<PAGE>
<PAGE>
$54,000,000 Principal Amount of 5 3/4% Convertible Subordinated Notes due 2002
(Interest Payable April 15 and October 15)
2,996,811 Shares of Common Stock
---------------
This Prospectus relates to (i) $54,000,000 aggregate principal amount of 5
3/4% Convertible Subordinated Notes due 2002 (the "Notes") of Kellstrom
Industries, Inc., a Delaware corporation ("Kellstrom" or the "Company"), (ii)
1,963,636 shares of common stock, par value $.001 per share (the "Common
Stock"), of the Company which are initially issuable upon conversion of the
Notes plus such additional indeterminate number of shares of Common Stock as may
become issuable upon conversion of the Notes as a result of adjustments to the
conversion price (the "Note Shares"), (iii) 758,785 shares of Common Stock
which are initially issuable upon the exercise of warrants, including warrants
held by certain affiliates of the Company (the "Warrants"), having exercise
prices ranging from $5.00 to $22.00 previously issued by the Company expiring
between April 15, 2000 and January 15, 2004, plus such additional indeterminate
number of shares of Common Stock as may become issuable upon exercise of the
Warrants as a result of anti-dilution provisions (the "Warrant Shares") and
(iv) 274,390 additional shares of Common Stock owned by a certain stockholder
(the "Additional Shares", and together with the Note Shares and Warrant Shares,
the "Shares"). The Notes and the Shares that are being registered hereby are to
be offered for the account of the holders thereof (the "Selling
Securityholders"). The Notes were initially acquired from the Company by BT
Alex. Brown Incorporated (the "Initial Purchaser") in October and November
1997 in connection with a private offering. See "Description of the Notes."
The Notes are convertible into Common Stock of the Company at any time
prior to maturity, unless previously redeemed, at a conversion price of $27.50
per share, subject to adjustments. The reported last sale price of the Common
Stock on the Nasdaq National Market on March 19, 1998, was $26.25 per
share. The Common Stock is traded under the symbol "KELL."
The Notes are not redeemable by the Company prior to October 15, 2000.
Thereafter, the Notes will be redeemable on at least 15 days' prior notice at
the option of the Company, in whole or in part, at any time, at the redemption
prices set forth in this Prospectus, in each case together with accrued
interest. Subject to certain restrictions and conditions, the Notes may also be
redeemed at the option of the holder if there is a Change in Control (as defined
herein) at 100% of the principal amount thereof, subject to adjustment in
certain events as defined herein, together with accrued interest. See
"Description of Notes -- Optional Redemption by the Company" and "--Repurchase
at Option of Holders Upon Change in Control." The Notes are not entitled to any
sinking fund. The Notes will mature on October 15, 2002.
The Notes are general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein). At December 31, 1997, the Company had approximately $19.1
million of indebtedness outstanding that constituted Senior Indebtedness. See
"Description of Notes -- Subordination of Notes" and "Risk Factors."
The Notes are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market. The Initial Purchaser has
advised the Company that it is currently making a market in the Notes as
permitted by applicable laws and regulations. The Initial Purchaser, however, is
not obligated to do so and any such market making may be discontinued at any
time without notice, in the sole discretion of the Initial Purchaser.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Notes.
The Notes and the Shares are being registered to permit public secondary
trading of the Notes and Additional Shares and, upon conversion of the Notes,
the underlying Note Shares, and upon exercise of the Warrants, the Warrant
Shares, by the holders thereof from time to time after the date of this
Prospectus. For a description of certain income tax consequences to holders of
the Notes, see "Certain Federal Income Tax Considerations." The Company has
agreed, among other things, to bear all expenses in connection with the
registration statement of which this Prospectus forms a part.
The Company will not receive any of the proceeds from sales of Notes or
the Shares by the Selling Securityholders. The Notes and the Shares may be
offered from time to time by the Selling Securityholders in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. See "Plan of Distribution." The Selling Securityholders may
be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "Securities Act"). If any broker-dealers are used by the Selling
Securityholders, any commissions paid to broker-dealers and, if broker-dealers
purchase any Notes or Shares as principals, any profits received by such
broker-dealers on the resale of the Notes or Shares may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
profits realized by the Selling Securityholders may be deemed to be underwriting
commissions.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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 March 19, 1998
<PAGE>
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") under File No. 0-23764.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission located at 7 World Trade Center, 13th Floor,
Suite 1300 New York, New York 10048-1102 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60606. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Copies of the above
reports, proxy statements and other information may also be inspected at the
offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does
not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Notes and the Shares offered hereby, reference is
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<PAGE>
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which are on file with the Commission, are
incorporated in this Prospectus by reference and made a part hereof:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997,
respectively;
(c) Proxy Statement used in connection with the Company's Annual Meeting
of Shareholders held on August 28, 1997;
(d) The Company's Current Report on Form 8-K filed January 24, 1997, as
amended on Form 8-K/A filed March 7, 1997 and on Form 8-K/A(2) filed on March
31, 1997;
(e) The Company's Current Report on Form 8-K filed September 24, 1997,
as amended on Form 8-K/A, filed November 24, 1997 and Form 8-K/A2, filed
February 27, 1998; and
(f) The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A dated April 1, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to
termination of the offering being made hereby shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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<PAGE>
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
which have been or may be incorporated in this Prospectus by reference, other
than exhibits to such documents which are not specifically incorporated by
reference into the information that this Prospectus incorporates. Requests for
such copies should be directed to the Company's principal executive offices at:
Kellstrom Industries, Inc., 14000 N.W. 4th Street, Sunrise, Florida 33325, Attn:
Chief Financial Officer, (954) 845-0427.
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<PAGE>
<PAGE>
THE COMPANY
The Company is a leader in the airborne equipment segments of the
international aviation services after-market. Kellstrom's principal business is
the purchasing, refurbishing (through subcontractors), marketing, reselling and
leasing of aircraft jet engines, jet engine parts and commercial aircraft.
Through its recent acquisition of the business of Aero Support USA Inc. ("Aero
Support"), the Company is also a leading international after-market reseller of
turbo-jet engines and turbo-jet engine parts for helicopters and large transport
aircraft. The Company specializes in providing engines and parts for large
turbo-fan engines manufactured by General Electric, CFMI, Pratt & Whitney and
Rolls Royce. The engine types serviced and supplied by the Company comprise
approximately 73% of the total world jet engine supply. The Company is an
approved supplier to a global customer base comprised of major domestic and
international airlines, original equipment manufacturers ("OEMs") and engine
overhaul shops, including American, Delta, Lufthansa, Swissair and Singapore
Airlines, Daimler-Benz, Pratt & Whitney and GE Aircraft Engine Services.
The demand for after-market engines and engine parts is driven primarily
by flying hours or cycles. Regardless of the profitability of the airline
industry, parts must be serviced or replaced at scheduled intervals. As such,
the demand for after- market parts is a function of the level of worldwide air
traffic. According to an industry study issued in 1996 by Boeing Commercial
Airplane Company Marketing, world air travel was projected to grow by 70% in the
ten years ending in 2005.
The aircraft engine and engine parts resale market is highly fragmented,
characterized by a limited number of large suppliers with broad product
offerings and numerous smaller competitors serving niche markets. Recently, the
industry has undergone significant consolidation among both large suppliers and
smaller competitors. The Company believes that only those companies with
superior quality assurance programs, sophisticated information systems and
adequate capital will succeed in this changing environment. The Company is an
active participant in the industry consolidation, having completed acquisitions
of two companies in 1997 with combined 1996 revenues of approximately $40
million.
The Company is an industry leader in quality assurance. Kellstrom's
management believes it is the first after-market aircraft engine and engine
parts supplier to receive the ISO 9002 certification from the International
Standards Organization ("ISO"), a quality assurance standard recognized
throughout the world. In the current environment of heightened scrutiny of
maintenance operations, airlines and maintenance facilities are reducing their
supplier list to include only those which maintain the highest quality control
and can provide instant access to the comprehensive history of any part. The
Company's ISO 9002 certification and
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<PAGE>
sophisticated optical tracking systems provide a significant competitive
advantage in the marketplace.
RECENT DEVELOPMENTS
AERO SUPPORT ACQUISITION
On September 10, 1997, Kellstrom completed the acquisition of the
business of Aero Support pursuant to which a wholly owned subsidiary of
Kellstrom acquired substantially all of the assets and liabilities of Aero
Support (the "Aero Support Acquisition"). The consideration paid by the Company
consisted of $13.8 million in cash (the "Cash Purchase Price") and three
warrants. One warrant is for the purchase of 75,000 shares of Common Stock at an
exercise price of $22.00 per share, expiring in three years. The other warrants
are for the purchase of an aggregate of 175,000 shares of Common Stock at an
exercise price of $19.00 per share, expiring in five years. Up to an additional
$5.0 million cash consideration may be paid in the form of an earn-out payable
over three years based upon the operating performance of the business acquired
from Aero Support.
In addition to the $2.1 million paid at closing, a portion of the Cash
Purchase Price consisted of the issuance of (i) a promissory note in the
aggregate principal amount of $9.0 million, which matured, and was paid, on
September 17, 1997, bearing interest at the so called "prime" rate of interest
charged from time to time by Barnett Bank, N.A. (Kellstrom's senior lender) on
short term loans and (ii) two promissory notes in the aggregate principal amount
of $2.7 million maturing January 15, 1998 and bearing interest at the same rate
(the "Aero Support Promissory Notes"). The financing for payment of the Cash
Purchase Price is being funded through the Company's $55.0 million revolving
credit facility with Barnett Bank, N.A. (the "Revolving Credit Facility").
Borrowings under the Revolving Credit Facility bear interest at .25% below the
prime rate or at LIBOR plus 225 basis points and are secured by substantially
all the assets of the Company.
Aero Support was an international after market reseller of turbojet
engines and engine parts for helicopters and large transport aircraft. Aero
Support had a customer base that includes domestic and foreign operators,
commercial and industrial enterprises and engine overhaul facilities. Its main
product lines are distinct from those of Kellstrom. Aero Support's primary focus
was on the Allison (Rolls Royce) T56/501 engine, which powers the military's
Hercules C-130 aircraft, the most widely used para-military transport aircraft
in the world, and the Allison 250, with 16,000 units actively in use by
helicopters. During 1996, Aero Support served 495 customers worldwide from its
headquarters in New York and its additional facility in Louisiana.
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Prior to the Aero Support Acquisition, the Company's business was
focused exclusively on the commercial jet engine industry. With the addition of
Aero Support's business, Kellstrom entered the large transport aircraft and
commercial helicopter engine and engine parts markets.
AEROCAR ACQUISITION
On October 14, 1997, the Company, through a wholly owned subsidiary,
acquired from Aerocar Aviation Corp. ("Aerocar") a portfolio of commercial
aircraft and jet engines, all of which are under operating leases (the "Aerocar
Acquisition"). The leases expire beginning in early 1998 through spring of 2002.
The consideration paid by the Company consisted of $20.3 million in cash. The
Company funded the Aerocar Acquisition with a portion of the proceeds from the
offering of the Notes.
1997 RESULTS
The Company recently announced the following results of operation and
financial condition for the year ended, and as at, December 31, 1997:
KELLSTROM INDUSTRIES, INC.
Consolidated Condensed Statement of Earnings
<TABLE>
<CAPTION>
Twelve Months
Ended
December 31,
1997
------------
<S> <C>
Net revenues $79,439,149
Cost of goods sold 51,394,988
-----------
Gross profit 28,044,161
Selling, general and administrative 8,877,598
Depreciation and amortization (including goodwill) 1,555,673
-----------
Operating income 17,610,890
Interest expense -- net of interest income 3,991,212
------------
Income before income taxes 13,619,678
Income taxes 5,077,159
-----------
Net income $ 8,542,519
===========
Net income per share -- basic $ 1.18
Weighted average number of shares -- basic 7,266,534
Net income per share -- diluted $ .95
Weighted average number of shares -- diluted 9,394,439
</TABLE>
KELLSTROM INDUSTRIES, INC.
Consolidated Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Cash and equivalents $ 462,676
Accounts receivable, net 10,189,082
Inventory 75,897,764
Other current assets 6,714,644
------------
Total current assets 93,264,166
Property, plant and equipment, net 5,027,096
Intangible assets, net 30,789,873
Other assets 5,700,266
------------
Total assets $134,781,401
============
Accounts payable and accrued expenses $ 11,180,725
Current portion of notes payable and other current liabilities 7,838,800
------------
Total current liabilities 19,019,525
Long-term debt and other long-term liabilities 65,849,956
------------
Total liabilities 84,869,481
Stockholders' equity 49,911,920
------------
Total liabilities and stockholders' equity $134,781,401
============
</TABLE>
The consolidated financial statements set forth above include all
adjustments necessary to a fair statement of the results of operations for the
period presented. All such adjustments are of a normal, recurring nature.
Revenues increased by 219% to $79,439,149 for the year ended December
31, 1997, compared to $24,921,587 for the year ended December 31, 1996. Of this
increase, approximately $21 million was internal growth and the remaining
growth resulted from the IASI Acquisition (as defined under the caption "Risk
Factors -- Growth Strategy and Risks Relating to Acquisitions") and the Aero
Support Acquisition.
INTEGRATED TECHNOLOGY ACQUISITION
On February 27, 1998, Kellstrom signed a definitive agreement pursuant
to which a wholly owned subsidiary of Kellstrom will acquire substantially all
the assets and liabilities of Integrated Technology Corp. ("ITC") for
approximately $20 million in cash plus an earn-out of up to $10 million payable
over a three-year period based on certain specified criteria (the "ITC
Acquisition"). Kellstrom expects to fund the purchase from its Revolving
Credit Facility. The Company is currently negotiating with Barnett Bank,
N.A. to increase the amount of borrowings available under the Revolving
Credit Facility from $55 million to $100 million. Closing of the ITC
Acquisition, which is scheduled to take place within 30 days of signing, is
subject to completion of certain legal due diligence requirements by Kellstrom
and compliance with the Hart-Scott-Rodino Antitrust Improvements Act.
ITC is an after-market supplier of jet engines and jet engine parts
for the airline industry. It also provides related services such as engine
leasing. ITC's principal product line features the Rolls Royce RB-211, Pratt &
Whitney JT8D and Rolls Royce Allison models, and, to a lesser extent, it
supplies Pratt & Whitney JT9D engines and parts.
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<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those projected or contemplated
in the forward-looking statements as a result of certain of the risk factors
set forth below and incorporated by reference in this Prospectus. In addition to
the other information contained and incorporated by reference in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing the Notes or the
Shares.
RISK FACTORS RELATED TO THE COMPANY
Limited Operating History; Potential Fluctuations in Operating Results.
The Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. Although the Company has historically
experienced increasing net sales, the Company may experience significant
fluctuations in its net sales, gross margins and operating results in the
future, both on an annual and a quarterly basis, caused by various factors,
including general economic conditions, specific economic conditions in the
commercial aviation industry, the availability, package size and price of
surplus aviation material, the size and timing of customer orders, returns by
and allowances to customers and the cost of capital to the Company. In a
strategic response to a changing, competitive environment, the Company may elect
from time to time to make certain pricing, product or marketing decisions, and
any such decisions could have a material adverse effect on the Company's
periodic results of operations, including net sales and net income from quarter
to quarter. A large portion of the Company's operating expenses are relatively
fixed. Since the Company typically does not obtain long-term purchase orders or
commitments from its customers with respect to the sale of engines or aircraft
parts, it must anticipate the future volume of orders based upon the historic
purchasing patterns of its customers and upon its discussions with its customers
as to their future requirements. Cancellations, reductions or delays in orders
by a customer or group of customers could have a material adverse effect on the
Company's business, financial condition and results of operations. Therefore,
comparisons of recent net sales and operating results of the Company should not
be taken as indicative of the results of operations that can be expected in the
future. There can be no assurance that the net sales and operating results of
the Company will continue at their current levels or will grow, or that the
Company will be able to achieve sustained profitability on a quarterly or annual
basis.
Management of Growth. The Company has recently experienced significant
expansion that has placed substantial demands upon its management, systems and
resources, finance and administrative operations. The Company's ability to
manage
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<PAGE>
its future growth, if any, will require the Company to continually improve its
financial and management controls, reporting systems and procedures on a timely
basis, implement new systems as necessary and expand, train and manage its
workforce. There can be no assurance that the Company's controls, systems or
procedures will continue to be adequate to support the Company's operations. The
failure of the Company's management to respond effectively to changing business
conditions would have a material adverse effect upon the Company's business,
operating results and financial condition.
Growth Strategy and Risks Relating to Acquisitions. A key element of the
Company's strategy involves growth through the acquisition of additional
inventories of aircraft spare parts and the acquisition of other companies,
assets or product lines that would complement or expand the Company's existing
aircraft spare parts redistribution and inventory management services business.
The Company's ability to grow by acquisition is dependent upon, and may be
limited by, the availability of suitable aircraft parts inventories, acquisition
candidates and capital, and by restrictions contained in the Company's credit
agreements. The Company completed the acquisition of substantially all of the
assets and certain liabilities of International Aircraft Support, L.P. ("IASI")
in January 1997 (the "IASI Acquisition") and the Aero Support Acquisition in
September 1997. The process of seeking to integrate an acquired company's
business into the Company's operations may result in ongoing and extraordinary
operating difficulties and expenditures, may absorb significant management
attention that would otherwise be available for the ongoing development of the
Company's business and may result in charges against income. In addition, future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's operating results and
financial condition. There can be no assurance that the Company will be able to
consummate future acquisitions on satisfactory terms. The Company is currently
evaluating a number of acquisition opportunities and is at varying stages of
negotiation with respect to such acquisitions. No commitments or binding
agreements have been entered into to date and accordingly no assurance can be
given that any of the acquisitions currently being considered will be
consummated. See "The Company -- Recent Developments."
Uncertain Supply of Inventory. The Company obtains its inventories of
aftermarket whole aircraft engines and engine components by purchasing surplus
aircraft engines and components. There is not an organized market for surplus
aircraft engines and components and the Company must rely on field
representatives and personnel, advertisements and its reputation as a buyer of
surplus aircraft engines and components in order to generate opportunities to
purchase these materials. The market for bulk sales of surplus aircraft engines
and components is highly competitive, in some instances involving a bidding
process. While the Company
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has been able to purchase surplus aircraft engines in this manner successfully
in the past, there can be no assurance that surplus inventories of the type
containing engine components required by the Company's customers will be
available on acceptable terms when needed in the future or that the Company will
continue to compete effectively in the purchase of surplus materials.
Dependence on Third-Party Aircraft Engine Repair Facilities. The Company
is dependent on third-party Federal Aviation Administration ("FAA") certified
repair facilities to perform repair services to bring surplus aircraft engines
held for resale and certain engine components into a condition of airworthiness
so that the Company can then sell such equipment to its customers. Third-party
repair facilities experience heavy workloads or may allocate their resources to
customers with which they have entered into long-term, regularly scheduled
aircraft engine and airframe maintenance agreements and thereby delay the
services to be provided to the Company.
The repair facilities utilized by the Company are responsible for
inspecting and certifying engines and aircraft parts to be of serviceable
quality. The Company does not have direct control over the quality of repairs
performed by such repair facilities or the accuracy of the airworthiness
condition designated by such facility. It is possible that engines and aircraft
parts could pass inspection by the Company, be sold by the Company and be
incorporated into an aircraft, and subsequently be determined to be unsafe or in
need of further repair. In such event, the FAA has the authority to take actions
which may include the grounding of an aircraft which contains such parts.
Additionally, the customer who purchased such engines or aircraft parts could
demand a replacement engine or aircraft part. While the Company has insurance
coverage to cover related losses, the effect of such a development on passenger
confidence and customer relations could have a material adverse effect upon the
Company.
Customer Concentration. The Company's pro forma net sales to its five
largest customers accounted for approximately 41% of total pro forma net sales
for the year ended December 31, 1996 and 37% of total pro forma net sales for
the nine months ended September 30, 1997. Specifically, for the year ended
December 31, 1996, AAR Corp. and The AGES Group accounted for 23.2% and 18.7%
of the Company's sales, respectively. In addition, for the nine months ended
September 30, 1997, SwissAir and Lufthansa accounted for 12.4% and 12.2% of
the Company's sales, respectively. In addition, certain significant customers
vary from period to period as a result of the large unit prices associated
with whole aircraft engine sales. The loss of, or significant curtailments of
purchases by, the Company's significant customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
Customer Credit Risks. The Company's inability to collect receivables
from a substantial sale could adversely affect the Company's financial position
and results of operations for a particular period although Company policy is to
generally sell whole engines for cash at closing. Although Kellstrom's bad debt
expense was less than 0.1% of sales for the years ended December 31, 1995 and
1996, the Company
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<PAGE>
anticipates that it may incur greater bad debt losses in the future as its
customer base grows and the Company experiences greater exposure to its
customers as a result, in part, of the implementation of a program for the
leasing of aircraft engines and airframes. There can be no assurance that the
Company will not incur significant bad debt losses in the future.
Dependence upon Key Personnel. The Company depends upon the efforts of
the officers and directors of the Company. The loss of the services of such key
personnel could have a material adverse effect on the Company's ability to
successfully achieve its business objectives. Although each of the key employees
has executed an employment agreement which prohibits him from competing against
the Company for a specified period of time, there can be no assurance that such
remedy will be available to the Company or that such protection will mitigate
any losses incurred as a result of termination of employment.
Product Liability. The Company's business exposes it to possible claims
for personal injury or death which may result from the failure of an aircraft
spare part sold by it or an engine or aircraft owned and leased by it. There
can be no assurance that claims will not arise in the future or that such
insurance coverage will be adequate. Although, the Company currently maintains
product liabilitity insurance coverage in the amount of $300 million on
an aggregate and per claim basis, there can be no assurance that such insurance
coverage can be maintained in the future at an acceptable cost. Any such
liability not covered by insurance could have a material adverse effect on the
financial condition of the Company.
YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company
has engaged a software consulting firm to replace its accounting and inventory
management software programs to be Year 2000 compliant. The Company believes
that by replacing these software programs, its software systems will be Year
2000 compliant. There can be no assurance, however, that replacing such
software programs will result in Year 2000 compliant software systems.
The Company expects the conversion efforts to be completed by the end of 1999.
Management does not expect the financial impact of making the required system
changes to be material to the Company's consolidated financial position,
results of operations or cash flows which are being funded through operating
cash flows.
RISK FACTORS RELATED TO THE INDUSTRY
Dependence on the Condition of the Airline Industry. Aircraft engine and
engine parts pricing is impacted to a degree by the overall economic condition
of the airline industry, which has historically been volatile. The demand for
after-market engines and engine parts is driven primarily by flying hours or
cycles. Regardless of the profitability of the airline industry, parts must be
serviced or replaced at scheduled intervals. As such, the demand for
after-market parts is a function of the level of worldwide air traffic.
Additionally, factors such as the price of fuel affect the aircraft parts
market, since older aircraft (into which aircraft parts are most often placed)
become less viable as the price of fuel increases. The Company has not operated
during a significant downturn in the aviation industry. During such a downturn,
there may be reduced overall demand for engines and aircraft parts, lower
selling prices for the Company's products, and increased credit risk associated
with doing business with industry participants. There can be no assurance that
economic and other factors which might affect the airline industry will not have
an adverse impact on the Company's results of operations.
-11-
<PAGE>
<PAGE>
Competition. The aviation parts after-market is highly competitive.
Competition is based on product quality, the ability to provide needed parts
quickly and price. The largest segment of the after-market is served by OEMs.
However, the relatively high overhead and slow response times which characterize
these large organizations can present a handicap in a fast-moving,
price-sensitive marketplace. OEMs generally concentrate on selling new parts,
leaving the market in serviceable and refurbished parts to other suppliers.
OEM-manufactured new parts generally do not compete with refurbished parts.
The largest resellers include companies such as AAR Corp. and AGES
Group. There are approximately 10 to 15 midsize resellers including the Company.
A large portion of the market revenue is generated by over 50 small after-market
suppliers and brokers. As a result of industry consolidation, management expects
that a number of these smaller operators will either be acquired or will have
difficulty competing in this changing market. There can be no assurance that the
Company will continue to compete effectively against present and future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, the engine parts supply business has been reshaped by the
widespread adoption of ILS -- the Inventory Locator Service. The ILS lists the
availability of thousands of types of parts from brokers, distributors, repair
facilities and airlines. The listing includes the quantity of parts available,
the condition of the parts, when the parts are available and a contact for more
information. The ILS has created a much freer flow of information concerning the
supply and demand for particular parts. Dealers now must compete not only on the
basis of their relationships with customers and knowledge regarding a potential
source for products, but also on the quality of the parts available, the
documentation tracing the history of the parts and the price.
Government Regulation. The aviation industry is highly regulated in the
United States by the FAA and the equivalent regulatory agencies in other
countries. While the Company's reselling business is not regulated, the aircraft
engines, engine components and airframe material which the Company sells to its
customers must be accompanied by documentation which enables the customer to
comply with applicable regulatory requirements. There can be no assurance that
new and more stringent government regulations will not be adopted in the future
or that any such new regulations, if enacted, would not have an adverse impact
on the Company.
Before engine components may be installed in an aircraft engine, they
must meet certain standards of airworthiness established by the FAA or the
equivalent regulatory agencies in other countries. Specific regulations vary
from country to country, although regulatory requirements in other countries are
generally satisfied
-12-
<PAGE>
<PAGE>
by compliance with FAA requirements. Engine components must also be traceable to
sources deemed acceptable by such agencies. Although the Company believes it
complies with the highest level of such regulatory standards, standards may
change in the future, requiring engine components already contained in the
Company's inventory to be scrapped or modified. Aircraft engine manufacturers
may also develop new engine components to be used in lieu of engine components
already contained in the Company's inventory. In all such cases, to the extent
that the Company has such engine components in its inventory, their value may be
reduced.
RISK FACTORS RELATED TO THE NOTES
Subordination. The Notes are unsecured and subordinated in right of
payment in full to all existing and future Senior Indebtedness of the Company.
Under the Indenture (as defined), the Notes are subordinated to the Company's
long-term debt and capital leases, any amounts outstanding under its line of
credit and the Aero Support Promissory Notes. As a result of such subordination,
in the event of any insolvency, liquidation or reorganization of the Company or
upon acceleration of the Notes due to an Event of Default (as defined in the
Indenture), the assets of the Company will be available to pay obligations on
the Notes and any other subordinated indebtedness of the Company only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes and any other
subordinated indebtedness of the Company then outstanding. The Indenture does
not prohibit or limit the incurrence of Senior Indebtedness or the incurrence of
other indebtedness and other liabilities by the Company. The incurrence of such
indebtedness could adversely affect the Company's ability to pay its obligations
under the Notes. As of December 31, 1997, the Company had $19.1 million of
indebtedness outstanding that constituted Senior Indebtedness.
Absence of Public Market for the Notes; Restrictions on Transferability.
The Notes are eligible for trading through the PORTAL market. Although the
Initial Purchaser has informed the Company that it is currently making a market
in the Notes, it is not obligated to do so and any such market making may be
discontinued at any time without notice. In addition, such market making
activity is subject to the limits imposed by the Securities Act and the Exchange
Act. Accordingly, there can be no assurance as to the development or liquidity
of any market for the Notes. If an active market for the Notes fails to be
sustained, the trading price of such Notes could be materially adversely
affected. The Company does not intend to apply for listing of the Notes on any
securities exchange or for quotation through The Nasdaq National Market.
Limitation on Repurchase of Notes upon Change in Control. Upon the
occurrence of a Change in Control (as defined) each holder of Notes may require
the
-13-
<PAGE>
<PAGE>
Company to repurchase all or a portion of such holder's Notes. If a Change in
Control were to occur, there could be no assurance that the Company would have
sufficient financial resources or would be able to arrange financing to pay the
repurchase price for all Notes tendered by holders thereof. The Company's
ability to repurchase the Notes in such event may be limited by law, the
Indenture and the terms of other agreements relating to borrowings that
constitute Senior Indebtedness, as such indebtedness or agreements may be
entered into, replaced, supplemented or amended from time to time. The Company
may be required to refinance Senior Indebtedness in order to make any such
payment. If the Company is prohibited from repurchasing the Notes, such failure
would constitute an Event of Default under the Indenture, which may, in turn,
constitute a further default under certain of the Company's existing agreements
relating to borrowings and the terms of other indebtedness that the Company may
enter into from time to time. In such circumstances, the subordination
provisions in the Indenture would prohibit payments to the holders of the Notes.
Furthermore, the Company may not have the financial ability to repurchase the
Notes in the event that maturity of Senior Indebtedness is accelerated as a
result of a default under the applicable loan or similar agreement. See
"Description of Notes -- Repurchase at Option of Holders upon Change in
Control."
-14-
<PAGE>
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
the Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
---------------------------------------- -------------------------------
Pro Forma Pro Forma
1995 1996 1996(1) 1997 1997(2)
---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed charges 2.8 7.2 2.3 4.2 3.3
</TABLE>
The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings before income taxes plus fixed charges. Fixed charges
consist of interest on all indebtedness, including amortization of original
issue discount and issue costs related to outstanding long-term debt.
- ----------------------
(1) Gives pro forma effect to the IASI Acquisition and the Aero Support
Acquisition as if such acquisitions had been consummated as of January 1,
1996. See "The Company - - Recent Developments" and "Risk Factors -- Growth
Strategy and Risks Relating to Acquisitions."
(2) Gives pro forma effect to the Aero Support Acquisition as if such
acquisition had been consummated as of January 1, 1997. See "The Company --
Recent Developments" and "Risk Factors -- Growth Strategy and Risks
Relating to Acquisitions."
USE OF PROCEEDS
The Company will not receive any of the proceeds from sales of the Notes
or the Shares by the Selling Securityholders.
The Company received net proceeds of approximately $51.9 million
(after deduction of the Initial Purchaser's discounts and offering expenses). Of
such net proceeds, $26.4 million was used for the repayment of debt, $20.3
million was used in connection with the Aerocar Acquisition and the remainder
was used for working capital purposes.
SELLING SECURITYHOLDERS
The Notes were originally acquired from the Company by the Initial
Purchaser on October 10, 1997. The Initial Purchaser has advised the Company
that the Initial Purchaser resold the Notes in transactions exempt from the
registration requirements of the Securities Act to "qualified institutional
buyers" (as defined in Rule 144A of the Securities Act). These subsequent
purchasers, or their transferees, pledgees, donees or successors, may from time
to time offer and sell any or all of the Notes and/or Note Shares pursuant to
this Prospectus.
The Notes and the Note Shares are being registered pursuant to the
Registration Rights Agreement, dated October 10, 1997, between the Company and
the Initial Purchaser (the "Registration Rights Agreement") which provides that
the Company file the Registration
-15-
<PAGE>
<PAGE>
Statement with regard to the Notes and the Shares within 90 days of the latest
date of original issuance of the Notes and keep such Registration Statement
effective until the earlier of (i) the sale pursuant to the Registration
Statement of all the securities registered thereunder and (ii) the expiration of
the holding period applicable to such securities under Rule 144(k) under the
Securities Act or any successor provision. The Warrant Shares are being
registered primarily pursuant to the terms of the Warrants which provide the
holders of the Warrants the right to have the Warrant Shares included in
registration statements filed by the Company, subject to certain terms and
conditions set forth in the Warrants. The Additional Shares are being registered
pursuant to an agreement between the holder of the Additional Shares and the
Company pursuant to which, among other things, such holder agreed to exchange
warrants to purchase 500,000 shares of Common Stock at an exercise price of
$9.25 per share for the Additional Shares and the Company agreed to include
the Additional Shares in the Registration Statement. Although none of the
Selling Securityholders has advised the Company that it currently intends to
sell all or any of the Notes or Shares pursuant to this Prospectus, the Selling
Securityholders may choose to sell the Notes and/or Shares from time to time
upon notice to the Company. See "Plan of Distribution."
The following table sets forth certain information as of February 25,
1998 with respect to the security ownership of the Notes and February 27, 1998
with respect to the security ownership of the Warrants and the Additional
Shares. Except as set forth below, none of the Selling Securityholders has had
a material relationship with the Company or any of its predecessors or
affiliates within the past three years.
NOTES AND NOTE SHARES:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT SHARES OF
OF DEBENTURES PRINCIPAL SHARES OF COMMON STOCK COMMON
BENEFICIALLY OWNED AMOUNT BENEFICIALLY OWNED STOCK
PRIOR TO OFFERING OF PRIOR TO OFFERING UNDERLYING
---------------------- DEBENTURES ---------------------- DEBENTURES
NAME AMOUNT PERCENT BEING SOLD NUMBER PERCENT BEING SOLD
------ ------- ---------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deutsche Morgan Grenfell........ $2,750,000 5.1% $2,750,000 100,000 1.3% 100,000
Maril & Co. .................... $ 100,000 * $ 100,000 3,636 * 3,636
Massachusetts Mutual Life
Insurance Company .............. $1,650,000 3.1% $1,650,000 60,000 * 60,000
Massmutual Corporate Investors.. $ 350,000 * $ 350,000 12,727 * 12,727
Massmutual Participation
Investors ...................... $ 200,000 * $ 200,000 7,272 * 7,272
Massmutual Corporate Value
Partners Limited ............... $ 800,000 1.5% $ 800,000 29,090 * 29,090
Massmutual High Yield Partners
LLC ............................ $1,000,000 1.9% $1,000,000 36,363 * 36,363
Delaware Group Premium Fund,
Inc. ........................... $ 9,000 * $ 9,000 327 * 327
Delaware Group Equity Funds V,
Inc. ........................... $ 5,000 * $ 5,000 181 * 181
</TABLE>
-16-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT SHARES OF
OF NOTES PRINCIPAL SHARES OF COMMON STOCK COMMON
BENEFICIALLY OWNED AMOUNT BENEFICIALLY OWNED STOCK
PRIOR TO OFFERING OF PRIOR TO OFFERING UNDERLYING
---------------------- NOTES ---------------------- NOTES
NAME AMOUNT PERCENT BEING SOLD NUMBER PERCENT BEING SOLD
------ ------- ---------- ------ ------- -----------
<S> <C> <C> <C> <C> <C>
Delaware Group Global Dividend
and Income Fund, Inc. ..................... $ 87,500 * $ 87,500 3,181 * 3,181
Delaware Group Dividend and
Income Fund, Inc. ......................... $ 173,500 * $ 173,500 6,309 * 6,309
Castle Convertible Fund, Inc. ............. $ 500,000 * $ 500,000 18,181 * 18,181
HBK Securities Ltd. (1).................... $ 1,908,000 3.5% $ 1,908,000 69,381 * 69,381
HBK Offshore Fund Ltd. (1)................. $ 9,569,000 17.7% $ 9,569,000 347,963 4.4% 347,963
HBK Finance L.P. (2)....................... $ 7,273,000 13.5% $ 7,273,000 264,472 3.4% 264,472
Dean Witter Convertible Securities
Trust ..................................... $ 3,500,000 6.5% $ 3,500,000 127,272 1.6% 127,272
Zazove Convertible Fund, L.P. ............. $ 900,000 1.7% $ 900,000 32,727 * 32,727
AAM/Zazove Institutional Income
Fund, L.P. ................................ $ 2,000,000 3.7% $ 2,000,000 72,727 * 72,727
McMahan Securities Co., L.P. .............. $ 850,000 1.6% $ 850,000 30,909 * 30,909
Delta Airlines Master Trust ............... $ 2,000,000 3.7% $ 2,000,000 72,727 * 72,727
Port Authority of Allegheny
County Retirement and Disability
Allowance Plan for the Employees
Represented by Local 85 of the
Amalgamated Transit Union ................. $ 1,000,000 1.9% $ 1,000,000 36,363 * 36,363
Champion International
Corporation Master Retirement
Trust ..................................... $ 900,000 1.7% $ 900,000 32,727 * 32,727
The Dow Chemical Company
Employees' Retirement Plan ................ $ 1,500,000 2.8% $ 1,500,000 54,545 * 54,545
RJR Nabisco, Inc. Defined Benefit
Master Trust .............................. $ 800,000 1.5% $ 800,000 29,090 * 29,090
Calamos Investment Trust
Calamos Investment Fund ................... $ 800,000 1.5% $ 800,000 29,090 * 29,090
Associated Electric Gas &
Insurance Services ........................ $ 500,000 * $ 500,000 18,181 * 18,181
Catholic Mutual Relief Society of
America ................................... $ 270,000 * $ 270,000 9,818 * 9,818
Catholic Mutual Relief Society
Retirement Plan & Trust ................... $ 200,000 * $ 200,000 7,272 * 7,272
Century National Insurance
Company ................................... $ 530,000 * $ 530,000 19,272 * 19,272
Damask Capital Ltd. (3).................... $ 100,000 * $ 100,000 3,636 * 3,636
LLT Limited (4)............................ $ 25,000 * $ 25,000 909 * 909
TQA Vantage Fund Ltd....................... $ 1,000,000 1.9% $ 1,000,000 36,363 * 36,363
Chrysler Insurance Total Return............ $ 30,000 * $ 30,000 1,090 * 1,090
Orrington Investments L.P.................. $ 220,000 * $ 220,000 8,000 * 8,000
Orrington International Fund Ltd........... $ 130,000 * $ 130,000 4,727 * 4,727
Paloma Securities L.L.C. .................. $ 1,400,000 2.6% $ 1,400,000 50,909 * 50,909
NHBO L.P................................... $ 1,000,000 1.9% $ 1,000,000 36,363 * 36,363
Silverton International Fund Limited....... $ 1,100,000 2.0% $ 1,100,000 40,000 * 40,000
Forest Alternative Strategies Fund LP,
II Series A5M........................... $ 25,000 * $ 25,000 909 * 909
Forest Alternative Strategies Fund II LP
Series A-5.............................. $ 150,000 * $ 150,000 5,454 * 5,454
Forest Global Convertible Fund Series A-5.. $ 150,000 * $ 150,000 5,454 * 5,454
Forest Alternative Strategies Fund II,
LP Series A5I........................... $ 50,000 * $ 50,000 1,818 * 1,818
Other Selling Debentureholders (5)......... $ 6,495,000 12.0% $ 6,495,000 236,201 3.0% 236,201(5)
</TABLE>
WARRANT SHARES:
<TABLE>
<CAPTION>
Shares of Common Stock Shares of
Beneficially Owned Common Stock
Prior to Offering Underlying
------------------------ Per Warrants
NAME Number Percent Being Sold
------ ------- -------------
<S> <C> <C> <C>
The Equitable Life Assurance
Society the United States (6).................................... 305,660 3.9% 305,660
Diversified Strategies Fund, L.P. (7)............................ 28,918(8) * 4,375(8)
Metropolitan Capital Advisors, L.P. (7).......................... 4,375(9) * 4,375(9)
Metropolitan Capital Advisors International Limited (7).......... 33,250(10) * 21,250(10)
Bedford Falls Investors, L.P. (7)................................ 290,740(9) 3.7% 43,125(9)
Scoggin Capital Management, L.P. (7)............................. 12,500 * 12,500
</TABLE>
-17-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Zvi Bar-On (11).................................................. 75,000 * 75,000
Mordechai Markowicz (11)......................................... 87,500 1.1% 87,500
Michael Navon (11)............................................... 87,500 1.1% 87,500
Helix Capital Services, L.L.C. (12).............................. 7,500 * 7,500
John Gleason (13)................................................ 94,500(14) 1.2% 10,000
JW Charles Securities, Inc. (15)................................. 25,000 * 25,000
David Jordan (15)................................................ 45,500 * 37,500
Barry Zelin (15)................................................. 62,500 * 37,500
</TABLE>
-18-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ADDITIONAL SHARES: BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF
------------------------ COMMON STOCK
NAME NUMBER PERCENT BEING SOLD
------ ------- -------------
<S> <C> <C> <C>
General William Lyon (16)............................................ 274,390 3.5% 274,390
</TABLE>
- -----------------------
* Less than 1%
(1) HBK Investments L.P. has sole voting and investment power with respect
to these securities.
(2) HBK Investments L.P. has shared voting and investment power with respect
to these securities.
(3) Zazove Associates, LLC, as investment advisor, has discretionary voting and
investment authority with respect to these securities.
(4) Forest Investment Management, L.P. has shared investment power with respect
to these securities.
(5) Information regarding these persons or entities will be added by supplement
to this Prospectus. The number of shares underlying these warrants includes
an additional 20 shares which may be issued upon the conversion of the
Notes in the event that ownership of the Notes is consolidated resulting
in fewer fractional shares.
(6) On January 15, 1997, the Equitable Life Assurance Society of the United
States ("Equitable") entered into a Securities Purchase Agreement with the
Company, pursuant to which the Company issued and sold to Equitable
$15,000,000 in aggregate principal amount of the Company's 11 3/4% Senior
Subordinated Notes due 2004 and warrants to purchase 305,660 shares
(subject to adjustment) of Common Stock at an exercise price equal to
$10.00 per share.
On October 10, 1997, Equitable and the Company entered into the
Consent and Third Amendment whereby Equitable consented to (a) the issuance
and sale of the Notes and (b) the redemption by the Company of $3,750,000
principal amount of notes held by Equitable at a redemption price equal to
the principal amount of the notes so redeemed plus accrued and unpaid
interest and a premium equal to 1% of the principal amount thereof.
(7) The IASI Acquisition was partially financed from the proceeds of a
$6,000,000 subordinated bridge loan according to an agreement by and among
the Company, on the one hand, and Diversified Strategies Fund, L.P.,
Bedford Falls Investors, L.P., Metropolitan Capital Advisors, L.P.,
Metropolitan Capital Advisors International Limited and Scoggin Capital
Management, L.P. ("Scoggin"), (collectively, the "Lenders"), on the other
hand. The Lenders also obtained warrants to purchase an aggregate of 85,625
shares of Common Stock at an exercise price of $10 per share, which Common
Stock is being registered hereby.
(8) Metropolitan Capital Partners II L.P., as investment advisor, has sole
voting and investment power with respect to these securities.
(9) Metropolitan Capital Advisors L.P., as general partner of Bedford Falls
Investors, L.P., may also be deemed to beneficially own the shares of
Common Stock and Warrants held by Bedford Falls Investors, L.P.
(10) Metropolitan Capital Partners III, L.P., as investment manager, has the
sole voting and investment power with respect to these securities.
(11) On September 10, 1997, the Company completed the Aero Support Acquisition,
described above under the caption "The Company - Recent Developments."
Messrs. Bar-On, Markowicz and Navon were shareholders of Aero Support. The
aggregate of 250,000 shares registered hereby underlie warrants obtained by
Messrs. Bar-On, Markowicz and Navon as part of the consideration for the
Aero Support Acquisition.
(12) The Company has engaged Helix Capital Services, L.L.C. ("Helix Services")
to act as the Company's exclusive financial advisor with respect to merger
and acquisition transactions and as principal financial advisor with
respect to other transactions for an initial term of eighteen months
commencing January 1, 1997. Under the terms of the agreement, Helix
Services receives a monthly retainer of $25,000 and a success fee to be
determined by the Company on a per transaction basis, that is not lower
than 2% of the aggregate consideration paid in connection with the
applicable transaction. The shares of Common Stock of Helix Services being
registered hereby underly warrants obtained by Helix Services as a portion
of the transaction fee relating to the Aero Support Acquisition. As a
result of ownership interest helds by Zivi R. Nedivi, the Chief Executive
Officer and President of the Company, and Yoav Stern, the Chairman of the
Board of the Company, in Helix Services, it is anticipated that a
substantial portion of transaction fees, if any, paid by the Company to
Helix Services will in turn be distributed to Messrs. Nedivi and Stern.
Monthly retainer payments under the engagement letter are in lieu of fees
payable to Mr. Stern as Chairman of the Board of the Company.
(13) This Selling Securityholder is the Executive Vice President, Treasurer and
a Director of the Company.
(14) Includes 70,000 shares of Common Stock issuable upon currently exercisable
options.
(15) This Selling Securityholder is registering shares underlying a warrant to
purchase Common Stock at an exercise price of $8.75 per share.
(16) The consideration paid by the Company for the IASI Acquisition consisted of
twenty five million dollars ($25,000,000) in cash, warrants issued to
General William Lyon to purchase an aggregate of 500,000 shares of Common
Stock, at an exercise price of $9.25 per share, and the assumption of
certain debt of IASI. General William Lyon and his affiliates were the sole
beneficial owners of all of the equity interests of IASI. Simultaneously
with the filing of this Registration Statement, the 500,000 warrants were
exchanged for 274,390 shares of Common Stock being registered hereby.
Information concerning the Selling Securityholders may change from time
to time and will be set forth in Supplements to this Prospectus. As of the date
of this Prospectus, the aggregate principal amount of Notes outstanding is
$54,000,000.
-19-
<PAGE>
<PAGE>
Because the Selling Securityholders may offer all or some of the Notes
and shares of Common Stock issued upon conversion thereof pursuant to the
offering contemplated by this Prospectus, and because there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the Notes or shares of Common Stock that will be held by the Selling
Securityholders after completion of this offering, no estimate can be given as
to the principal amount of Notes or shares of Common Stock that will be held by
the Selling Securityholders after completion of this offering. See "Plan of
Distribution."
PLAN OF DISTRIBUTION
The Notes and the Shares are being registered to permit public secondary
trading of such securities by the holders thereof from time to time after the
date of this Prospectus. The Company has agreed, among other things, to bear all
expenses in connection with the registration of the Notes and the Shares covered
by this Prospectus.
The Company will not receive any of the proceeds from the offering of
Notes and the Shares by the Selling Securityholders. The Selling Securityholders
(and their donees and pledgees) may sell all or a portion of the Notes and
Shares beneficially owned by them and offered hereby from time to time on any
exchange on which the securities are listed on terms to be determined at the
times of such sales. The Selling Securityholders may also make private sales
directly or through a broker or brokers. Alternatively, any of the Selling
Securityholders may from time to time offer the Notes or Shares beneficially
owned by them through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, commissions or concessions
from the Selling Securityholders and the purchasers of the Notes or Shares for
whom they may act as agent. The aggregate proceeds to the Selling
Securityholders from the sale of the Notes or Shares offered by them hereby will
be the purchase price of such Notes or Shares less discounts and commissions, if
any.
The Notes and the Shares may be sold from time to time in one or more
transactions at fixed offering prices, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the holders of such securities or by agreement between such
holders and underwriters or dealers who may receive fees or commissions in
connection therewith.
The outstanding Common Stock is publicly traded on the Nasdaq National
Market and the Shares have been approved for listing upon official notice of
issuance. The Initial Purchaser has informed the Company that it is making a
market in the Notes; however, it is not obligated to do so and any such
market-making may be discontinued at any time without notice, in the sole
discretion of the Initial Purchaser. The Company does not intend to apply for
listing of the Notes on any securities exchange or for quotation through the
Nasdaq National Market.
-20-
<PAGE>
<PAGE>
Accordingly, no assurance can be given as to the development or liquidity of any
trading market that may develop for the Notes.
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the Notes or the Shares may be deemed to be "underwriters"
within the meaning of the Securities Act, in which event any commissions
received by such broker-dealer, agents or underwriters and any profits realized
by the Selling Securityholders on the resales of the Notes or the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
In addition, any securities covered by this Prospectus which qualify for
sale pursuant to Rule 144, Rule 144A or any other available exemption from
registration under the Securities Act may be sold under Rule 144, Rule 144A or
such other available exemption rather than pursuant to this Prospectus. There is
no assurance that any Selling Securityholder will sell any or all of the Notes
or Shares described herein, and any Selling Securityholder may transfer, devise
or gift such securities by other means not described herein.
The Notes were originally sold by the Company to the Initial Purchaser
in October and November 1997 in a private placement. The Company agreed to
indemnify and hold the Initial Purchaser harmless against certain liabilities
under the Securities Act that could arise in connection with the sale of the
Notes by the Initial Purchaser. The Registration Rights Agreement and each of
the warrants provides for the Company and the Selling Securityholders to
indemnify each other against certain liabilities arising under the Securities
Act.
The Registration Statement has been filed by the Company pursuant to the
Registration Rights Agreement. The Company has agreed to use its best efforts to
keep the Registration Statement effective until the earlier of the date that is
two years after the latest date of original issuance of the Notes and the date
that either (x) all Note Shares have been sold under the Registration Statement
or sold to the public under Rule 144 or (y) all Note Shares are saleable under
Rule 144(k) under the Securities Act. The Registration Rights Agreement provides
that the Company may suspend the use of this Prospectus in connection with the
sales of Notes and Note Shares by holders for a period not to exceed 30 days in
any three-month period, and not more than one time in any three-month period,
under certain circumstances relating to pending corporate developments, public
filings with the Commission and similar events. The Company has agreed to pay
predetermined liquidated damages to those Selling Securityholders owning Notes
or Note Shares who have requested to sell pursuant to the Registration Statement
if the Registration Statement is not timely filed or if this Prospectus is
unavailable for periods in excess of those permitted above. The Company has
further agreed, if such failure to file or unavailability continues for an
additional thirty-day period, to pay predetermined liquidated damages to all
Selling Securityholders, owning Notes or Note Shares, whether or not such holder
has requested to sell pursuant to the Registration
-21-
<PAGE>
<PAGE>
Statement. Expenses of preparing and filing the Registration Statement and all
post-effective amendments will be borne by the Company.
The Warrant Shares have been included in this Prospectus and the
Registration Statement primarily pursuant to incidental registration rights
included in such Warrants or otherwise upon agreement between the holder of such
Warrants and the Company. The Additional Shares have been included in this
Prospectus and the Registration Statement pursuant to an agreement between the
holder thereof and the Company. Pursuant to such agreement, among other things,
the holder agreed to exchange warrants to purchase 500,000 shares of Common
Stock at an exercise price of $9.25 per share for the Additional Shares and the
Company agreed to include the Additional Shares in the Registration Statement.
DESCRIPTION OF NOTES
The Notes have been issued under an indenture, dated as of October 10,
1997 (the "Indenture"), between the Company and First Union National Bank, as
Trustee (the "Trustee"). A copy of the Indenture and the Registration Rights
Agreement is available from the Trustee upon request by a registered holder of
Notes. The following summaries of certain provisions of the Notes, the Indenture
and the Registration Rights Agreement do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Notes, the Indenture and the Registration Rights Agreement,
including the definitions therein of certain terms which are not otherwise
defined in this Prospectus. Wherever particular provisions or defined terms of
the Indenture (or of the form of Note which is a part thereof) or the
Registration Rights Agreement are referred to, such provisions or defined terms
are incorporated herein by reference.
GENERAL
The Notes represent unsecured general obligations of the Company
subordinate in right of payment to certain other obligations of the Company as
described under "-- Subordination of Notes," and convertible into Common Stock
as described under " -- Conversion of Notes." The Notes will be limited to
$54,000,000 in aggregate principal amount, (including $4,000,000 aggregate
principal amount of Notes issued pursuant to the exercise of a portion of the
Initial Purchaser's over allotment option) will be issued only in denominations
of $1,000 or any multiple thereof and will mature on October 15, 2002, unless
earlier redeemed at the option of the Company or repurchased by the Company at
the option of the holder upon a Change in Control.
The Indenture does not contain any financial covenants or any
restrictions on the payment of dividends, the incurrence of Senior Indebtedness
or the issuance or repurchase of securities of the Company. The Indenture
contains no covenants or other provisions to afford protection to holders of
Notes in the event of a highly
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leveraged transaction or a change in control of the Company except to the extent
described under " -- Repurchase at Option of Holders upon Change in Control."
The Notes bear interest at the rate of 5 3/4% per annum, payable on
April 15 and October 15, commencing on April 15, 1998, to holders of record at
the close of business on April 1 and October 1, respectively. However, with
respect to a Note or portion thereof called for redemption on a redemption date,
or repurchased in connection with a Change in Control on a Repurchase Date (as
defined below) during the period from the Record Date to (but excluding) the
next succeeding Interest Payment Date, accrued interest shall be payable on the
redemption date or Repurchase Date to the holder of the Note or portion thereof
redeemed or repurchased. Notes converted after the Record Date and before the
next succeeding Interest Payment Date are required to be accompanied by funds
equal to the amount of interest payable on such succeeding Interest Payment Date
on the principal amount so converted (see " -- Conversion of Notes" below).
Interest may, at the Company's option, be paid by check mailed to such holders,
provided that a holder of Notes with an aggregate principal amount in excess of
$5,000,000 will be paid by wire transfer in immediately available funds at the
election of such holder. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal and premium, if any, are payable, and the Notes may be
presented for conversion, registration of transfer and exchange, without service
charge, at the office of the Company maintained for such purpose in Richmond,
Virginia, which shall initially be the office or agency of the Trustee.
The Indenture is governed by and construed under the laws of the
Commonwealth of Virginia. The Registration Rights Agreement is governed by and
construed under the laws of the State of Delaware.
BOOK ENTRY, DELIVERY AND FORM
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and multiples thereof.
Global Note, Book-Entry Form. The Notes offered hereby will be evidenced
by a global note (the "Registered Global Note"), which will be deposited with,
or on behalf of the Depository Trust Company, and registered in the name of Cede
& Co. ("Cede") as DTC's nominee. Except as set forth below, the Registered
Global Note may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
Purchasers of the Notes offered hereby may hold their interests in the
Registered Global Note directly through DTC if such purchaser is a participant
in DTC, or indirectly through organizations which are participants in DTC (the
"Participants"). Transfers between Participants will be effected in the ordinary
way in accordance with DTC rules and will be settled in same-day funds. The laws
of
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some states require that certain persons take physical delivery of securities in
definitive form. Consequently, the ability to transfer beneficial interest in
the Registered Global Note to such persons may be limited.
Persons who are not Participants may beneficially own interests in the
Registered Global Note held by DTC only through Participants or certain banks,
brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC, is
the registered owner of the Registered Global Note, Cede for all purposes will
be considered the sole holder of the Registered Global Note. Except as provided
below, owners of beneficial interests in the Registered Global Note will not be
entitled to have certificates registered in their names, will not receive or be
entitled to receive physical delivery of certificates in definitive form and
will not be considered holders thereof.
Payment of interest on and the redemption price of the Registered Global
Note will be made to Cede, the nominee of DTC, as the registered owner of the
Registered Global Note, by wire transfer of immediately available funds on the
applicable payment date therefor. Neither the Company, the Trustee nor any
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Registered Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment
of interest on, or the redemption price of, the Registered Global Note, DTC's
practice is to credit Participants' accounts on the applicable payment date
therefor with payments in amounts proportionate to their respective beneficial
interests in the Notes represented by the Registered Global Note, as shown on
the records of DTC (adjusted as necessary so that such payments are made with
respect to whole Notes only), unless DTC has reason to believe that it will not
receive payment on such payment date. Payments by Participants to owners of
beneficial interests in Notes represented by the Registered Global Note held
through such Participants will be the responsibility of such Participants, as is
now the case with securities held for the accounts of customers registered in
"street name."
Holders who desire to convert their Notes into Common Stock pursuant to
the terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Registered Global Note
to pledge such interest to persons or entities that do not participate in the
DTC system, or otherwise take
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actions in respect of such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below), only at the direction of
one or more Participants to whose account DTC interests in the Registered Global
Note are credited and only in respect of the principal amount of the Notes
represented by the Registered Global Note as to which such Participant or
Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities for its
Participants. DTC also facilitates the clearance and settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes to accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations
such as the Initial Purchaser. Certain of such Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly. The rules applicable to DTC and its
Participants are on file with the Securities and Exchange Commission.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Registered Global Note among
Participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. If DTC is
at any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by the Company within 90 days, the Company will
cause Notes to be issued in definitive form in exchange for the Registered
Global Note. None of the Company, the Trustee nor any of their respective agents
will have any responsibility for the performance by DTC, its Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in Registered Global Notes.
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Certificated Notes. Holders of Notes may request that their Notes be
issued in certificated form, and may request at any time that their interest in
a Registered Global Note be exchanged for a Note in certificated form.
Certificated Notes may be issued in exchange for Notes represented by the
Registered Global Note if no successor depositary is appointed by the Company as
set forth above under " -- Global Note, Book-Entry Form."
CONVERSION OF NOTES
The holders of Notes will be entitled at any time through the close of
business on the final maturity date of the Notes, subject to prior redemption or
repurchase, to convert any Notes or portions thereof (in denominations of $1,000
or multiples thereof) into Common Stock, at the conversion price $27.50 per
share, subject to adjustment as described below. Except as described below, no
adjustment will be made on conversion of any Notes for interest accrued thereon
or for dividends on any Common Stock issued upon conversion of the Notes.
If any Notes not called for redemption are converted after a Record Date
for the payment of interest and prior to the next succeeding Interest Payment
Date, such Notes must be accompanied by funds equal to the interest payable on
such succeeding Interest Payment Date on the principal amount so converted. No
such payment will be required if the Company exercises its right to redeem such
Notes on a redemption date that is an Interest Payment Date. The Company is not
required to issue fractional shares of Common Stock upon conversion of Notes
and, in lieu thereof, will pay a cash adjustment based upon the market price of
the Common Stock on the last Trading Day (as defined) prior to the date of
conversion. In the case of Notes called for redemption, conversion rights will
expire at the close of business on the fifth business day preceding the date
fixed for redemption, unless the Company defaults in payment of the redemption
price. A Note in respect of which a holder is exercising its option to require
repurchase upon a Change in Control may be converted only if such holder
withdraws its election to exercise its option in accordance with the terms of
the Indenture.
The initial conversion price of $27.50 per share of Common Stock is
subject to adjustment (under formulae set forth in the Indenture) in certain
events, including: (i) the issuance of Common Stock as a dividend or
distribution on Common Stock of the Company; (ii) certain subdivisions and
combinations of the Common Stock; (iii) the issuance to all holders of Common
Stock of certain rights or warrants to purchase Common Stock; (iv) the
distribution to all holders of Common Stock of shares of capital stock of the
Company (other than Common Stock) or evidences of indebtedness of the Company or
assets (including securities, but excluding those rights, warrants, dividends
and distributions referred to above and dividends and distributions in
connection with the liquidation, dissolution or winding up of the Company or
paid in cash); (v) dividends or other distributions consisting exclusively of
cash (excluding any cash portion of distributions referred to in clause (iv)) to
all holders of Common Stock to the extent that such distributions, combined
together with (A) all other such
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all-cash distributions made within the preceding 12 months in respect of which
no adjustment has been made plus (B) any cash and the fair market value of other
consideration payable in respect of any tender offers by the Company for Common
Stock concluded within the preceding 12 months in respect of 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 times the number of
shares of Common Stock then outstanding on the Record Date for such
distribution); (vi) the purchase of Common Stock pursuant to a tender offer made
by the Company or any of its subsidiaries to the extent that the same involves
an aggregate consideration that, together with (X) any cash and the fair market
value of any other consideration payable in any other tender offer by the
Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding such tender offer in respect of which no adjustment has been
made plus (Y) the aggregate amount of any such all-cash distributions referred
to in clause (v) above to all holders of Common Stock within the 12 months
preceding the expiration of such tender offer in respect of which no adjustments
have been made, exceeds 10% of the Company's market capitalization on the
expiration of such tender offer; and (vii) payment in respect of a tender offer
or exchange offer by a person other than the Company or any subsidiary of the
Company in which, as of the closing date of the offer, the Board of Directors is
not recommending rejection of the offer. If an adjustment is required to be made
as set forth in clause (v) above as a result of a distribution that is not a
quarterly dividend, such adjustment would be based upon the full amount of the
distribution. The adjustment referred to in clause (vii) above will only be made
if the tender offer or exchange offer is for an amount which increases that
person's ownership of Common Stock to more than 25% of the total shares of
Common Stock outstanding and, if the cash and value of any other consideration
included in such payment per share of Common Stock, exceeds the Current Market
Price per share of Common Stock on the business day next succeeding the last
date on which tenders or exchanges may be made pursuant to such tender or
exchange offer. The adjustment referred to in clause (vii) above will not be
made, however, if, as of the closing of the offer, the offering documents with
respect to such offer disclose a plan or an intention to cause the Company to
engage in a consolidation or merger of the Company or a sale of the Company's
assets, as an entirety or substantially as an entirety.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination involving the Company or a sale or
conveyance to another person of the property and assets of the Company as an
entirety or
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substantially as an entirety, in each case as a result of which holders of
Common Stock shall be entitled to receive stock, other securities, other
property or assets (including cash) with respect to or in exchange for such
Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had such Notes been converted into Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance assuming that a holder of Notes would not have
exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock (or
other transaction) which results in any adjustment of the conversion price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Federal Income Tax
Considerations."
The Company from time to time may, to the extent permitted by law,
reduce the conversion price of the Notes by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days' notice of
such decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in the
conversion price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Federal Income Tax Considerations."
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not entitled to any sinking fund. At any time on or after
October 15, 2000, all or any part of the Notes will be redeemable at the
Company's option on at least 15 but not more than 60 days' notice, as a whole
or, from time to time in part, at the following prices (expressed in percentages
of the principal amount), together with accrued interest to, but excluding, the
date fixed for redemption.
If redeemed during the 12-month period beginning October 15:
REDEMPTION
YEAR PRICE
---- ----------
2000....................................... 102.30%
2001....................................... 101.15%
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and 100% at October 15, 2002; provided that any semi-annual payment of interest
becoming due on the date fixed for redemption shall be payable to the holders of
record on the relevant Record Date of the Notes being redeemed.
If fewer than all the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed in principal amounts of $1,000 or multiples thereof by
lot or, in its discretion, on a pro rata basis. If any Note is to be redeemed in
part only, a new Note or Notes in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a holder's Notes is
selected for partial redemption and such holder converts a portion of such
Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption.
REPURCHASE AT OPTION OF HOLDERS UPON CHANGE IN CONTROL
The Indenture provides that if a Change in Control occurs, each holder
of Notes shall have the right to require the Company to repurchase all of such
holder's Notes, or any portion of the principal amount thereof that is an
integral multiple of $1,000, on the date (the "Repurchase Date") that is 30 days
after the date of the Company Notice (as defined below), for cash at a price
equal to 100% of the principal amount thereof (the "Repurchase Price"), together
with accrued and unpaid interest to, but excluding, the Repurchase Date;
provided that any semi-annual payment of interest becoming due on the Repurchase
Date shall be payable to the holders of record on the relevant Record Date of
the Notes being repurchased.
Within 15 days after the occurrence of a Change in Control, the Company
or, at the Company's request, the Trustee is obligated to mail to all holders of
record of Notes a notice (the "Company Notice") of the occurrence of such Change
in Control and of the repurchase right arising as a result thereof. The Company
must also deliver a copy of the Company Notice to the Trustee. To exercise the
repurchase right, a holder of such Notes must deliver to the Trustee on or
before the Repurchase Date, written notice of the holder's exercise of such
right, together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer to the Company.
A "Change in Control" will be deemed to have occurred at such time after
the original issuance of the Notes as:
(i) any Person (as defined in the Indenture) (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 or any such subsidiary, is or
becomes the beneficial owner, directly or indirectly, through a purchase
or other acquisition transaction or series of transactions (other than a
merger or consolidation involving the Company), of shares of capital
stock of the Company entitling such Person to exercise in excess of 50%
of the total voting power of all shares
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of capital stock of the Company entitled to vote generally in the
election of directors;
(ii) 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 sale or transfer of the assets of the
Company, as an entirety or substantially as an entirety, to another
Person (other than (a) any such transaction pursuant to which the
holders of the Common Stock immediately prior to such transaction have,
directly or indirectly, shares of capital stock of the continuing or
surviving corporation immediately after such transaction which entitle
such holders to exercise in excess of 50% of the total voting power of
all shares of capital stock of the continuing or surviving corporation
entitled to vote generally in the election of directors and (b) any
merger (1) which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock or (2)
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 solely into shares of common stock
and separate series of common stock carrying substantially the same
relative rights as the Common Stock); or
(iii) a change in the Board of Directors of the Company in which
the individuals who constituted the Board of Directors of the Company at
the beginning of the one-year period immediately preceding such change
(together with any other director whose election by the Board of
Directors of the Company or whose nomination for election by the
stockholders of the Company was approved by a vote of at least a
majority of the directors then in office either who were directors at
the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute
a majority of the directors then in office;
provided, however, that a Change in Control shall not be deemed to have occurred
if either (a) the closing price per share of the Common Stock for any ten
Trading Days within the period of 20 consecutive Trading Days ending immediately
before the Change in Control shall equal or exceed 105% of the conversion price
in effect on each such Trading Day, or (b) (i) at least 90% of the consideration
(excluding cash payments for fractional shares) in the transaction or
transactions constituting the Change in Control consists of shares of common
stock with full voting rights traded on a national securities exchange or quoted
on the Nasdaq National Market (or which will be so traded or quoted when issued
or exchanged in connection with such Change in Control) (such securities being
referred to as "Publicly Traded Securities") and as a result of such transaction
or transactions such Notes become convertible solely into such Publicly Traded
Securities and (ii) the consideration in the transaction or transactions
constituting the Change in Control consists of cash, Publicly Traded Securities
or a combination of cash and Publicly Traded Securities with an aggregate fair
market value (which, in the case of Publicly Traded Securities, shall be equal
to the average closing price of such Publicly Traded Securities during the ten
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consecutive Trading Days commencing with the sixth Trading Day following
consummation of the transaction or transactions constituting the Change in
Control) is at least 105% of the Conversion Price in effect on the date
immediately preceding the date of consummation of such Change in Control. The
term "beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 or any other tender offer rules, and will file a Schedule 13E-4 or
any other schedule required under such rules, in connection with any offer by
the Company to repurchase Notes upon a Change in Control.
The Change in Control feature of the Notes may in certain circumstances
make more difficult or discourage a takeover of the Company and, thus, the
removal of incumbent management. The repurchase right is not the result of
management's knowledge of any effort to accumulate any Common Stock or to obtain
control of the Company by means of a merger, tender offer, solicitation or
otherwise, or part of a plan by management to adopt a series of anti-takeover
provisions. Instead, this right is the result of negotiations between the
Company and the Initial Purchaser.
The foregoing provisions would not necessarily afford holders of the
Notes protection in the event of a highly leveraged transaction, certain changes
in control of the Company or other transactions involving the Company that may
adversely affect holders.
The Company's ability to repurchase Notes upon the occurrence of a
Change in Control is subject to limitations. If a Change in Control were to
occur, there could be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all Notes tendered by holders thereof. In addition, the
terms of certain of the Company's existing debt agreements prohibit the Company
from purchasing any Notes and also identify certain events that would constitute
a change in control, as well as certain other events with respect to the Company
or certain of its subsidiaries, which would constitute an event of default under
such debt agreements. Any future credit agreements or other agreements related
to other Indebtedness (including other Senior Indebtedness) to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change in Control occurs at a time when the Company is prohibited from
repurchasing Notes, the Company could seek the consent of its lenders to
repurchase the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from repurchasing Notes. Any
failure by the Company to repurchase the Notes when required following a Change
in Control would result in an Event of Default under the Indenture whether or
not such repurchase is permitted by the subordination provisions of the
Indenture. Any such default may, in turn, cause a default under Senior
Indebtedness of the Company. Moreover, the occurrence of a Change in
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Control may cause an event of default under Senior Indebtedness of the Company.
As a result, in each case, any repurchase of the Notes would, absent a waiver,
be prohibited under the subordination provisions of the Indenture until the
Senior Indebtedness is paid in full. See " -- Subordination of Notes" below,
"Risk Factors -- Subordination" and "Risk Factors -- Limitation on Repurchase of
Notes upon Change in Control."
SUBORDINATION OF NOTES
The Indebtedness evidenced by the Notes is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness. The Notes are also effectively subordinated to all indebtedness
and liabilities of subsidiaries of the Company. Upon any distribution of assets
of the Company upon any dissolution, winding up, liquidation or reorganization,
the payment of the principal of, or premium, if any, and interest on the Notes
is subordinated to the extent provided in the Indenture in right of payment to
the prior payment in full in cash of all Senior Indebtedness. In the event of
any acceleration of the Notes because of an Event of Default (as defined in the
Indenture), the holders of any Senior Indebtedness then outstanding would be
entitled to payment in full in cash of all obligations in respect of such Senior
Indebtedness before the holders of the Notes are entitled to receive any payment
or distribution in respect thereof. The Indenture requires that the Company
promptly notify holders of Senior Indebtedness if payment of the Notes is
accelerated because of an Event of Default. In addition, the Indenture requires
that the Company promptly notify the Trustee upon becoming aware of any Event
of Default. The Trustee, in turn, must notify the Noteholders within 90 days
of acquiring actual knowledge of an occurrence of default, subject to certain
conditions set forth in the Indenture.
The Company also may not make any payment upon or in respect of the
Notes if (i) a default in the payment of the principal of, premium, if any,
interest, lease payment or other obligations in respect of Senior Indebtedness
occurs and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Indebtedness
(as defined) that permits holders of the Designated Senior Indebtedness as to
which such default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or other
person permitted to give such notice under the Indenture. Payments on the Notes
may and shall be resumed (a) in case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received if the maturity of such Designated Senior Indebtedness has not been
accelerated. No new period of payment blockage may be commenced pursuant to a
Payment Blockage Notice unless and until (i) 365 days have elapsed since the
initial effectiveness of the immediately prior Payment Blockage Notice and (ii)
all scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
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By reason of the subordination provisions described above, in the event
of the Company's bankruptcy, dissolution or reorganization, holders of Senior
Indebtedness may receive more, ratably, and holders of the Notes may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrence of any Event of Default under the Indenture.
The term "Senior Indebtedness" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with, and all fees, costs, expenses and other amounts accrued or
due on or in connection with, Indebtedness (as defined) of the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by the Company (including all
deferrals, renewals, extensions or refundings of, or amendments, modifications
or supplements to, the foregoing), unless in the case of any particular
Indebtedness the instrument creating or evidencing the same or the assumption or
guarantee thereof expressly provides that such Indebtedness shall not be senior
in right of payment to the Notes or expressly provides that such Indebtedness is
"pari passu" or "junior" to the Notes. Notwithstanding the foregoing, the term
Senior Indebtedness shall not include any Indebtedness of the Company to any
Subsidiary (as defined in the Indenture) of the Company.
The term "Indebtedness" means, with respect to any Person (as defined in
the Indenture), and without duplication, (a) the principal of and premium, if
any, and interest on, and fees, costs, enforcement expenses, collateral
protection expenses and other reimbursement or indemnity obligations in respect
to all indebtedness or obligations of the Company to any Person, including but
not limited to banks and other lending institutions, for money borrowed that is
evidenced by a note, bond, debenture, loan agreement, or similar instrument or
agreement (including purchase money obligations with original maturities in
excess of one year and noncontingent reimbursement obligations in respect of
amounts paid under letters of credit), (b) all reimbursement obligations and
other liabilities (contingent or otherwise) of such Person with respect to
letters of credit, bank guarantees or bankers' acceptances, (c) all obligations
and liabilities (contingent or otherwise) in respect of leases of such Person
required, in conformity with generally accepted accounting principles, to be
accounted for as capital lease obligations on the balance sheet of such Person,
(d) all obligations of such Person (contingent or otherwise) with respect to an
interest rate or other swap, cap or collar agreement or other similar instrument
or agreement or foreign currency hedge, exchange, purchase or similar instrument
or agreement, (e) all direct or indirect guaranties or similar agreements by
such Person in respect of, and obligations or liabilities (contingent or
otherwise) of such Person to purchase or otherwise acquire, or otherwise assure
a creditor-against loss in respect of, indebtedness, obligations or liabilities
of another Person of the kind described in clauses (a) through (d), (f) any
indebtedness or other obligations, excluding any operating leases the Company is
currently (or may become) a party to, described in
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clauses (a) through (d) secured by any mortgage, pledge, lien or other
encumbrance existing on property which is owned or held by such Person,
regardless of whether the indebtedness or other obligation secured thereby shall
have been assumed by such Person and (g) any and all deferrals, renewals,
extensions and refundings of, or amendments, modifications or supplements to,
any indebtedness, obligation or liability of the kind described in clauses (a)
through (f).
The term "Designated Senior Indebtedness" means the Company's
indebtedness outstanding (as defined below) from time to time under its
Revolving Credit Facility and the Senior Subordinated Indebtedness and any
particular Senior Indebtedness in which the instrument creating or evidencing
the same or the assumption or guarantee thereof (or related agreements or
documents to which the Company is a party) expressly provides that such Senior
Indebtedness shall be "Designated Senior Indebtedness" for purposes of the
Indenture (provided that such instrument, agreement or other document may place
limitations and conditions on the right of such Senior Indebtedness to exercise
the rights of Designated Senior Indebtedness).
The term "Senior Subordinated Indebtedness" means the $11.25 million of
senior subordinated debt of the Company held by the Equitable Life Assurance
Society of the United States. The interest rate on the Senior Subordinated
Indebtedness is 11.75% per annum, payable semi-annually. Principal on the
indebtedness is payable in three equal annual installments beginning January 15,
2002.
Any right of the Company to receive any assets of any of its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company.
As of December 31, 1997, the Company had approximately $19.1 million of
indebtedness outstanding that constituted Senior Indebtedness. The Indenture
will not limit the amount of additional indebtedness, including Senior
Indebtedness, which the Company can create, incur, assume or guarantee, nor will
the Indenture limit the amount of indebtedness which any subsidiary can create,
incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any
holder of Notes receives any payment or distribution of assets of the Company of
any kind in contravention of any of the subordination provisions of the
Indenture, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the Notes before all
Senior Indebtedness is paid in full, then such payment or distribution will be
held by the recipient in trust for the benefit of
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holders of Senior Indebtedness or their representative or representatives to the
extent necessary to make payment in full of all Senior Indebtedness remaining
unpaid, after giving effect to any concurrent payment or distribution, or
provision therefor, to or for the holders of Senior Indebtedness.
The Company is obligated to pay reasonable compensation to the Trustee
and to indemnify the Trustee against any losses, liabilities or expenses
incurred by it in connection with its duties relating to the Notes. The
Trustee's claims for such payments will be senior to those of holders of the
Notes in respect of all funds collected or held by the Trustee.
EVENTS OF DEFAULT AND REMEDIES
The following will be Events of Default under the Indenture: (i) default
in the payment of any interest upon the Notes, continued for 30 days, (ii)
default in the payment of principal or premium, if any, upon the Notes when due
or in the payment of any redemption obligation, (iii) default by the Company or
any subsidiary with respect to its obligation to pay principal of or interest on
indebtedness for borrowed money, which default shall have resulted in
indebtedness aggregating more than $10 million, (iv) default by the Company with
respect to indebtedness for borrowed money, which default results in the
acceleration of such indebtedness in an amount exceeding $10 million, which
indebtedness has not been discharged or such acceleration has not been rescinded
or annulled for a period of 10 days, (v) failure to perform any other covenant
or warranty of the Company, continued for 60 days after written notice as
provided in the Indenture, (vi) final judgments or orders are rendered against
the Company or any of its subsidiaries which require the payment by the Company
or any of its subsidiaries of an amount (to the extent not covered by insurance)
in excess of $10 million and such judgments or orders remain unstayed or
unsatisfied for more than 60 days and are not being contested in good faith by
appropriate proceedings, and (vii) certain events of bankruptcy, insolvency or
reorganization with respect to the Company.
The Indenture provides that if an Event of Default shall have occurred
and be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and accrued
interest on the Notes to be due and payable immediately, but if the Company
shall cure all defaults (except the nonpayment of principal of, premium, if any,
and interest on any of the Notes which shall have become due by acceleration)
and certain other conditions are met, with certain exceptions, such declaration
may be annulled and past defaults may be waived by the holders of a majority of
the principal amount of the Notes then outstanding. In the case of certain
events of bankruptcy or insolvency, the principal of and accrued interest on the
Notes shall automatically become and be immediately due and payable.
The holders of a majority in principal amount of the Notes then
outstanding shall have the right to direct the time, method and place of
conducting any
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proceedings for any remedy available to the Trustee, subject to certain
limitations specified in the Indenture.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Notes at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the holders of the Notes, except
that no such modification shall (i) extend the fixed maturity of any Note,
reduce the rate or extend the time of payment of interest thereon, reduce the
principal amount thereof or premium, if any, thereon, reduce any amount payable
upon redemption thereof, change the obligation of the Company to repurchase any
Note upon the occurrence of any Change in Control in a manner adverse to holders
of Notes, impair the right of a holder to institute suit for the payment
thereof, change the currency in which the Notes are payable, or impair the right
to convert the Notes into Common Stock in any material respect, or modify the
provisions of the Indenture with respect to the subordination of the Notes in a
manner adverse to the holders of the Notes in any material respect, without the
consent of the holder of each Note so affected, or (ii) reduce the aforesaid
percentage of Notes the holders of which are required to consent to any such
supplemental indenture, without the consent of the holders of all of the Notes
then outstanding.
REGISTRATION RIGHTS
The Company has agreed to file with the Commission the registration
statement of which this Prospectus forms a part covering resales by holders of
Notes and Common Stock issuable upon conversion of the Notes. The Company agreed
to use its best efforts to keep the registration statement effective for two
years from the latest date of original issuance of Notes. The Company will be
permitted to suspend the use of this Prospectus during certain periods of time
and under certain circumstances relating to pending corporate developments,
public filings with the Commission and similar events. The Company has agreed to
pay liquidated damages to all holders of Notes and all holders of Common Stock
issued upon conversion of the Notes if this Prospectus is unavailable for
periods in excess of those permitted under the Registration Rights Agreement.
The Company will pay all expenses of the registration statement, provide to each
registered holder requesting to sell Notes or Note Shares copies of this
Prospectus and take certain other actions as are required to permit, subject to
the foregoing, unrestricted resales of the Notes and the Note Shares. A holder
who sells the Notes pursuant to the registration statement generally will be
required to be named as a selling stockholder in a Supplement to this Prospectus
and to deliver a Prospectus to purchasers and will be bound by the provisions of
the Registration Rights Agreement which are applicable to such holder (including
certain indemnification provisions).
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CONCERNING THE TRUSTEE
First Union National Bank, the Trustee under the Indenture, has been
appointed by the Company as the initial paying agent, conversion agent,
registrar and custodian with regard to the Notes. The Company may maintain
deposit accounts and conduct other banking transactions with the Trustee or its
affiliates in the ordinary course of business, and the Trustee and its
affiliates may from time to time in the future provide banking and other
services to the Company in the ordinary course of their business.
DESCRIPTION OF WARRANTS
Of the Warrants, warrants to purchase 305,660 shares of Common Stock
have an exercise price equal to $10.00 per share and are exercisable until
January 15, 2004; warrants to purchase 75,000 shares of Common Stock have an
exercise price of $10.00 per share and are exercisable until April 15, 2000;
warrants to purchase 180,250 shares of Common Stock have an exercise price of
$19.00 per share and are exercisable until September 9, 2002, warrants to
purchase 77,250 shares of Common Stock have an exercise price of $22.00 per
share and are exercisable until September 9, 2000; warrants to purchase 10,000
shares of Common Stock have an exercise price of $5.00 per share and are
exercisable until April 11, 2001; and warrants to purchase 100,000 shares of
Common Stock have an exercise price of $8.75 per share and are exercisable until
April 11, 2001.
The exercise price and number of shares of Common Stock issuable upon
exercise of the Warrants are subject to adjustment in certain circumstances,
including in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of the Company. However, no Warrant is subject to
adjustment for issuances of Common Stock at a price below the exercise price of
that Warrant, incuding the issuance of shares of Common Stock pursuant to the
Company's stock option plans.
Warrants to purchase 332,500 shares of Common Stock include the right
to demand that the Company register for resale under the Securities Act the
shares of Common Stock underlying the Warrants on one occasion and warrants to
purchase 305,660 shares of Common Stock include the right to demand such
registration on three occasions. In addition, of the Warrants, warrants to
purchase 748,785 shares of Common Stock have incidental registration rights
and warrants to purchase 10,000 shares of Common Stock have no registration
rights.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of material United States federal
income tax consequences relating to the purchase, ownership and disposition of a
Note and of Common Stock into which the Note may be converted. This discussion
is based on existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder, judicial decisions
and administrative rulings, all of which are subject to change or alternative
construction, possibly with retroactive effect. This summary does not discuss
other federal taxes (such as federal estate and gift taxes) or any state, local
or foreign tax considerations, nor does it purport to address all federal income
tax consequences applicable to all categories of investors, some of which may be
subject to special rules, such as life insurance companies, tax-exempt
organizations, dealers in securities or currency, banks or other financial
institutions, investors whose functional currency is not the U.S. dollar or
investors that hold Notes or Common Stock as part of a hedge, straddle or
conversion transaction. In addition, this summary deals only with Notes and
Common Stock which are held as "capital assets" within the meaning of Section
1221 of the Code, and does not address the tax consequences to investors who
hold their Notes or Common Stock through a partnership or other pass-through
entity. The Company will not seek a ruling from the Internal Revenue Service
(the "IRS") with respect to the statements made in this summary and, therefore,
there can be no assurance that the IRS will agree with the conclusions set forth
below.
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of a Note or Common Stock that is (i) a citizen or resident of the United
States, (ii) a corporation, created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of its
source and (iv) a trust if either (a) a U.S. court is able to exercise primary
supervision over the trust's administration and one or more U.S. fiduciaries
have the authority to control all of the trust's substantial decisions or (b)
the trust was in existence on August 20, 1996 and, in general, would have been
treated as a U.S. Holder under rules applicable prior to such time, provided the
trust elects to continue such treatment thereafter. The term "Non-U.S. Holder"
shall mean the beneficial owner of a Note or Common Stock other than a U.S.
Holder.
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PERSONS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF UNITED STATES FEDERAL TAX LAWS, AS WELL
AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR
PARTICULAR SITUATIONS. THIS SUMMARY DOES NOT PURPORT TO ADDRESS ALL ASPECTS OF
FEDERAL, STATE, LOCAL OR FOREIGN TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S
DECISION TO PURCHASE NOTES.
TAXATION OF U.S. HOLDERS
Payments of Interest. The payment of stated interest on the Notes will
be taxable to a U.S. Holder as ordinary interest income at the time it accrues
or is received in accordance with the holder's usual method of accounting for
federal income tax purposes. The Notes were not issued with "original issue
discount" within the meaning of the Code.
Disposition of Notes or Common Stock. A U.S. Holder of a Note generally
will recognize gain or loss upon the sale, exchange, redemption or other
disposition of the Note measured by the difference between (i) the amount
realized (except to the extent the amount is attributable to accrued interest
not previously included in income, which amount generally will be taxable as
ordinary income) and (ii) the U.S. Holder's tax basis in the Note. A U.S.
Holder's tax basis in a Note generally will be equal to the cost of the Note to
the holder increased by the amount of any market discount previously taken into
income by the holder and reduced (but not below zero) by the amount of any bond
premium amortized by the holder. See "- Market Discount" and "- Acquisition
Premium", below.
In general, each U.S. Holder of Common Stock into which the Notes have
been converted will recognize gain or loss upon the sale, exchange, redemption
or other disposition of the Common Stock under rules similar to those applicable
above. However, special rules may apply to redemptions of Common Stock which may
result in the amount paid being treated as a dividend.
Subject to the market discount rules discussed below, the gain or loss
on the disposition of Notes or Common Stock generally will be treated as capital
gain or loss. The Taxpayer Relief Act of 1997 (the "1997 Act"), which was
enacted August 5, 1997, includes substantial changes to the U.S. federal income
taxation of capital gains recognized by noncorporate U.S. Holders. With respect
to noncorporate U.S. Holders, the maximum effective federal income tax rate
applicable to capital gains recognized on the disposition of Notes or Common
Stock is 20% if the Notes or Common Stock were held for more than 18 months at
the time of disposition, and 28% if the Notes or Common Stock were held for more
than 12 months but not more than 18 months at the time of disposition. Capital
gain or loss on the disposition of Notes or Common Stock by corporate U.S.
Holders will be long-term capital gain or loss if the Notes or Common Stock were
held for more than one year at the time of the disposition. For
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the holding period of Common Stock acquired through conversion of a Note, see
discussion under "- Conversion of a Note into Common Stock", below. U.S. Holders
are urged to consult their own tax advisers regarding the taxation of gains or
losses realized on the disposition of Notes or Common Stock.
Market Discount. Subject to a de minimis exception, a holder of a Note
acquired at a market discount generally will be required to treat as ordinary
income any gain recognized on the disposition of the Note (including certain
nontaxable dispositions such as a gift) or on the receipt of a principal payment
to the extent of the accrued market discount on the Note at such time. For this
purpose, the market discount on a Note generally will be equal to the amount, if
any, by which the stated redemption price at maturity of the Note immediately
after its acquisition exceeds the holder's tax basis in the Note. In general,
market discount on a Note will be treated as accruing on a ratable basis over
the term of the Note or, at the election of the holder, under a constant yield
method. A holder of a Note acquired at a market discount may also be required to
defer the deduction of a portion of the interest on any indebtedness incurred or
maintained to purchase or carry the Note until the Note is disposed of in a
taxable transaction. The foregoing rules will not apply if the holder elects to
include accrued market discount in income currently. If a holder acquires a Note
at a market discount and receives Common Stock upon conversion of the Note, the
amount of accrued market discount with respect to the Note through the date of
the conversion should be treated, under regulations to be issued, as ordinary
income on the disposition of the Common Stock.
Acquisition Premium. A holder that purchases a Note for an amount in
excess of its principal amount may be entitled to elect to treat a portion of
such excess as "amortizable bond premium," which will (i) reduce the amount
required to be included in the holder's income each year as interest on the Note
by the amount of such premium allocable to that year based on the Note's yield
to maturity and (ii) reduce the tax basis of the Note by the amount of such
premium allocable to such year. However, the value of the conversion feature of
the Notes would be subtracted from the cost of the Note in determining the
amount of any amortizable bond premium. An election to amortize bond premium
would apply to all debt instruments held by the holder at the beginning of the
taxable year to which the election applies or thereafter acquired by the holder.
Conversion of a Note into Common Stock. In general, a U.S. Holder will
not recognize gain or loss on conversion of a Note solely into Common Stock of
the Company pursuant to the terms of the conversion right of the Notes, except
with respect to cash received in lieu of a fractional share. The holding period
of the Common Stock received by the U.S. Holder upon conversion of a Note
generally will include the period during which the Note was held prior to the
conversion. The U.S. Holder's aggregate tax basis in the Common Stock received
upon conversion of a Note generally will equal the U.S. Holder's aggregate tax
basis in the Note exchanged (reduced by the portion allocable to cash received
in lieu of a fractional share). For the tax basis of a Note, see discussion
under "- Disposition of Notes or Common
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Stock", above. Cash received in lieu of a fractional share of Common Stock
should be treated as a payment in exchange for such fractional share. On the
basis of a published ruling of the IRS, a U.S. Holder generally will recognize
capital gain or loss in connection with any cash received in lieu of a
fractional share in an amount equal to the difference between the amount of cash
received and the U.S. Holder's tax basis allocable to the fractional share. U.S.
Holders should consult their own tax advisors regarding the tax consequences of
converting the Notes into Common Stock, in particular in the case of the
conversion of a Note into Common Stock after a record date for the payment of
interest but prior to the next succeeding interest payment date.
Adjustment to Conversion Price. The Indenture provides that the
conversion price will be adjusted upon the occurrence of certain circumstances
pursuant to the antidilution provisions of the Indenture, and may be reduced at
the discretion of the Company. Section 305 of the Code treats as a distribution
taxable as a dividend (to the extent of the Company's current or accumulated
earnings and profits) certain actual or constructive distributions of stock with
respect to stock and convertible securities. Applicable Treasury regulations
treat holders of convertible debentures as having received such a constructive
distribution where the conversion price is adjusted to reflect certain
distributions with respect to the stock into which such debentures are
convertible. Thus, under certain circumstances, an adjustment in the conversion
price of the Common Stock may be taxable to the U.S. Holders as a dividend
distribution. In such a case, U.S. Holders may recognize income as a result of
an event pursuant to which they receive no cash or property that could be used
to pay the related income tax. Generally, a holder's tax basis in a Note will be
increased by the amount of any such constructive dividend. Similarly, a failure
to adjust the conversion price of the Notes to reflect a stock dividend or
similar event could in some circumstances give rise to constructive dividend
income to holders of Common Stock. Holders of the Notes are advised to consult
their tax advisors with respect the potential of taxable constructive dividend
distributions upon such conversion price modifications.
Distributions with Respect to Common Stock. In general, distributions
made by the Company with respect to Common Stock will constitute dividends for
federal income tax purposes and will be taxable to a holder as ordinary income
to the extent of the Company's undistributed current or accumulated earnings and
profits (as determined for federal income tax purposes). Distributions in excess
of the Company's current or accumulated earnings and profits will be treated
first as a nontaxable return of capital reducing the U.S. Holder's tax basis in
the Common Stock, thus increasing the amount of any gain (or reducing the amount
of any loss) which might be realized by such holder upon the sale, exchange or
redemption of such Common Stock. Any such distributions in excess of the U.S.
Holder's tax basis in the Common Stock generally will be treated as capital gain
to the U.S. Holder. For treatment of capital gains, see discussion under the
caption "-- Disposition of Notes or Common Stock," above.
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Subject to certain limitations, to the extent that distributions made by
the Company are treated as dividends, a U.S. Holder of Common Stock that is
taxed as a domestic corporation and that meets the applicable holding period and
taxable income requirements of the Code may be entitled to a deduction under
Section 243 of the Code equal in amount to 70% of the dividends paid out of such
earnings and profits (the "Dividends Received Deduction"). With respect to
Common Stock considered to be "portfolio stock" as defined in Section 246A of
the Code, the Dividends Received Deduction will be reduced to the extent that
the Common Stock constitutes "debt financed portfolio stock." In addition, under
certain circumstances, the receipt of a dividend on the Common Stock determined
to be an "extraordinary dividend" may cause the holder's tax basis in the Common
Stock to be reduced by the untaxed portion of the dividend and could result in
gain recognition pursuant to Section 1059 of the Code.
Constructive Sale of Notes or Common Stock. Pursuant to the 1997 Act, a
U.S. Holder generally will be required to recognize gain with respect to an
"appreciated financial position" upon entering into certain transactions,
including, but not limited to, a short sale, certain offsetting notional
principal contracts or certain forward or future contracts, with respect to the
"appreciated financial position." Both the Notes and the underlying Common Stock
should constitute "appreciated financial positions" if gain would be recognized
were such instruments sold for their fair market value.
TAXATION OF NON-U.S. HOLDERS
Payments of Interest. The payment of stated interest on a Note by the
Company or any paying agent to a Non-U.S. Holder will qualify for the "portfolio
interest exemption" and, therefore, will not be subject to United States federal
income tax or withholding tax, provided that such interest income is not taxable
as effectively connected with a United States trade or business of the Non-U.S.
Holder and provided that the Non-U.S. Holder (i) does not actually or
constructively own 10% or more of the combined voting power of all classes of
stock of the Company entitled to vote, (ii) is not a controlled foreign
corporation related to the Company actually or constructively through stock
ownership, (iii) is not a bank receiving interest on a loan entered into in the
ordinary course of business, and (iv) either (a) provides a Form W-8 (or
suitable substitute form) signed under penalties of perjury that includes its
name and address and certifies he, she or it is not a "United States person" (as
defined in the Code) in compliance with applicable law and regulations, or (b)
deposits the Note with a securities clearing organization, bank or financial
institution that holds customers' securities in the ordinary course of its trade
or business and which holds the Note and provides a statement to the Company or
its agent under penalties of perjury in which it certifies that such a Form W-8
(or a suitable substitute) has been received by it from the Non-U.S. Holder or
qualifying intermediary and furnishes the Company or its agent with a copy
thereof. For this purpose, the Non-U.S. Holder of Notes would be deemed to own
constructively the Common Stock into which it could be converted.
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Under recently adopted Treasury regulations, which generally are
effective for payments made after December 31, 1998 (the "New Regulations"), and
subject to certain exceptions, the certification described in clause (iv) above
may also be provided by a qualified intermediary on behalf of one or more
beneficial owners of the payments of interest (or other intermediaries),
provided such intermediary has entered into a withholding agreement with the IRS
and certain conditions are met. Non-U.S. Holders of the Notes are advised to
consult their tax advisors with respect to their qualification for the portfolio
interest exemption and the steps necessary to comply with such exemption.
Except to the extent otherwise provided under an applicable tax treaty,
a Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder
with respect to interest on a Note if such interest income is effectively
connected with a United States trade or business of the Non-U.S. Holder.
Effectively connected interest received by a corporate Non-U.S. Holder may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate (or, if applicable, a lower treaty rate). Interest income of a
Non-U.S. Holder that is not effectively connected with a United States trade or
business and that does not qualify for the portfolio interest exemption
described above generally will be subject to a withholding tax at a 30% rate
(or, if applicable, a lower treaty rate). To claim the benefit of a tax treaty
or to claim exemption from withholding because the income is U.S. trade or
business income, a Non-U.S. Holder must provide a properly executed Form 1001 or
4224 (or such successor forms as the IRS designates), as applicable, prior to
the payment of interest. These forms must be periodically updated. Under the New
Regulations, the Forms 1001 and 4224 will be replaced by a new Form W-8. Under
the New Regulations, a non-U.S. Holder who is claiming the benefits of a treaty
may be required to obtain a U.S. taxpayer identification number and make certain
certifications. Special procedures are provided in the New Regulations for
payments through qualified intermediaries. In addition, under the New
Regulations, in the case of a Non-U.S. Holder that is fiscally transparent
(e.g., a partnership) for U.S. federal income tax purposes, the certification
requirements generally would be applied to each of the ultimate beneficial
owners of the entity. Non-U.S. Holders are advised to consult their tax advisors
regarding the effect, if any, of the New Regulations.
Conversion of a Note into Common Stock. In general, no United States
federal income tax or withholding tax will be imposed upon the conversion of a
Note into Common Stock by a Non-U.S. Holder except, with respect to the receipt
of cash in lieu of fractional shares by Non-U.S. Holders upon conversion of a
Note, where any one of the four exceptions described below under " --
Disposition of Notes or Common Stock" is applicable. In addition, under certain
circumstances, the extent to which the fair market value of the Common Stock
received upon conversion is attributable to accrued interest will be treated as
ordinary interest income taxable as described above under " -- Payments of
Interest."
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Disposition of Notes or Common Stock. A Non-U.S. Holder of the Note (or
the Common Stock into which it was converted) generally will not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale, exchange, retirement or other disposition of the Note (including the
receipt of cash in lieu of fractional shares upon conversion of the Note to
Common Stock), unless (i) the gain is effectively connected with a United States
trade or business of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder
who is an individual, such holder is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of the
disposition, and either such holder has a "tax home" in the United States or the
disposition is attributable to an office or other fixed place of business
maintained by such holder in the United States, (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates, or (iv) the Company is a United States real property
holding corporation. The Company does not believe that it is, or is likely to
become, a United States real property holding corporation. To the extent that
the amount of cash and the fair market value of any property received upon the
sale or other disposition of Notes or Common Stock is attributable to the
payment of accrued interest, in the case of a sale or other disposition of
Notes, or is deemed a dividend distribution, in the case of a sale or other
disposition of Common Stock, the Non-U.S. Holder may be subject to tax on such
cash or other property as described above under "- Payments of Interest" or as
described below under "-Distributions with respect to Common Stock,"
respectively
Distributions with Respect to Common Stock. To the extent distributions
made by the Company are treated as dividends (as described above under "U.S.
Holders -- Distributions with Respect to Common Stock"), a Non-U.S. holder will
be subject to United States federal withholding tax at a 30% rate (or lower rate
provided under an applicable income tax treaty) on dividends paid (or deemed
paid, as described above under " -- Adjustment to Conversion Price") on Common
Stock, unless the dividends are taxable as effectively connected with the
conduct of a trade or business in the United States and the Non-U.S. Holder
delivers IRS Form 4224 to the payor. Except to the extent otherwise provided
under an applicable tax treaty, a Non-U.S. Holder generally will be taxed in the
same manner as a U.S. Holder on dividends paid (or deemed paid) that are
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Holder. If such Non-U.S. Holder is a foreign corporation,
it may also be subject to a United States branch profits tax on such effectively
connected income at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payer has knowledge to the contrary) for purposes of the withholding rules
discussed below and, under the current interpretation of Treasury Regulations,
for purposes of determining the applicability of a tax treaty rate. Under the
New Regulations, however, a Non-U.S. Holder of Common Stock who wishes to claim
the benefit of an applicable treaty rate generally would be required to provide
a Form W-8 (or suitable substitute
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form) certifying such Non-U.S. Holder's entitlement to benefits under the
treaty. Special procedures are provided in the New Regulations for payments
through qualified intermediaries. In addition, under the New Regulations, in the
case of a Non-U.S Holder that is fiscally transparent (e.g., a partnership) for
U.S. federal income tax purposes, the certification requirements generally would
be applied to each of the ultimate beneficial owners of the entity. Non-U.S.
Holders are advised to consult their tax advisors regarding the effect, if any,
of the New Regulations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. Holders. Under current United States federal income tax law, U.S.
Holders of Notes or Common Stock will be subject to information reporting and,
under certain circumstances, may be subject to "backup withholding" at the rate
of 31% in respect to payments of principal, interest and dividends made to, and
the proceeds of disposition of Notes or Common Stock by, certain noncorporate
U.S. Holders. Generally, the backup withholding rules will apply only if the
U.S. Holder (i) fails to furnish its taxpayer identification number ("TIN") to
the payer, (ii) furnishes such payor with an incorrect TIN, (iii) is notified by
the IRS that it has failed to report properly interest, dividends or other
"reportable payments" as defined by the Code, or (iv) under certain
circumstances, fails to provide such payor or the U.S. Holder's securities
broker with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the U.S. Holder is not subject to backup
withholding. Backup withholding will not apply with respect to payments made to
certain U.S. Holders of the Notes, including payments to certain exempt
recipients (such as corporations and exempt organizations). The amount of backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund
provided the required information is furnished to the IRS.
Non-U.S. Holders. The Company must report annually to the Service and to
each Non-U.S. Holder any interest or dividend that is subject to withholding, or
that is exempt from U.S. withholding tax (pursuant to a tax treaty or the
exceptions described above).
Backup withholding at a rate of 31% and information reporting generally
may apply to payments of principal, interest and premium (if any) if the payee
fails to certify under penalties of perjury that it is not a U.S. person,
provided the payor does not have actual knowledge that the holder is a United
States person. Dividends paid to Non-U.S. Holders that are subject to the 30%
withholding tax described above or that are subject to treaty reduction
generally will be exempt from United States backup withholding tax.
Payment of the proceeds of the sale or other disposition of Notes or
Common Stock to or through a United States office of a broker, U.S. or foreign,
will be subject to information reporting and possible backup withholding at a
rate of 31% unless the owner certifies its non-United States status under
penalties of perjury or otherwise
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establishes an exemption (provided the broker does not have actual knowledge
that the holder is a U.S. Person or that the conditions of any other exemption
are not, in fact, satisfied). Payment of the proceeds of the sale of Notes or
Common Stock to or through a foreign office of a foreign broker that is not a
"U.S. related person" generally will not be subject to information reporting or
backup withholding tax. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes
or (ii) a foreign person 50% or more of whose gross income from all sources for
a specified period is derived from activities that are effectively connected
with the conduct of a United States trade or business. In the case of the
payment of proceeds from the disposition of Notes to or through a foreign office
of a broker that is either a United States person or a related person,
information reporting is required on the payment unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder and the
broker has no actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment
to a Non-U.S. Holder will be allowed as a refund or a credit against such
Non-U.S. Holder's United States federal income tax, provided that the required
information is furnished to the IRS.
With respect to payments made after December 31, 1998, the New
Regulations, subject to certain transition rules, alter the foregoing rules in
certain respects. Those regulations provide presumptions under which a Non-U.S.
Holder is subject to information reporting and backup withholding at the rate of
31% unless the Company receives certification from the holder of non-U.S.
status. Depending on the circumstances, this certification will need to be
provided (i) directly by the Non-U.S. Holder, (ii) in the case of a Non-U.S.
Holder that is treated as a partnership or other fiscally transparent entity, by
the partners, shareholders or other beneficiaries of such entity, or (iii)
certain qualified financial institutions or other qualified entities on behalf
of the Non-U.S. Holder.
Holders of Notes should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
LEGAL MATTERS
The validity of the issuance of the Notes and Shares offered hereby will
be passed upon for the Company by Fulbright & Jaworski L.L.P., New York, New
York.
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EXPERTS
The financial statements of the Company as of December 31, 1996 and
1995, and for each of the years in the two-year period ended December 31, 1996,
incorporated in this Prospectus by reference to the Annual Report on Form 10-KSB
for the year ended December 31, 1996, have been so incorporated in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
and upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of International Aircraft Support as
of December 31, 1996 and for the year then ended, incorporated in this
Prospectus by reference to the Annual Report on Form 10-KSB for the year ended
December 31, 1996, have been so incorporated in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
The combined financial statements of International Aircraft Support as
of December 31, 1995 and for the year then ended, incorporated in this
Prospectus by reference to the Annual Report on Form 10-KSB for the year ended
December 31, 1996, have been so incorporated in reliance upon the report of
Ernst & Young LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
The combined financial statements of Aero Support USA, Inc. as of
December 31, 1996 and for the year ended, incorporated in this Prospectus by
reference to the Company's Current Report on Form 8-K, filed September 23, 1997,
as amended on Form 8-K/A, filed November 24, 1997, have been so incorporated in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED BY THE
COMPANY OR ANY SELLING SECURITYHOLDER TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
Page
----
Available Information......................2
Incorporation of Certain Documents
by Reference...............................3
The Company................................5
Risk Factors...............................8
Ratio of Earnings to Fixed Charges........15
Use of Proceeds...........................15
Selling Securityholders...................15
Plan of Distribution......................20
Description of Notes......................22
Description of Warrants...................37
Federal Income Tax Considerations.........37
Legal Matters.............................45
Experts...................................46
KELLSTROM INDUSTRIES,
INC.
$54,000,000 PRINCIPAL AMOUNT
OF 5 3/4% CONVERTIBLE
SUBORDINATED
NOTES DUE 2002
2,996,811 SHARES
OF COMMON STOCK
____________________
PROSPECTUS
____________________
March 19, 1998
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