distribution on the Preferred Stock or
the Common Stock which would otherwise constitute a dividend for federal income
tax purposes exceeds the current and accumulated earnings and profits of the
Company, such distribution will be treated as a tax-free return of capital,
reducing a holder's basis in the Preferred Stock or the Common Stock. The
reduction in basis will increase any gain, or reduce any loss, realized by the
holder on any subsequent sale, redemption or other disposition of the Preferred
Stock or the Common Stock. Any such distribution in excess of a holder's
adjusted basis in the Preferred Stock or the Common Stock will be treated as
capital gain. For a corporate holder, treatment of a distribution as a capital
gain rather than as a dividend will result in an increase in the maximum
effective federal income tax rate on any amount so treated.
Redemption, Sale and Exchange of Preferred Stock
A redemption of the Preferred Stock for cash or Debentures or a sale of
Preferred Stock for cash or other property will be a taxable event.
A redemption of the Preferred Stock for cash will be treated, under
Section 302 of the Code, as a distribution that is treated as a taxable
dividend, nontaxable recovery of basis or an amount received in exchange for the
Preferred Stock pursuant to the rules described under "--Dividends on the
Preferred Stock or the Common Stock" above, unless the redemption (a) results in
a "complete termination" of the stockholder's stock interest in the Company
under Section 302(b)(3) of the Code; (b) is "substantially disproportionate"
with respect to the stockholder under Section 302(b)(2) of the Code; or (c) is
"not essentially equivalent to a dividend" under Section 302(b)(1) of the Code.
In determining whether any of these tests has been met, shares considered to be
owned by the stockholder by reason of certain constructive ownership rules in
Sections 302(c) and 318 of the Code, as well as shares actually owned, must be
taken into account. If any of these tests were met, the redemption of the
Preferred Stock for cash would be treated as a sale or exchange for tax
purposes. A distribution will be "not essentially equivalent to a dividend" as
to a particular stockholder if it results in a "meaningful reduction" in that
stockholder's interest in the Company. If, as a result of the redemption for
cash of the Preferred Stock, a stockholder of the Company, whose relative stock
interest in the Company is minimal and who exercises no control over corporate
affairs, suffers a reduction in his proportionate interest in the Company
(taking into account shares of Common Stock and shares owned by the stockholder
under Sections 302(c) and 318 of the Code and, in certain events, dispositions
of the stock which occur contemporaneously with the redemption) then that
stockholder may be regarded as having suffered a meaningful reduction in his
interest in the Company. There can be no certainty as to when such reduction has
occurred because the applicable test is not based on numerical criteria.
Satisfaction of the "complete termination" and "substantially disproportionate"
exceptions is dependent upon compliance with the objective tests set forth in
the Code.
A redemption of the Preferred Stock by exchange for the Debentures will
be subject to the same rules as a redemption for cash, including the rules for
treating the redemption as a dividend or as a sale or exchange. However, because
under the constructive ownership rules of Section 302(c) and 318 of the Code a
holder of the Debentures would be treated as owning the Common Stock into which
the Debentures are convertible, such a redemption could not satisfy the
"complete termination" or "substantially disproportionate" tests. The redemption
would, therefore, be taxable as a dividend to the extent of the accumulated
earnings and profits of the Company unless it satisfied the "not essentially
equivalent to a dividend" test. As noted above, this subjective test requires
that the distribution result in a meaningful reduction of the stockholder's
stock interest in the Company in order for the distribution to qualify as a sale
or exchange. Because a holder will be deemed for purposes of section 302(b) of
the Code to own shares of Common Stock into which Debentures are convertible,
under a literal interpretation of the Code, Treasury Regulations and IRS
rulings, the receipt of Debentures in exchange for Preferred Stock will be
taxable as a dividend to the extent of the stockholder's allocable share of the
Company's earnings and profits because the exchange does not result in any
reduction in stock interest in the Company. Accordingly, each stockholder is
urged to consult his tax advisor regarding this issue, including the possible
effect of the disposition of a portion of its interest in the Company
contemporaneously and as part of an integrated plan with the exchange of the
Preferred Stock for Debentures.
A redemption of the Preferred Stock that is treated as a sale or
exchange, rather than as a distribution, and any sale of the Preferred Stock for
cash or other property will result in taxable capital gain or, except in the
case of a redemption in exchange for the Debentures, loss equal to the
difference between (i) the sum of the amount of cash, the "issue price" of the
Debentures (as defined in "--Interest and Original Issue Discount"), and the
fair market value of any other property received and (ii) the holder's tax basis
in the Preferred Stock. However, because it is anticipated that the Debentures
will be treated as securities for federal income tax purposes, it is not
anticipated that a holder will be entitled to deduct any loss realized on the
redemption of the Preferred Stock in exchange for Debentures.
If a redemption of the Preferred Stock is treated as a distribution
taxable as a dividend, the amount of the distribution will be measured by the
amount of cash and the "issue price" (and likely not the principal amount) of
the Debentures, as defined below in "--Interest and Original Issue Discount." In
any event, the amount of the distribution will not be reduced by the
stockholder's adjusted tax basis in the Preferred Stock. The stockholder's tax
basis in the redeemed Preferred Stock will be transferred to any remaining
stockholdings in the Company. If the stockholder does not retain any stock
ownership in the Company, such basis may be entirely lost.
A holder's holding period in the Debentures will (i) begin on the day
of the exchange of the Preferred Stock for the Debentures if the exchange is
treated as a distribution, or (ii) include the holder's holding period in the
Preferred Stock if the exchange is treated as a sale or exchange.
A distribution to a corporate stockholder in redemption of the
Preferred Stock that is treated as a dividend may also be considered an
"extraordinary dividend" subject to the basis reduction and gain recognition
requirements under Section 1059 of the Code. See "--Dividends on the Preferred
Stock or Common Stock" above. In making the basis reduction and determining the
amount of gain required to be recognized in a redemption for which options are
treated as stock, only the basis in the redeemed stock is taken into account.
Application of this rule is limited somewhat by a special rule that provides
that dividends on a share of Preferred Stock which is not in arrears as to
dividends at the time the holder acquires such stock, that do not exceed an
actual rate of return of 15% of the lower of the holder's adjusted basis or the
liquidation preference (excluding dividend arrearages, if any) of the Preferred
Stock will be treated as extraordinary only if the holder disposes of the
Preferred Stock before it has held the stock for more than five years and only
to the extent that the actual rate of return to the holder exceeds the stated
rate of return on the Preferred Stock, as determined under Section 1059(e)(3) of
the Code.
Interest and Original Issue Discount
Stated interest on the Debentures will be taxable as ordinary income to
the holders of the Debentures and will be required to be included by each holder
in income in accordance with its method of accounting for federal income tax
purposes.
If the Preferred Stock is redeemed by exchange for the Debentures at a
time when the principal amount of such Debentures exceeds the issue price of
such Debentures by an amount equal to or greater than 1/4% of such principal
amount times the number of complete years to maturity, such excess will
generally be includible in gross income as "original issue discount" over the
term of such Debentures, even though the cash to which such income is
attributable would not be received until maturity or redemption of the
Debentures. If the Debentures are traded on an established securities market
within 30 days of their issuance, the issue price of the Debentures for purposes
of determining the amount, if any, or original issue discount on the Debentures
will be the fair market value of the Debentures, determined as of the date of
issuance. If the Debentures are not traded on an established securities market
within 30 days of their issuance, but the Preferred Stock is traded on such a
market within 30 days before or after the date of issuance, the issue price of
the Debentures will be the fair market value of the Preferred Stock as of the
exchange date. If neither the Debentures nor the Preferred Stock is so traded,
the issue price of the Debentures will be the lesser of (i) their stated
principal amount or (ii) their imputed principal amount, which is the sum of the
present values of all payments due under the Debentures discounted from the date
of payment to the issue date at the appropriate "applicable federal rate." The
amount of any original issue discount included in income for each year would be
calculated under a constant yield to maturity basis that would result in the
allocation of less original issue discount to the early years of the term of the
Debentures and more original issue discount to later years. The amount of
original issue discount required to be included in income by a subsequent holder
of a Debenture will be decreased by any "acquisition premium" paid by such
holder. Acquisition premium is the amount by which a holder's initial tax basis
in the Debenture exceeds the sum of the issue price of the Debenture plus the
amount of original issue discount previously required to be included in income
(without regard to any acquisition premium in the hands of other holders).
If the tax basis of a Debenture exceeds the amount payable at maturity,
Section 171 of the Code provides for an election whereby such excess or premium,
to the extent not attributable to the conversion feature of the Debenture, can
be offset against (and operate to reduce) interest income on the Debenture. The
premium is amortized, as an offset to income received, over the remaining term
of the Debenture.
A holder's initial tax basis in a Debenture received in exchange for
the Preferred Stock will equal the issue price of the Debenture, determined as
described above. Such tax basis will be increased by the amount of any original
issue discount (and market discount, as defined below) previously included in
the income of the holder with respect to the Debenture, and reduced by any
amortized premium.
Disposition of the Debentures
Generally any sale or redemption of Debentures will result in taxable
gain or loss equal to the difference between the amount of cash and the fair
market value of any other property received (except to the extent of cash
attributable to accrued interest, which will be taxable as interest income) and
the holder's tax basis in the Debentures (except to the extent attributable to
accrued and unpaid interest). Subject to the market discount provisions of
Sections 1276-1278 of the Code discussed in the following paragraph, such gain
or loss would be capital gain or loss.
The value of a Debenture may be adversely affected by the market
discount provisions of Section 1276-1278 of the Code which require a person who
purchases a Debenture at a market discount to either (i) elect to accrue market
discount into income currently over the period during which the holder owns the
Debenture or (ii) (a) treat a portion of the gain recognized upon any
disposition of the Debenture as ordinary income (and not as capital gain) to the
extent such market discount accrued during the period such person owned the
Debenture and (b) defer the deduction of all or a portion of interest paid or
accrued on indebtedness incurred or continue to purchase or carry such Debenture
until such Debenture is disposed of in a taxable transaction.
Redemption Premium on the Preferred Stock
Under Section 305 of the Code and applicable Treasury regulations, if
the redemption price of redeemable preferred stock exceeds its issue price by
more than a de minimis amount (i.e., one-quarter of 1% of the redemption price
multiplied by the number of complete years to maturity) ("redemption premium")
and if based on all of the facts and circumstances as of the issue date,
redemption is considered more likely than not to occur, the entire amount of
such excess may be treated as distributed over the holding period of the
Preferred Stock. The amount treated as distributed each year would be determined
on a constant yield to maturity basis that would result in the allocation of a
lesser amount of distributions to the early years and a greater amount to the
later years of such period. Any such constructive distribution would be
classified as a dividend, non-taxable recovery of basis or an amount received in
exchange for the Preferred Stock pursuant to the rules summarized under
"--Dividends on the Preferred Stock or the Common Stock" above. Under a safe
harbor, redemption is not deemed more likely than not to occur if the issuer and
the holder are not related; there are no plans, arrangements, or agreements that
effectively require or are intended to compel the issuer to redeem the Preferred
Stock; and exercise of the right to redeem would not reduce the yield of the
Preferred Stock, as determined under principles similar to the provisions of the
Code dealing with original issue discount on debt obligations. In addition,
these economic accrual rules will not apply if the premium is in the nature of a
penalty for a premature redemption and the premium is paid as a result of
changes in economic or market conditions over which neither the Company nor the
holder has legal or practical control. The Company believes that the redemption
of the Preferred Stock is not more likely than not to occur, although no
assurance can be given that it will be so considered by the IRS or a court.
Conversion of the Preferred Stock or the Debentures into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes on conversion of the Preferred Stock or the Debentures solely into
shares of the Common Stock. (If dividends on the Preferred Stock were in arrears
at the time of conversion, however, a portion of the Common Stock received in
exchange for the Preferred Stock could be viewed under Section 305(c) of the
Code as a distribution with respect to the Preferred Stock, taxable as a
dividend). Gain realized (i.e., the excess of the cash received over the portion
of basis allocable to the fractional shares) upon receipt of cash paid in lieu
of fractional shares of the Common Stock will be taxed immediately. In general,
the tax basis for the Common Stock received on conversion will be equal to the
tax basis of the Preferred Stock or Debentures converted, reduced by the portion
of basis allocable to any fractional share exchanged for cash. The holding
period of the shares of Common Stock will include the holding period of such
Preferred Stock or Debentures. Under the aforementioned market discount
provisions of the Code, any accrued market discount not previously included in
income as of the date of conversion of the Debentures will carry over to the
Common Stock received on conversion and will be treated as ordinary income upon
subsequent disposition of such Common Stock.
Adjustment of Conversion Price
Section 305 of the Code and the Treasury regulations thereunder treat
holders of convertible preferred stock and convertible debentures as having
received a constructive distribution, taxable as described in "--Dividends on
the Preferred Stock or the Common Stock" above, due to certain adjustments in
conversion ratios. Adjustments to a conversion ratio made pursuant to a bona
fide, reasonable adjustment formula which has the effect of preventing the
dilution of a holder generally will not be considered to result in a
constructive distribution of stock. The conversion rate of the Preferred Stock
and the Debentures is subject to adjustment under certain circumstances. Certain
adjustments increasing the number of shares of Common Stock into which the
Preferred Stock or the Debentures can be converted could cause the holders
thereof to be viewed under Section 305 of the Code as receiving a deemed
distribution taxable as a dividend, as described in "--Dividends on the
Preferred Stock or the Common Stock," above, whether or not such holders
exercise their conversion rights.
Back-up Withholding
Under Section 3406 of the Code and applicable Treasury regulations, a
holder of the Preferred Stock, the Common Stock or the Debentures may be subject
to back-up withholding at the rate of 31% with respect to dividends or interest
paid, original issue discount or redemption premium accrued with respect to, or
proceeds received from a sale, exchange or redemption of, the Preferred Stock,
Common Stock or the Debentures, as the case may be. The payor will be required
to deduct and withhold a tax if (i) the payee fails to furnish a taxpayer
identification number ("TIN") to the payor or establish an exemption from backup
withholding, (ii) the IRS notifies the payor that the TIN furnished by the payee
is incorrect, (iii) there has been a notified payee underreporting with respect
to interest, dividends or original issue discount described in Section 3406(c)
of the Code or (iv) there has been a failure of the payee to certify under the
penalty of perjury that the payee is not subject to withholding under the Code.
Backup withholding will not apply with respect to payments to certain holders,
including payments to certain exempt recipients (such as corporations and
tax-exempt organizations).
State, Local and Other Taxes
Holders of the Preferred Stock, the Common Stock, or the Debentures may
be liable for state and local income taxes with respect to dividends or interest
paid or redemption premium or original issue discount accrued with respect to,
or gain from the sale, exchange or redemption of the Preferred Stock, the Common
Stock or the Debentures, as the case may be. Many states and localities do not
allow corporations a deduction analogous to the federal dividends received
deduction. Prospective investors are advised to consult their own tax advisors
as to the state, local and other tax consequences of acquiring, holding and
disposing of the Preferred Stock, the Common Stock or the Debentures.
PLAN OF DISTRIBUTION
The Shares being sold hereby may be offered to purchasers directly by any
of the Selling Stockholders acting as principals for their own account.
Alternatively, the Selling Stockholders may from time to time offer the Shares
through underwriters, brokers, dealers or agents, who may receive compensation
in the form of discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of the Shares for whom they may act as agent
or to whom they sell as principals (which compensation to a particualr broker
might be in excess of customary commission. The Selling Stockholders and any
such underwriters, brokers, dealers or agents that participate in the
distribution of the Shares offered hereby may be deemed to be underwriters under
the Securities Act, and any profit on the sale of such Shares by them and any
discounts, commissions, or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Act.
The Shares offered hereby may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. The distribution
of the Shares offered hereby by the Selling Stockholders may be effected in one
or more transactions that may take place in the over-the-counter market, on
Nasdaq, including ordinary broker's transactions, privately-negotiated
transactions or through sales to one or more broker-dealers for resale of such
Shares as principals, or a combination of such methods of sales, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees, discounts and commissions may be paid by the Selling
Stockholders in connection with such sales of Shares.
At the time a particular offer of the Shares offered hereby is made, to
the extent required, a supplement to this Prospectus will be distributed (or, if
required, a post-effective amendment to the Registration Statement of which this
Prospectus is a part will be filed) which will identify the specific Shares
being offered and set forth the aggregate amount of Shares being offered, the
purchase price and the terms of the offering, including the name or names of the
Selling Stockholders and of any underwriters, dealers or agents, the purchase
price paid by any underwriter for Shares purchased from the Selling
Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, including the proposed
selling price to the public. In addition, an underwritten offering may require
clearance by the National Association of Securities Dealers, Inc. of the
underwriter's compensation arrangements. The Company will not receive any of the
proceeds from the sale by the Selling Stockholders of the Shares offered hereby.
Substantially all of the expenses incident to the Registration Statement and
sale of the Shares offered hereby to the public will be borne by the Company,
including without limitation, certain fees and disbursements of underwriters
customarily paid by issuers or sellers of securities, but excluding underwriting
fees, discounts and commissions.
Pursuant to that certain Registration Rights Agreement granting
registration rights to certain Selling Stockholders, which was executed in
connection with the Company's Private Placement, the Company will use its best
efforts to keep the Registration Statement, of which this Prospectus forms a
part, continuously effective under the Securities Act until the second
anniversary of the issuance of the Preferred Stock except that it shall be
permitted to suspend the use of the Registration Statement during certain
periods and under certain circumstances. In addition, the Company will indemnify
and hold harmless the Selling Stockholders and their directors, officers,
employees and agents, if any, each other person who participates as an
underwriter in the offering or sale of such securities and each other person, if
any, who controls such Selling Stockholders or any such underwriter within the
meaning of the Securities Act, against any losses, liabilities, claims, damages
and expenses arising, under certain circumstances, out of any registration of
the Shares. In addition, the Company will require an undertaking from the
Selling Stockholders to indemnify and hold harmless, in the same manner and to
the same extent as provided with respect to the Company's indemnification of the
Selling Stockholders, the Company and any of its directors, officers signatory
to such registration statement and persons who control the Company within the
meaning of the Securities Act, if any.
In order to comply with certain states securities laws, if applicable,
the Shares offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In certain states the Shares may not
be sold unless the Shares have been registered or qualified for sale in such
state, or unless an exemption from registration or qualification is available
and is obtained.
The certificates representing the Shares offered hereby contain legends
as to their restricted transferability. Upon the effectiveness of the
Registration Statement, of which this Prospectus forms a part, and the transfer
of the Shares pursuant thereto, such legends will no longer be necessary, and
accordingly, new certificates representing such Shares will be issued to the
transferee without any such legends unless otherwise required by law.
In addition to sales pursuant to the Registration Statement, of which
this Prospectus forms a part, the Shares may be sold in accordance with Rule 144
promulgated under the Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to the shares for a period of two business
days prior to the commencement of such distribution. In addition, each Selling
Stockholder will be subject to applicable provisions of the Exchange Act and
rules and regulations thereunder, including without limitation Regulation M
provisions may limit the timing of purchases and sales of any of the Shares by
the Selling Stockholders. All of the foregoing may effect the marketability of
the Shares.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Walther, Key, Maupin, Oats, Cox, Klaich & LeGoy, Reno, Nevada.
EXPERTS
The financial statements of Reno Air, Inc. at December 31, 1996 and 1995,
and for each of the two years in the period ended December 31, 1996,
incorporated by reference in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, and for the year ended
December 31, 1994, by Arthur Andersen LLP, independent public accountants, as
set forth in their respective reports thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such reports given the authority of such firms as
experts in accounting and auditing.
GLOSSARY
"Available seat miles" or "ASMs" means the number of seats available for
passengers on completed scheduled and track charter flights multiplied by the
number of miles those seats are flown; ASM represents the total passenger
carrying capacity offered.
"Average aircraft stage length" means the average length of each aircraft
flight segment, weighted by the ASMs for each aircraft flight segment.
"Average aircraft utilization" means average block hours flown by each
aircraft in the fleet per day.
"Average fare" means passenger revenues divided by enplaned passengers.
"Block hours flown" means the time between aircraft gate departure and
aircraft gate arrival.
"Breakeven load factor" means the percentage of RPMs that must be flown for
the airline to break even on a net income basis during the year, assuming yield
and operating expenses remained constant.
"Operating expenses per ASM" means operating expenses divided by ASMs;
operating expenses per ASM represents a measure of the Company's cost per unit
of production.
"Passenger load factor" means RPMs divided by ASMs; passenger load factor
represents the percentage of available seat capacity occupied by revenue
passengers.
"Passenger revenues per ASM" means total passenger revenues divided by
total ASMs; passenger revenues per ASM represents the passenger revenue received
for each seat mile flown.
"Revenue passenger miles" or "RPMs" represents the number of revenue
passenger miles flown on scheduled and track charter flights.
"Yield" means total passenger revenues divided by RPMs; Yield represents
the passenger revenue received for each mile a passenger is carried.
<PAGE>
No dealer, sales representative or other person has been authorized in
connection with the offering made hereby to give any information or to make any
representations not contained in this Prospectus and, if given or made,
1,436,000 Shares such information or representations must not be relied upon as
having been authorized by the Company or any other person. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction in which 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 the
information contained herein is correct as of any date subsequent to the date
hereof.
[GRAPHIC OMITTED]
1,436,000 Shares
Series A Cumulative
Convertible Exchangeable
Preferred Stock
and
4,162,318 Shares of Common Stock
PROSPECTUS
November ___, 1997
TABLE OF CONTENTS
Available Information (i)
Incorporation of Certain Doctuments by Reference (i)
Prospectus Summary 1
Risk Factors 7
Use of Proceeds 13
Dividend Policy 13
Selling Shareholders 15
Description of Capital Stock 15
Description of the Preferred Stock 17
Descripton of Debentures 25
Certain Federal Income Tax Considerations 31
Plan of Distribution 36
Legal Matters 38
Experts 38
Glossary 39
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
Securities and Exchange Commission Registration Fee $ 10,879
Nasdaq Listing Fee 7,000
Printing Costs 500
Legal Fees and Expenses 10,000
Accounting Fees and Expenses 7,500
Miscellaneous 14,121
------
Total $ 50,000
All of the above items, except the registration fee and the Nasdaq
listing fee, are estimated. All expenses incurred in connection with this
Offering will be borne by the Company, including without limitation, the
reasonable fees and disbursements of counsel retained by the Selling
Stockholders, but excluding underwriting discounts and commissions, if any.
ITEM 15. Indemnification of Directors and Officers
The right of the stockholders to sue any director for misconduct in
conducting the affairs of the Company is limited by Article VII of the Company's
Articles of Incorporation and Nevada statutory law to cases for damages
resulting from breaches of fiduciary duties involving acts or omissions
involving intentional misconduct, fraud, knowing violations of the law or the
unlawful payment of dividends. Ordinary negligence is not a ground for such a
suit. The statute does not limit the liability of directors or officers for
monetary damages under federal securities laws.
The Company also has the obligation, pursuant to Article VIII of the
Company's Articles of Incorporation and Article VII of the Company's Bylaws, to
indemnify any director or officer of the Company for all expenses incurred by
them in connection with any legal action brought or threatened against such
person for or on account of any action or omission alleged to have been
committed while acting in the course and scope of the person's duties, if the
person acted in good faith and in a manner which the person reasonably believed
to be in or not opposed to the best interests of the Company, and with respect
to criminal actions, had no reasonable cause to believe the person's conduct was
unlawful, provided that such indemnification is made pursuant to then existing
provisions of Nevada statutes at the time of any such indemnification.
ITEM 16. Exhibits
The following exhibits are filed as part of this Registration
Statement.
Exhibit
Number Description
3.1 Articles of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 of the Registration Statement on
Form S-1 (No. 33-46031) filed with the Commission on May 12,
1992.
3.2 Bylaws, as amended. (Incorporated by reference to
Exhibit 2 to the Company's Form 8-A Registration
Statement filed on November 13, 1997 (the "1997 Form
8-A"))
3.3 Certificate of Designations for the Preferred Stock
(Incorporated by reference to Exhibit 3 to the 1997 Form
8-A).
3.4 Form of Indenture (Incorporated by reference to Exhibit 4 to
the 1997 Form 8-A).
5.1 Opinion of Walther, Key, Maupin, Oats, Cox, Klaich & LeGoy
(to be filed by amendment).
8.1 Opinion of Shereff Friedman Goodman & Hoffman regarding tax
matters (to be filed by amendment).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Walther, Key, Maupin, Oats, Cox, Klaich & LeGoy
(to be included in Exhibit 5.1).
23.4 Consent of Shereff Friedman Goodman & Hoffman (to be
included in Exhibit 8.1)
24.1 Power of Attorney (appears on signature pages).
ITEM 17..Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) promulgated under the Securities Act
of 1933 if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in this Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (ii) shall not apply
if the Registration Statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered herein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Reno, State of Nevada, on November 24, 1997.
RENO AIR, INC.
By: /s/ Robert W. Reding
Name: Robert W. Reding
Title: Chief Executive Officer,President
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signature appears below constitutes and appoints Robert W. Reding and Robert M.
Rowen and each of them (with full power of each of them to act alone), his true
and lawful attorney-in-fact and agents, with full power of substitution and
resubstitution for him and on his behalf, and in his name, place and stead, in
any all capacities to execute and sign any and all amendments or post-effective
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact or any of them or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof and the Registrant hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 24, 1997
Name and Signature Title
/s/ Lee M. Hydeman Chairman of the Board and Director
Lee M. Hydeman
/s/ Robert W. Reding Chief Executive Officer, President and Director
Robert W. Reding (Principal Executive Officer)
/s/ B.J. Rone Senior Vice President and Chief Financial Officer
B.J. Rone (Principal Financial Officer)
/s/ David W. Asai Vice President, Controller and Chief Accounting
David W. Asai Officer (Principal Accounting Officer)
/s/ Donald L. Beck
Donald L. Beck Director
/s/ Barrie K. Brunet Director
Barrie K. Brunet
/s/ Joe M. Kilgore Director
Joe M. Kilgore
/s/ James T. Lloyd Director
James T. Lloyd
/s/ Wayne L. Stern, M.D. Director
Wayne L. Stern, M.D.
/s/ Agnieszke Winkler Director
Agnieszka Winkler
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Reno Air, Inc. for
the registration of 1,436,000 shares of Series A preferred stock and up to
4,162,318 shares of common stock issuable upon conversion of the preferred
stock, and to the incorporation by reference therein of our report dated
February 18, 1997, with respect to the financial statements of Reno Air, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1996,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Reno, Nevada
November 24, 1997
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated March 28, 1995
included in Reno Air Inc.'s Form 10-K for the year ended December 31, 1994 and
to all references to our firm included in this registration statement.
/s/ Arther Andersen LLP
Phoenix, Arizona,
November 21, 1997.
