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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1996
REGISTRATION NO. 333-12091
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTER(BULLET)ACT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 7389 56-1817510
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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14 WESTPORT AVENUE
NORWALK, CONNECTICUT 06851
(203) 750-0300
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
RICHARD A. VINCHESI, JR.
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INTER(BULLET)ACT SYSTEMS, INCORPORATED
14 WESTPORT AVENUE
NORWALK, CONNECTICUT 06851
(203) 750-0300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
WITH COPIES TO:
DORIS R. BRAY
SCHELL BRAY AYCOCK ABEL & LIVINGSTON P.L.L.C.
POST OFFICE BOX 21847
GREENSBORO, NORTH CAROLINA 27403
(910) 370-8800
Approximate date of commencement of proposed distribution of the securities
to the public: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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(A redherring appears on the left-hand side of this page, rotate 90
degrees. Text is as follows:)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION (DATED DECEMBER , 1996)
PROSPECTUS
INTER(BULLET)ACT SYSTEMS, INCORPORATED (INTER(Bullet)ACT LOGO)
OFFER TO EXCHANGE ITS 14% SENIOR DISCOUNT NOTES DUE 2003,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 14% SENIOR DISCOUNT NOTES DUE 2003
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
,1997, UNLESS EXTENDED.
Inter(Bullet)Act Systems, Incorporated (the "Company" or "Inter(Bullet)Act ")
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange its 14% Senior Discount Notes due 2003 (the "New Notes") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for an equal principal amount of its outstanding 14% Senior Discount Notes due
2003 (the "Old Notes"), of which $142,000,000 aggregate principal amount is
outstanding as of the date hereof. The New Notes and the Old Notes are
collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be
, 1997 (30 days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. Old Notes may be tendered only in
integral multiples of $1,000. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes are generally the same as the form and terms of
the Old Notes, except that the New Notes do not contain terms with respect to
the interest rate step-up provisions applicable upon Registration Defaults (as
defined herein) and the New Notes have been registered under the Securities Act
and therefore will not bear legends restricting the transfer thereof. Holders of
Notes are entitled to certain cash interest payments as a result of Registration
Defaults by the Company. See "Description of the New Notes."
The New Notes will mature on August 1, 2003. No cash interest will be payable on
the New Notes prior to February 1, 2000. The New Notes will accrue cash interest
at a rate of 14% per annum, commencing on August 1, 1999, payable semi-annually
on February 1 and August 1 of each year commencing on February 1, 2000. At any
time and from time to time prior to August 1, 1999, the Company may redeem in
the aggregate up to $30 million of the principal amount at maturity of the New
and/or Old Notes with the proceeds of one or more Public Equity Offerings (as
defined herein), at a redemption price (expressed as a percentage of Accreted
Value (as defined herein)) of 114%; PROVIDED, HOWEVER, that at least $112
million aggregate principal amount at maturity of New Notes must remain
outstanding after each such redemption. In addition, the Notes will be
redeemable in whole or in part, at any time after August 1, 2000, at the option
of the Company, at the redemption price set forth herein plus accrued and unpaid
interest, if any, to the date of redemption and, upon a Change of Control (as
defined), the Company will be required to make an offer to purchase the Old and
New Notes at a purchase price equal to 101% of the Accreted Value thereof plus
accrued and unpaid interest, if any, to the date of purchase.
The New Notes will rank senior in right of payment to all subordinated
indebtedness of the Company and PARI PASSU in right of payment with all
unsecured senior indebtedness of the Company. At September 28, 1996, the Company
had $73.2 million of total indebtedness, including $72.8 of indebtedness
subordinated in right of payment to the Notes. See "Description of the New
Notes."
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission"), as set forth in no-action letters issued to third parties,
the Company believes that the New Notes issued pursuant to the Exchange Offer
may be offered or sold, or otherwise transferred by holders thereof (other than
any holder that is an "affiliate" of the Company as defined under Rule 405 of
the Securities Act), provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement
with any person to participate in the distribution of such New Notes. However,
the staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances. By tendering the Old Notes in exchange for the
New Notes, each holder, will represent to the Company that: (i) it is not an
affiliate of the Company (as defined under Rule 405 of the Securities Act); (ii)
any New Notes to be received by it were acquired in its ordinary business; and
(iii) it is not engaged in, and does not intend to engage in, a distribution of
such New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Notes where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 90 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old Notes
or New Notes. If such a market were to develop, the New Notes could trade at
prices that may be higher or lower than their principal amount. The Company does
not intend to apply for listing or quotation of the New Notes on any securities
exchange or stock market. Therefore, there can be no assurance as to the
liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop. See "Risk Factors -- Lack of Public
Market."
The Company will not receive any proceeds from this Exchange Offer. The Company
has agreed to pay the expenses of the Exchange Offer. No underwriter is being
used in connection with this Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD
NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
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 , 1996.
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AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the new Notes offered
hereby, reference is made to the Registration Statement. This Prospectus
contains summaries of the material terms and provisions of certain documents
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement. Copies of the Registration Statement
and the exhibits thereto may be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C., 20549 and at the Commission's regional offices at Seven
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Room of the Commission at
450 Fifth Street, N.W., Washington D.C. 20540, at prescribed rates, and also can
be obtained electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's web site (http:\\www.sec.gov).
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS (INCLUDING THE
NOTES THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES BEFORE
TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. AS USED IN THIS PROSPECTUS,
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO
"INTER(BULLET)ACT" OR THE "COMPANY" SHALL MEAN INTER(BULLET)ACT SYSTEMS,
INCORPORATED, A NORTH CAROLINA CORPORATION, AND ITS SUBSIDIARY.
THE COMPANY
The Company develops, owns and operates proprietary electronic marketing
systems that are designed to give consumer products manufacturers (the
"Manufacturers") and retailers the ability to influence the purchasing behavior
of consumers moments before shopping begins and to track and analyze individual
consumer purchasing behavior on an ongoing basis. The Company's current
commercial product offering utilizes interactive "touch-screen" terminals inside
the entrance of retail supermarkets that issue individually targeted, and
immediately usable, coupons and other promotional incentives based on each
consumer's cumulative purchasing history. This automated process saves consumers
time and money while providing Manufacturers and retailers substantially more
control, efficiency and cost effectiveness than traditional mass advertising and
promotion media. The Company receives recurring revenue from transaction fees
paid by Manufacturers for each electronic redemption of their coupons and other
incentives. Since its formation in 1993, the Company has focused its system
development and commercialization efforts primarily in the retail supermarket
industry.
The Company competes in the in-store marketing segment of the $30 billion
consumer product promotion and couponing business via its proprietary,
interactive multi-media system called the Inter(Bullet)Act Promotion Network
(the "IPN"). It is estimated that more than 70% of all brand purchasing
decisions for supermarket products are made in-store, according to a 1995 study
conducted by the Point-of-Purchase Advertising Institute. Upon entering a
supermarket, consumers insert their frequent shopper cards in the Company's
ATM-like terminals, known to customers as COUPON XPRESS(REGISTER MARK) or COUPON
CENTRALTM. The IPN terminals, which are interconnected to a store's
point-of-sale system, then present a series of screens displaying full-color
icons of targeted product promotions -- usually price discounts or multiple
purchase bonuses -- that have been selected for each consumer by the Company's
proprietary Target Engine Software ("TES") based on each consumer's purchases
recorded in that store during the most recent period of up to 12 months. The TES
categorizes consumers based on their degree of loyalty to a specific brand
within a product category and provides the Manufacturer with the ability to
target its promotions accordingly. After the shopper touches the desired icons,
the terminal can deliver either individual coupons or a "shopping list" for all
selected promotions, identified by aisle so that the products can be easily
located when shopping. The entire process takes most shoppers less than 60
seconds. At checkout, the Company's automated clearing process, when used in
conjunction with the store's point-of-sale system, virtually eliminates the
problem of mistaken and fraudulent redemptions associated with the handling of
traditional paper coupons, which is estimated by industry sources to cost
Manufacturers more than $500 million per year.
The Company believes its IPN offers Manufacturers two unique competitive
advantages compared to alternative in-store marketing techniques: (1) the
ability to offer promotions targeted to each individual consumer AT THE
BEGINNING of the shopping experience and (2) the highest redemption rate,
currently averaging over 30% in retail chains where the IPN has been fully
implemented, of distributed product promotions (free standing newspaper insert
coupons ("FSIs") average under 2%). As a result of these key advantages, and
because the Company charges Manufacturers a fee only for redeemed promotions
rather than for the distribution of promotions, the Company is positioning
itself to Manufacturers as the lowest cost, most efficient provider in the
in-store marketing industry. See "Business -- Benefits of IPN -- Manufacturers
and Other Brand Marketers."
Currently, the Company has contractual commitments and letters of intent
with retail supermarket chains to deploy the IPN in more than 3,000 stores. The
retail chains under contract with the Company to participate in the IPN include:
A&P, ACME, Food Emporium, Food Lion, Foodtown, Gerland's, Grand Union, Jewel,
Marsh, Price Chopper, Riser Foods, SuperFresh, and Waldbaum's. The chains that
have entered into letters of intent with the Company include Kings, Spartan
Stores, Lanco, Piggly Wiggly and Randalls. The Company is in active discussions
with retail grocery chains representing a large number of potential additional
stores and plans to continue a
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nationwide expansion strategy over the next several years. As of December 9,
1996, Inter(Bullet)Act had IPN terminals in commercial operation in 333 grocery
stores located in seven states.
As of December 9, 1996, 19 Manufacturers representing 53 different packaged
goods brand offerings were participating in the IPN. Participating Manufacturers
currently include, among others, General Mills, ConAgra, Keebler, Lever
Brothers, James River, Nestle and Reynolds.
The Company's strategy is to achieve increasing recurring revenue through
the nationwide commercialization of its proprietary IPN. Accordingly, the
Company plans to accelerate the installation of the IPN in the more than 3,000
retail grocery stores under contract or letter of intent, further expand
retailer commitments, procure new commitments from Manufacturers and more
substantial commitments from Manufacturers already supporting the IPN and
increase consumer acceptance.
While the Company's primary objective is the nationwide commercialization
of the IPN in retail grocery stores in the United States, it believes that its
proprietary technology may have several other commercial applications such as
the electronic delivery of information and targeted promotions in retail
pharmacies. See "Business -- Other Opportunities."
Inter(Bullet)Act has received, and expects to continue receiving,
substantial business development support from its three largest shareholders:
Vanguard Cellular Systems, Inc. ("Vanguard") (NASDAQ: VCELA), one of the largest
independent operators of cellular telephone systems in the United States; the
Richardson Family, founders and former operators of the consumer products
company Richardson-Vicks, Inc.; and Toronto Dominion Investments, Inc., a wholly
owned indirect subsidiary of Toronto Dominion Bank, which is one of the largest
media finance institutions in the world.
The principal executive offices of the Company are located at 14 Westport
Avenue, Norwalk, Connecticut 06851 and its telephone number is (203) 750-0300.
RECENT DEVELOPMENTS
MANAGEMENT. In September 1996, Richard A. Vinchesi, Jr. began to serve as
the Company's Vice President and Chief Financial Officer. Prior thereto, Mr.
Vinchesi was a Vice President of Salomon Brothers Inc in its Media Corporate
Finance group. In November 1996, Aretas F. Stearns, President, Chief Operating
Officer and a director of the Company, reached a mutual agreement with the
Company whereby he will resign his positions effective December 31, 1996. The
search for a new Chief Operating Officer is expected to begin in 1997. Pending
the selection of a new Chief Operating Officer, Stephen R. Leeolou, Chief
Executive Officer of the Company, is assuming many of the primary
responsibilities of the position of Chief Operating Officer. In addition, to
help it in anticipating and resolving technical issues that the Company
encounters in the widespread commercialization of the IPN, the Company has
engaged an executive search firm to assist it in hiring a new executive officer
to lead the Company's technical services division. Pursuant to its two-year
management services agreement with the Company, Vanguard continues to provide
technical support to the Company.
RETAILERS. Installations of the IPN have proceeded more slowly than
expected. Substantially all of the Company's scheduled IPN installations for the
first quarter of fiscal 1997 were under its A&P and Food Lion contracts.
Unanticipated technical implementation problems have delayed such scheduled
installations. The principal problems encountered by the Company have been the
low scanning quality of certain frequent shopper cards used by A&P customers and
difficulties in integrating the IPN with Food Lion's POS systems. In beginning
test installation of the IPN in the pilot A&P stores, the Company and A&P
discovered that large numbers of personal shopping cards of A&P customers could
not be read by the IPN because of their poor quality. To address this problem,
the Company developed a numeric "keypad" feature for display on the IPN that
allows a store's customer to input his or her card number if the IPN does not
read the card after insertion into the terminal. This feature has been
implemented in 29 of the A&P pilot stores and has been approved by A&P for
rollout to all 740 stores under contract. Although the Company believes that the
numeric keypad solution will work effectively, to date there is no statistical
data available from the pilot stores to evaluate its effect on customer usage.
During the planning process for the Food Lion pilot, the Company and Food Lion
discovered that Food Lion's store POS systems needed modification to communicate
with the IPN. The Company has delivered a prototype solution of this problem to
Food Lion which consists of readily available software and hardware additions to
Food Lion's equipment, and Food Lion has indicated that the prototype has
performed satisfactorily in tests run by its testing facility. The solution
would require
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incremental expenditures of approximately $1,100 per Food Lion store, some or
all of which may be borne by the Company. The Company currently has not
installed the IPN in any of its contracted Food Lion stores. See "Risk
Factors -- Management of Growth; Early State Products and Services; Accelerated
Installation."
The Company continues to build its base of retail stores under contract and
letter of intent. In recent weeks, the Company obtained letters of intent from
Laneco, Piggly Wiggly and Randalls.
MANUFACTURERS. Primarily as a result of the slower than expected growth in
IPN installations, the number of Manufacturers participating in the IPN has not
grown as expected. However, during each calendar quarter of 1996, the number of
Manufacturers participating on the IPN in the quarter has increased. A total of
17, 18, 22 and 25 Manufacturers participated during the first, second and third
calendar quarters and in the fourth calendar quarter to date, respectively.
Management believes that the quality of its participating Manufacturers
continues to improve. Four new clients, General Mills, Pillsbury, Georgia
Pacific and Pine Mountain, recently began their first IPN participation, and
Kraft Foods followed-up its promotion of five brands on the IPN in October with
a nine-brand promotion in November and is evaluating additional promotions. To
date, the Company's contracts with Manufacturers typically have been for
relatively low promotional dollar commitments and short terms to trial the IPN's
effectiveness. See "Risk Factors -- Ability to Obtain Brand Contracts; Lengthy
Sales Cycle; Uncertainty of Market Acceptance." As a result, the number of
participating Manufacturers and brand offerings on the IPN have varied from time
to time in each quarter.
CONSUMERS. The Company, through its IPN in the ACME retail chain, recently
completed a seven-week sweepstakes promotion sponsored by ACME in which shoppers
were able to enter a contest to win prizes and receive certain special
promotions via the IPN's touchscreen. The promotion allowed consumers to benefit
from both direct-to-consumer dollars (through the IPN) and retailer trade
dollars (through the chain's clipless coupons). During this promotion, the
Company experienced substantial increases in both volume (nearly tripled) and
rate of redemptions (up 58%) recorded by shoppers, as well as increased average
daily results on non-sweepstakes-related IPN promotions.
THE EXCHANGE OFFER
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Registration Agreement................ The Old Notes were sold by the Company on August 2, 1996, to the Initial Purchasers,
which placed the Old Notes with institutional investors (the "Private Placement"). In
connection therewith, the Company executed and delivered for the benefit of the
holders of the Old Notes the Registration Agreement (as defined) providing, among
other things, for the Exchange Offer.
The Exchange Offer.................... New Notes are being offered in exchange for an equal principal amount of Old Notes. As
of the date hereof, $142,000,000 aggregate principal amount of Old Notes are
outstanding. Since the New Notes will be recorded in the Company's accounting records
at the same carrying value as the Old Notes, no gain or loss will be recognized by the
Company upon the consummation of the Exchange Offer. See "The Exchange
Offer -- Accounting Treatment." Holders of the Old Notes do not have appraisal or
dissenter's rights in connection with the Exchange Offer under the North Carolina
Business Corporation Act, the governing law of the state of incorporation of the
Company. Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that holders of Old
Notes (other than any holder who is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) who exchange their Old Notes for New Notes
pursuant to the Exchange Offer may offer such New Notes for resale, resell such New
Notes and otherwise transfer such New Notes without compliance with the registration
and prospectus delivery provisions of the Securities Act; provided such New Notes are
acquired in the ordinary course of the holder's business and such holders are not
engaged in, and do not intend to engage in, a distribution of
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such New Notes and have an arrangement or understanding with any person to participate
in a distribution of such New Notes. The staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be no assurance
that the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." To comply with the securities laws of certain jurisdictions,
it may be necessary to qualify for sale or register the New Notes prior to offering or
selling such New Notes. The Company has agreed, pursuant to the Registration Agreement
and subject to certain specified limitations therein, to register or qualify the New
Notes for offer or sale under the securities or "blue sky" laws of such jurisdictions
as may be necessary to permit the holders of New Notes to trade the New Notes without
any restrictions or limitations under the securities laws of the several states of the
United States. If a holder of Old Notes does not exchange such Old Notes for New Notes
pursuant to the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. See "Risk Factors -- Consequences of Failure to
Exchange" and "Description of the New Notes -- Exchange Offer -- , Registration
Rights."
Expiration Date....................... 5:00 P.M., New York City time, on , 1997 (30 days
following the commencement of the Exchange Offer), unless the Exchange Offer is
extended, in which case the term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Conditions to the Exchange Offer...... The Exchange Offer is subject to certain customary conditions, which may be waived by
the Company. See "The Exchange Offer -- Conditions." Except for the requirements of
applicable Federal and state securities laws, there are no Federal or state regulatory
requirements to be complied with or obtained by the Company in connection with the
Exchange Offer. NO VOTE OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT THE
EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering Old Notes.... Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or otherwise deliver such Letter
of Transmittal, or such facsimile, together with the Old Notes to be exchanged and any
other required documentation to the Exchange Agent (as defined) at the address set
forth herein and therein. See "The Exchange Offer -- Procedures for Tendering."
Withdrawal Rights..................... Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New York City
time, on the Expiration Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be received by the Exchange Agent at
its address set forth below under "Exchange Agent" prior to 5:00 P.M., New York City
time, on the Expiration Date.
Acceptance of Old Notes and all Subject to certain conditions, the Company will accept for exchange any Old Notes
Delivery of New Notes............... which are properly tendered in the Exchange Offer prior to 5:00 P.M., New York City
time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
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Certain Tax Considerations............ The exchange of New Notes for Old Notes should not be a sale or exchange or otherwise
a taxable event for Federal income tax purposes. See "Certain Federal Income Tax
Considerations."
Exchange Agent........................ Fleet National Bank is serving as exchange agent (the "Exchange Agent") in connection
with the Exchange Offer.
Use of Proceeds....................... There will be no proceeds to the Company from the Exchange Offer. The net proceeds of
the Private Placement were approximately $90.9 million. The Company will continue to
use such proceeds (i) predominantly to fund capital expenditures, working capital
requirements and operating losses incurred in connection with the large-scale
commercialization of the IPN (primarily in retail supermarket chains) and (ii) for
general corporate purposes. See "Use of Proceeds."
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SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $142,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes, and will be entitled to the benefits of the same
Indenture. The form and terms of the New Notes are generally the same as the
form and terms of the Old Notes, except that the New Notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof. See "Description of the New Notes."
COMPARISON WITH OLD NOTES
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Freely Transferable................... Generally, the New Notes will be freely transferable under the Securities Act by
holders who are not affiliates of the Company. The New Notes otherwise will be
substantially identical in all material respects (including interest rate and
maturity) to the Old Notes, except that the New Notes do not contain terms with
respect to the interest rate step-up provisions applicable upon Registration Defaults
(as defined herein) by the Company. See "The Exchange Offer -- Terms of the Exchange
Offer."
Registration Rights................... The holders of Old Notes currently are entitled to certain registration rights
pursuant to a registration rights agreement (the "Registration Agreement") dated as of
July 30, 1996, between the Company and the Initial Purchasers. However, upon
consummation of the Exchange Offer, subject to certain exceptions, holders of Old
Notes who do not exchange their Old Notes for New Notes in the Exchange Offer will no
longer be entitled to registration rights and will not be able to offer or sell their
Old Notes, unless such old Notes are subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the Company will have no obligation to
do), except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See "Risk Factors Consequences of
Failure to Exchange."
</TABLE>
THE NEW NOTES
TERMS OF THE NEW NOTES
<TABLE>
<S> <C>
Maturity Date......................... August 1, 2003.
Yield and Interest.................... 14% per annum (computed on a semi-annual bond equivalent basis). Cash interest will
not accrue on the New Notes prior to August 1, 1999. Thereafter, interest on the Notes
will accrue in cash and be payable semi-annually on each February 1 and August 1,
commencing February 1, 2000.
</TABLE>
<TABLE>
<S> <C>
Original Issue Discount............... The Old Notes were issued with original issue discount requiring holders of the New
Notes to include amounts as gross income for Federal income tax purposes prior to the
receipt of the cash to which the income is attributable. See "Certain Federal Income
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Tax Considerations -- Tax Consequences to U.S. Persons -- Original Issue Discount."
Optional Redemption................... The New Notes are redeemable at the option of the Company, in whole or in part, on or
after August 1, 2000, at 107% of their principal amount at maturity, declining to par
on or after August 1, 2002, plus accrued and unpaid interest, if any, to the date of
redemption. In addition at any time and from time to time prior to August 1, 1999, the
Company may redeem in the aggregate up to $30 million of the principal amount at
maturity of the Old and New Notes with the proceeds of one or more Public Equity
Offerings (as defined herein), at a redemption price (expressed as a percentage of
Accreted Value (as defined herein)) of 114%; PROVIDED, HOWEVER, that at least $112
million aggregate principal amount at maturity of Notes must remain outstanding after
each such redemption. See "Description of Notes -- Optional Redemption."
Sinking Fund.......................... None.
Change of Control..................... Upon a Change of Control (as defined herein), the Company will be required to make an
offer to purchase the Old and New Notes at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to the date of
purchase. There can be no assurance that the Company will have the financial resources
necessary to purchase the Notes upon a Change of Control. See "Description of
Notes -- Change of Control Offer."
Ranking............................... The New Notes are senior unsecured obligations of the Company, ranking PARI PASSU with
all other existing and future senior indebtedness of the Company, and ranking senior
in right of payment to all existing and future subordinated indebtedness of the
Company. As of June 29, 1996, on an as adjusted basis after giving effect to the
Private Placement, the Company's total indebtedness (including the Notes) would have
been $70.5 million, including $322,747 of subordinated indebtedness owed to
shareholders of the Company. In addition, all indebtedness and other liabilities of
present or future subsidiaries of the Company will be effectively senior in right of
payment to the New Notes. Although the Indenture for the New Notes contains
limitations on the amount of additional indebtedness which the Company and its
subsidiaries may incur, the amounts of such indebtedness could be substantial and, in
any case, all such indebtedness will be effectively senior in right of payment to the
New Notes. Moreover, claims of creditors of the Company's subsidiaries, including
trade creditors, and holders of preferred stock of the Company's subsidiaries, if any,
will generally have a priority as to the assets of such subsidiaries over claims of
the Company.
Certain Covenants..................... The Indenture for the New Notes contains limitations on, among other things, (a) the
ability of the Company and its Restricted Subsidiaries (as defined herein) to incur
additional indebtedness, (b) the payment of dividends and other distributions with
respect to the capital stock of the Company and the purchase, redemption or retirement
of capital stock of the Company, (c) the incurrence of certain liens, (d) the ability
of the Company to restrict distributions by Restricted Subsidiaries, (e) the use of
proceeds from certain asset sales, (f) the ability of the Company and any Restricted
Subsidiary to engage in any business other than a Related Business (as defined
herein), (g) transactions with affiliates and (h) certain consolidations, mergers and
transfers of assets. All these limitations are subject to a number of important
qualifications some of which provide the Company significant flexibility to incur
additional indebtedness and engage in the other actions limited by the covenants. See
"Description of New Notes -- Certain Covenants."
</TABLE>
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited and unaudited Consolidated Financial Statements included elsewhere
in this Offering Memorandum.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
FEBRUARY 25, 1993 FOR THE PERIOD FROM
(DATE OF YEAR ENDED YEAR ENDED FEBRUARY 25, 1993
INCEPTION) TO SEPTEMBER 30, SEPTEMBER 28, (DATE OF INCEPTION) TO
SEPTEMBER 30, 1993 1994 1995 1996 SEPTEMBER 28, 1996
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................ $ 11 $ 3 $ 110 $ 205 $ 329
Gross profit (deficit)................... 7 (260) (732) (2,489) (3,473)
Loss from operations..................... (1,295) (2,267) (4,427) (9,750) (17,739)
Net loss................................. (1,295) (2,344) (4,526) (11,559) (19,723)
Net loss per share....................... $ (0.46) $ (0.83) $ (1.27) $ (1.91) N/A
Weighted average common shares
outstanding............................ 2,793 2,830 3,556 6,038 N/A
Deficiency of earnings available to cover
fixed charges (a)...................... $ 1,295 $ 2,354 $ 4,615 $ 12,494 $ 20,758
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
<S> <C>
BALANCE SHEET DATA:
Working capital.......................................................................................... $ 91,836
Total assets............................................................................................. 107,757
Total debt............................................................................................... 73,227(b)
Common stock purchase warrants........................................................................... 24,464(b)
Stockholders' equity..................................................................................... 7,934
</TABLE>
(a) For purposes of computing the deficiency of earnings available to cover
fixed charges, earnings include loss from operations, which excludes
interest expense, interest and dividend income, and other income, net. Fixed
charges consist of interest expense.
(b) Reflects the effect of the valuation of Warrants issued in the Private
Placement with respect to 7.334 shares issuable per warrant. Does not
reflect additional shares which would be issuable if the Company has not
completed a Qualifying Initial Public Offering (as defined) by September 30,
1997.
8
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
AS WELL AS OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE TENDERING
THEIR OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW (OTHER
THAN "CONSEQUENCES OF FAILURE TO EXCHANGE") ARE GENERALLY APPLICABLE TO THE NEW
NOTES AS WELL AS THE OLD NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, as set forth in no-action
letters to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the issuer within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holder's business and such holders are
not engaged in, and do not intend to engage in, a distribution of such New Notes
and have an arrangement or understanding with any person to participate in a
distribution of such New Notes. The staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Notes where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 90 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available and is complied with. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES
The Company was incorporated in February 1993 and has concentrated its
efforts on the development, testing and initial deployment of the IPN, on
capital formation and on the recruitment of management and other key employees.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. To date, the Company
has generated minimal operating revenue, has incurred significant losses and has
experienced substantial negative cash flow from operations. The Company had net
losses of $2.3 million for the year ended September 30, 1994, $4.5 million for
the year ended September 30, 1995 and $11.6 million for the year ended September
28, 1996. The Company expects to incur substantial additional costs to install
additional IPN terminals and to sponsor selected promotions to demonstrate the
utility of the IPN to consumers, retailers and Manufacturers. See
"Business -- Business Strategy -- Brand Strategy -- Selective Brand Promotions
By the Company." The Company expects to incur net losses in fiscal 1996 and
fiscal 1997 and may operate at a loss for the foreseeable future, and there can
be no assurance that the Company will ever be able to achieve profitability or,
if achieved, sustain such profitability.
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the early stages of
their development. To address these risks, the Company must, among other things,
manage effectively any growth that may occur, successfully commercialize its
product by
9
<PAGE>
securing new and renewal commitments from Manufacturers, respond to competitive
developments and attract and retain management and other key personnel.
ABILITY TO OBTAIN BRAND CONTRACTS; LENGTHY SALES CYCLE; UNCERTAINTY OF MARKET
ACCEPTANCE
All or substantially all of the Company's revenue is expected to be derived
for the foreseeable future from fees paid by Manufacturers that place product
promotions on the IPN. However, Manufacturers currently participating in the IPN
are doing so at relatively low promotional dollar commitments to trial the IPN's
effectiveness. Accordingly, the Company's future success will depend
substantially on its ability to establish, maintain and expand relationships
with Manufacturers to promote their products using the IPN. Moreover, it is
critical that the Company obtain additional commitments from Manufacturers of
major brands in the most popular consumer product categories and develop
long-term relationships with these Manufacturers in order to ensure that an
appropriate mix of products is displayed on the IPN.
The Company has experienced a lengthy sales cycle in marketing the IPN to
Manufacturers. In most cases, the time between initial contact with the
Manufacturer and the execution of the final contract, if any, exceeds five
months. However, the Company is commencing its large-scale installation of the
IPN prior to obtaining commitments from major and other Manufacturers sufficient
to support its future operations. The Company could fail to obtain such
commitments or could experience substantial delays in obtaining such
commitments, or the Company could fail to maintain relationships through renewal
contracts. There can be no assurance that the Company will obtain additional
commitments on a timely basis from any Manufacturers and maintain long-term
relationships with these Manufacturers to participate in the IPN. Even if the
Company obtains initial commitments from additional major and other
Manufacturers, these contracts typically have had short-term durations and there
can be no assurance that such Manufacturers will make the IPN a component of
their long-term promotional strategies. If any of the foregoing events occur,
the Company may be required to delay implementation of its large-scale
commercialization of the IPN and it may incur substantially greater losses for a
longer period than expected and experience a material adverse effect on its
results of operations and financial condition. In addition, as a new market
participant, it may only receive one opportunity to convince any single
Manufacturer to become and remain a customer of the Company. As a result, even
short-term difficulties in implementing its strategies could have a material
adverse effect on its results of operations and financial condition.
In order to enhance its prospects of enrolling major and other
Manufacturers in the IPN, the Company has elected in the past, and expects to
elect in the future, to sponsor from time to time, at its own cost, selected
product promotions in its stores to continue to demonstrate the effectiveness of
the IPN in prompting product sales and targeting promotions to individual
consumers. Since these promotional expenditures are classified as selling,
general and administrative expenses and are incurred to attract Manufacturers
and enhance future revenue, the Company's current losses will be increased in
the period of the expenditures and, if the expected future revenue does not
materialize, any liquidity difficulties being experienced by the Company could
be exacerbated.
Because the utility and the ultimate attractiveness of the IPN to
Manufacturers is substantially dependent on the number of shoppers using the
system, the size of the Company's installed store base significantly affects its
revenue generation potential. The Company's profitability and the success of its
growth plans will be significantly affected by its ability to contract with
additional retailers for the installation of the IPN and to install the system
in such stores in a rapid and orderly manner. While the Company has contractual
commitments and letters of intent from 17 supermarket chains as of December 9,
1996, there can be no assurance that retailers who currently or in the future
have IPN terminals installed will retain the IPN in their stores or that the
Company will be able to continue to increase the number of stores in which the
IPN is installed.
The Company also is dependent on the level of general acceptance and usage
by consumers. Consumer acceptance and usage are dependent on many factors, such
as actual and perceived ease of use, access to terminals during peak shopping
periods, reliability of the Company's IPN and perceived attractiveness of the
product offerings of the IPN. There can be no assurance that an adequate number
of consumers will use the IPN at a level sufficient to support the IPN on an
ongoing basis.
Inasmuch as demand by Manufacturers, retailers and consumers is
substantially interrelated, any significant continuous lack or lessening of
demand by any one of these constituencies could have an adverse effect on
overall market acceptance. See "Business -- Business Strategy" and
"Business -- Sales and Marketing."
10
<PAGE>
MANAGEMENT OF GROWTH; EARLY STAGE PRODUCTS AND SERVICES; ACCELERATED
INSTALLATION
The Company's rapid growth has placed, and is expected to continue to
place, significant pressure on the Company's managerial, operational and
financial resources. To manage its growth, the Company must continue to
strengthen its management team, implement and improve its operational and
financial systems and expand, train and manage its employee base. The Company
also will be required to develop and manage multiple relationships with various
customers, business partners and other third parties. The Company's systems,
procedures or controls may not be adequate to support the Company's operations
and Company management may not be able to achieve the rapid expansion necessary
to exploit potential market opportunities for the Company's products and
services. Any significant problems in the Company's commercialization of the IPN
could create a negative image in the consumer product promotion and couponing
business that may be impossible to overcome. The Company's future operating
results will also depend on its ability to expand its sales and marketing and
research and development organizations, to implement and manage new distribution
channels to penetrate markets and to expand its support organization. If the
Company is unable to manage growth effectively, the Company's business,
operating results and financial condition will be materially adversely affected.
Although it has been tested in commercial and noncommercial environments,
the IPN is in the early stages of implementation and is subject to the risks
inherent in the commercialization of new products. The Company has limited
experience in installing and operating substantial numbers of IPN terminals and
has encountered technical implementation problems as it installs IPN terminals
on a greater scale, which have delayed a substantial number of the Company's
scheduled IPN installations.
Substantially all of the Company's planned installations for the first
quarter of fiscal 1997 were in the A&P and Food Lion chains. The principal
problems encountered by the Company have been the low scanning quality of
certain frequent shopper cards used by A&P customers and difficulties in
integrating the IPN with Food Lion's POS systems. In beginning test installation
of the IPN in the pilot A&P stores, the Company and A&P discovered that large
numbers of personal shopping cards of A&P customers could not be read by the IPN
because of their poor quality. To address this problem, the Company developed a
numeric "keypad" feature for display on the IPN that allows a store's customer
to input his or her card number if the IPN does not read the card after
insertion into the terminal. This feature has been implemented in 29 of the A&P
pilot stores and has been approved by A&P for rollout to all 740 stores under
contract. Although the Company believes that the numeric keypad solution will
work effectively, to date there is no statistical data available from the pilot
stores to evaluate its effect on customer usage. During the planning process for
the Food Lion pilot, the Company and Food Lion discovered that Food Lion's store
POS systems needed modification to communicate with the IPN. The Company has
delivered a prototype solution of this problem to Food Lion which includes
readily available hardware and software additions to Food Lion's equipment, and
Food Lion has indicated that the prototype has performed satisfactorily in tests
run by its testing facility. The Company's solution would require incremental
expenditures of approximately $1,100 per Food Lion store, some or all of which
may be borne by the Company. The Company currently has not installed the IPN in
any of its contracted Food Lion stores.
There can be no assurance that these or other problems associated with new
product commercialization will not continue to occur. As the Company continues
to install terminals on a greater scale, there are likely to be other technical
implementation problems, some of which may be material. The continuing
occurrence of difficulties in installing and operating a large number of
terminals could have a material adverse effect on the Company's prospects,
operating results and financial condition.
RISKS RELATING TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company is highly leveraged, with indebtedness that is substantial in
relation to its stockholders' equity. As of September 28, 1996, the Company had
an estimated aggregate of $73.2 million of indebtedness and stockholders' equity
of $7.9 million. See "Capitalization." Earnings before income taxes and fixed
charges were insufficient to cover fixed charges by $12.5 million for the year
ended September 28, 1996. See "Selected Consolidated Financial Data."
The Company's high degree of leverage could have important consequences to
the holders of the Notes and Warrants, including but not limited to the
following: (i) the Company's ability to obtain additional financing for capital
expenditures, working capital, general corporate purposes or other purposes
(including potential acquisitions) may be impaired in the future; and (ii) the
Company's flexibility to adjust to changing market conditions and ability to
11
<PAGE>
withstand competitive pressures could be limited, and the Company may be more
vulnerable to a downturn in general economic conditions of its business, or be
unable to carry out capital spending that is important to its growth strategy.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes and its other indebtedness will ultimately
depend on its financial and operating performance, which in turn, is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors that may be beyond its control, including operating
difficulties, increased operating costs, product prices, the response of
competitors, regulatory developments and delays in implementing its strategy.
The Company's ability to meet its debt service and other obligations will depend
on the extent to which the Company can implement successfully its business
strategy of achieving large-scale commercialization of the IPN. There can be no
assurance that the Company will be able to implement fully its strategy or that
the anticipated results of its strategy will be realized. See
"Business -- Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, seek to obtain additional equity capital, or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future, or that any such alternative measures would be
available at reasonable costs or would permit the Company to meet its scheduled
debt service obligations. In the absence of adequate operating results and/or
capital resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom.
EFFECTIVE SUBORDINATION TO OBLIGATIONS OF SUBSIDIARIES
The Notes are effectively subordinated to all indebtedness and other
liabilities and commitments of the present and future subsidiaries of the
Company, including trade payables and other indebtedness and preferred stock
obligations, if any. Any right of the Company to receive assets of any such
subsidiary upon the liquidation or reorganization of such subsidiary is
effectively subordinated to the claims of that subsidiary's creditors, except to
the extent the Company is itself recognized as a creditor of such subsidiary, in
which case the claims of the Company are still subject to any security interests
in the assets of such subsidiary and subordinate to any claims of such
subsidiary senior to those held by the Company. The Company's sole subsidiary is
inactive and, as of September 28, 1996, had no balance sheet liabilities. Under
the Indenture for the Notes, the Company's present and future subsidiaries are
permitted to incur substantial additional liabilities.
NEED FOR ADDITIONAL FINANCING
The Company may require additional capital prior to December 31, 1997 to
fund its planned expansion and to address liquidity needs caused by shortfalls
in revenue. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources." If additional funds
are raised through debt financing, such financing will increase the financial
leverage of the Company and earnings would be reduced by the associated interest
expense. The Indenture permits the Company to incur additional indebtedness,
subject to certain limitations. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or at
all. If adequate funds are not available on acceptable terms, the Company may be
unable to continue its planned IPN installations, expand both the number and
dollar amount of Manufacturer commitments, or respond to competitive pressures,
any of which could have a material adverse effect on the Company's results of
operations and financial condition.
LACK OF PRODUCT DIVERSIFICATION; DEPENDENCE ON CONSUMER PRODUCTS ADVERTISING AND
PROMOTIONAL BUSINESS
The Company's business is currently concentrated in the commercialization
of the IPN for use in supermarkets and is expected to be so concentrated for the
foreseeable future, thereby making the Company susceptible to a downturn in that
industry. For the year ended September 28, 1996, the Company derived all its
revenue from its IPN operations, and substantially all the Company's revenue for
the foreseeable future is expected to be derived from the operation of the IPN
in supermarkets. Any decrease in Manufacturers' promotional expenditures could
result in a smaller overall market for the Company's services. In addition,
Manufacturers may decide to decrease
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promotional expenditures in favor of increased advertising, lower prices or
other marketing strategies, including "every day low price" and efficient
consumer response initiatives. For example, the Company is aware of one major
Manufacturer that has been testing, in selected markets, a strategy of
eliminating the use of FSIs. These factors as well as others affecting the
advertising and promotional strategy of consumer products manufacturers could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON THIRD PARTIES
The expected growth of the market for the IPN, in conjunction with the
Company's limited resources, make the success of the Company and its business
dependent on, among other things, its ability to work successfully with third
parties. There can be no assurance that the Company will be successful in
identifying such third parties, that it will be able to maintain suitable
agreements with such third parties or that it will be able to implement
successfully any future agreements should they become necessary. Failure by the
Company to accomplish any of the above could have a material adverse effect on
the Company's business, operating results and financial condition.
For example, the Company has sold its manufacturing operations to Coleman
Resources and the Company's success will depend particularly on the ability of
Coleman Resources to fulfill the Company's needs on a timely basis. The ability
of the Company to realize recurring revenue from promotion redemptions will be
dependent on the success of the Company's plan to accelerate installation of IPN
terminals in retail stores with whom the Company has secured contractual
commitments. Failure of Coleman Resources to generate and sustain production
demand for the finished IPN terminals would have a material adverse effect on
the Company's business, operating results and financial condition.
Although the Company views strategic and other alliances with third parties
as an important factor in the development and commercialization of its products
and services, there can be no assurance that such third parties will view their
alliances with the Company as significant for their own businesses or that they
will not reassess their commitment to the Company at any time in the future.
COMPETITION
The consumer product advertising and promotional business is intensely
competitive. Many media outlets compete for the advertising and promotional
dollars Manufacturers spend to help sell their products. The Company's services
compete against these media outlets, such as television, radio, newspapers and,
most directly, coupons. A number of new, electronic marketing products and
services also have been introduced, including electronic shelf markers,
computer-screen equipped shopping carts, battery-powered coupon dispensers,
electronic marketing networks and frequent shopper programs. A number of
potential competitors have failed because of a lack of acceptance, lack of
capital, technical problems or a combination of these factors. While the Company
believes it provides a cost-effective targeted marketing service, there are many
factors a Manufacturer will take into account in allocating advertising or
promotional expenditures, and there can be no assurance that the Company's
services will compete effectively against alternative marketing outlets. Most of
the Company's competitors in the consumer product promotional and advertising
business are larger, possess significantly greater financial resources and have
longer operating histories than the Company. See "Business -- Competition."
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company holds licenses to United States patents which cover various
aspects of its systems and methods of distributing promotions, and the Company
also has an additional patent application pending. The Company believes that its
early entrance into interactive electronic marketing provides an advantage over
later market entrants. However, it is possible that patent rights held by the
Company may be held invalid or that disputes with third parties over the scope
of licensed patents or other proprietary rights may occur. In addition, certain
aspects of the Company's services may not be adequately protected from
infringement or copying. Further, there can be no assurance that the Company's
licensed patents or its trademarks would be upheld if challenged or that
competitors might not develop similar or superior processes or services outside
the protection of any patents licensed to the Company. See "Business -- Patents,
Proprietary Information and Trademarks."
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<PAGE>
NEW MANAGEMENT; DEPENDENCE ON KEY EMPLOYEES
The Company's Chief Financial Officer has served in such capacity since
September 1996, its Senior Vice President of Sales and Marketing has served
since 1995 and substantially all the Company's sales force has been hired in the
current year. The Company's Chief Executive Officer was elected to such position
on June 12, 1996 and is also a co-founder and executive officer of Vanguard. In
addition, the Company plans to begin searching in 1997 for a new Chief Operating
Officer and the position is unfilled at present. The Company's former President
and Chief Operating Officer has resigned effective December 31, 1996. See
"Business -- Recent Developments." An inability of new management and other
recently hired employees of the Company to adjust quickly to, and to perform as
expected in, their respective roles within the Company or an inability of the
Company to attract and retain employees with such skills could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management."
The Company is also highly dependent on certain key technical employees and
on its ability to recruit, retain and motivate high quality technical personnel.
The Company is searching for a new Vice President to lead its technical services
division and the position remains unfilled at present. Competition for such
personnel is intense, and the inability to attract and retain additional
qualified employees or the loss of current key technical employees could
materially and adversely affect the Company's business, operating results and
financial condition. See "Management."
RELATIONSHIP WITH DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS; POTENTIAL
CONFLICTS OF INTEREST
The directors, officers and principal shareholders of the Company have
potential conflicts of interest in certain transactions with the Company and
between the Company and certain parties controlled by or otherwise related to
directors, officers or principal shareholders. These transactions include asset
purchases, private purchases of stock, loans to the Company, licensing of
proprietary rights, option grants, consulting agreements and other transactions.
See "Certain Transactions." In addition, directors and officers of Vanguard who
are also directors or officers of the Company have certain fiduciary obligations
to each organization. Vanguard and directors and officers of Vanguard who are
also directors and officers of the Company are in positions involving the
possibility of conflicts of interest with respect to certain transactions
concerning the Company. Although the terms of certain of these arrangements were
established in consultation with the Company, they were not the result of
arm's-length negotiations. Accordingly, although the Company believes that the
terms of these arrangements were reasonable under the circumstances, there can
be no assurance that these arrangements are as favorable to the Company as those
that could have been obtained from unaffiliated third parties. With respect to
future transactions, the Company currently has not adopted or formulated any
procedures to resolve conflicts of interest other than customary board practices
such as relying on the judgment of disinterested directors, when appropriate.
However, the Indenture includes a covenant that provides, among other things,
that transactions with Affiliates (as defined) be set forth in writing, be in
the best interests of the Company and be no less favorable to the Company than
those that could be obtained in a comparable arm's length transaction.
ABSENCE OF PUBLIC TRADING MARKET
The New Notes will constitute a new issue of securities for which there is
no established trading market and may not be widely distributed. The Initial
Purchasers have informed the Company that they currently intend to make a market
in the New Notes as permitted by applicable laws and regulations; however, the
Initial Purchasers are not obligated to do so and may discontinue market making
at any time without notice. The Company does not intend to list the New Notes on
any national securities exchange or to seek the admission thereof to trading in
the Nasdaq National Market, and there can be no assurance as to the development
of any market or liquidity of any market that may develop for the New Notes. If
a market does develop, the price of the New Notes may fluctuate and liquidity
may be limited. If a market for the New Notes does not develop, purchasers may
be unable to resell such securities for an extended period of time, if at all.
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their principal
amount at maturity. Consequently, holders of the New Notes generally will be
required to include amounts in gross income for federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable. See
"Certain Federal
14
<PAGE>
Income Tax Considerations" for a more detailed discussion of the federal income
tax consequences to the holders of the New Notes of the acquisition, ownership
and disposition of the New Notes.
If a bankruptcy case is commenced by or against the Company under federal
bankruptcy law after the issuance of the New Notes, the claim of a holder of New
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial offering price of the Old Notes exchanged
for New Notes and (ii) that portion of the original issue discount that is not
deemed to constitute "unmatured interest" for purposes of federal bankruptcy
law. Any original issue discount that was not amortized as of any such
bankruptcy filing would constitute "unmatured interest."
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes pursuant to a Purchase
Agreement dated as of July 30, 1996, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Agreement.
The Registration Agreement obligates the Company to (i) file the
Registration Statement of which this Prospectus is a part for the Exchange Offer
within 45 days after August 2, 1996, the date the Old Notes were issued (the
"Issue Date"), (ii) use its best efforts to cause the Registration Statement to
become effective within 120 days after the Issue Date and (iii) consummate the
Exchange Offer within 150 days of the Issue Date. The Exchange Offer is being
made pursuant to the Registration Agreement. See "Description of the New
Notes -- Exchange Offer, Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
the Company will accept for exchange all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The
Company will issue New Notes in exchange for an equal principal amount of
outstanding Old Notes accepted in the Exchange Offer.
As of the date of this Prospectus, $142,000,000 aggregate principal amount
of Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of , 1996.
The Company's obligation to accept Old Notes for exchange pursuant to the
Exchange Offer is subject to certain conditions as set forth herein under
" -- Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. securities laws.
See "Risk Factors -- Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1997 (30 days following
the commencement of the Exchange Offer), unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated within 150 days of the Issue Date, a Registration Default will
occur and additional cash interest will accrue on the Notes at the rate of 0.50%
per annum. See "Description of New Notes -- Exchange Offer; Registration
Rights." See " -- Acceptance of Old Notes for Exchange; Delivery of New Notes."
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
15
<PAGE>
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
" -- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Old Notes of such amendment
and the Company will extend the Exchange Offer for a period of five to 10
business days, depending upon the significance of the amendment and the manner
of disclosure to holders of the Old Notes, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the North Carolina Business Corporation
Act, the state in which the Company is incorporated.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, Letter of
Transmittal and all other required documents must be received by the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of all documents must be made to the Exchange Agent at its address set forth
below. Holders may also request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a
16
<PAGE>
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion subject to the terms and conditions of the
Exchange Offer, which determination will be final and binding. The Company
reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes which, if accepted by the Company, would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under " -- Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that: (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act);
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business; and (iii) at the time of commencement of the Exchange Offer, it
was not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Notes. If
a holder of Old Notes is an affiliate of the Company, and is engaged in or
intends to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder could not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and Prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker or dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker or dealer as a result of market-making
activities, or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
17
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See " -- Conditions" below. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. For each Old Note accepted for exchange, the holder of such Old
Notes will receive a New Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under " -- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of
18
<PAGE>
the person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under " -- Procedures for Tendering" above at any
time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the Securities Act and the Exchange Act and without
material restrictions under the "blue sky" or securities laws of substantially
all of the states.
EXCHANGE AGENT
Fleet National Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY MAIL: BY HAND/OVERNIGHT DELIVERY:
Fleet National Bank Fleet National Bank
Attn Corporate Trust
CT/OP/TO6B Attn: Corporate Trust
Hartford, Connecticut 06102 One Talcott Plaza
5th Floor Window
Hartford, Connecticut 06120
</TABLE>
FACSIMILE TRANSMISSION:
(860) 986-7908
CONFIRM BY TELEPHONE:
Patricia Williams
(860) 986-2910
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
19
<PAGE>
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee (as hereinafter defined) and accounting, legal, printing and related
fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes in accordance with generally accepted accounting principles.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the New
Notes pursuant to the Exchange Offer. The Company will continue using the net
proceeds from the Private Placement of the Old Notes as described in the
Offering Memorandum dated July 30, 1996, (i) predominately to fund capital
expenditures, working capital requirements and operating losses incurred in
connection with the large-scale commercialization of the IPN (primarily in
retail supermarket chains) and (ii) for general corporate purposes. Pending such
uses, the Company intends to invest such net proceeds in short-term,
investment-grade, interest-bearing securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE>
CAPITALIZATION
The following table sets forth as of September 28, 1996 the actual cash
position and capitalization of the Company. This table should be read in
conjunction with the Company's Consolidated Financial Statements appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 28, 1996
<S> <C>
(DOLLARS IN
THOUSANDS)
Cash and cash equivalents............................................................................. $ 93,480
Long-term Debt:
14% Senior Discount Notes Due 2003.................................................................. $ 72,751(a)
Notes Payable to Stockholders....................................................................... 237
Capital Lease Obligations........................................................................... 239
Total long-term debt........................................................................ 73,227(a)
Other long-term liabilities........................................................................... 58
Common stock purchase warrants........................................................................ 24,464(a)
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized, 7,658,555 shares outstanding, actual and
as adjusted...................................................................................... 27,651
Additional paid in capital.......................................................................... 768
Deferred compensation............................................................................... (762)
Deficit accumulated during the development stage.................................................... (19,723)
Total stockholders' equity.................................................................. 7,934
Total capitalization...................................................................... $ 105,683
</TABLE>
(a) Reflects the effect of the valuation of Warrants issued in the Private
Placement with respect to 7.334 shares issuable per warrant. Does not
reflect additional shares which would be issuable if the Company has not
completed a Qualifying Initial Public Offering (as defined) by September 30,
1997.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected financial data for the periods
indicated. The following financial data should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited and unaudited Consolidated
Financial Statements included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
FEBRUARY 25, 1993 YEAR ENDED YEAR ENDED FEBRUARY 25, 1993
(DATE OF INCEPTION) TO SEPTEMBER 30, SEPTEMBER 28, (DATE OF INCEPTION) TO
SEPTEMBER 30, 1993 1994 1995 1996 SEPTEMBER 28, 1996
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $ 11 $ 3 $ 110 $ 205 $ 329
Gross profit (deficit).................. 7 (260) (732) (2,489) (3,473)
Loss from operations.................... (1,295) (2,267) (4,427) (9,750) (17,739)
Net loss................................ (1,295) (2,344) (4,526) (11,559) (19,723)
Net loss per share...................... $ (0.46) $ (0.83) $ (1.27) $ (1.91) N/A
Weighted average common shares
outstanding........................... 2,793 2,830 3,556 6,038 N/A
Deficiency of earnings available to
cover fixed charges (a)............... $ 1,295 $ 2,354 $ 4,615 $ 12,494 $ 20,758
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 SEPTEMBER 28, 1996
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................................................... $ (753) $ 91,836
Total assets....................................................................... 2,178 107,757
Total debt......................................................................... 2,042 73,227(b)
Common stock purchase warrants..................................................... -- 24,464(b)
Stockholders' equity (deficit)..................................................... (910) 7,934
</TABLE>
(a) For purposes of computing the deficiency of earnings available to cover
fixed charges, earnings include loss from operations, which excludes
interest expense and other income, net. Fixed charges consist of interest
expense.
(b) Reflects the effect of the valuation of Warrants issued in the Private
Placement with respect to 7.334 shares issuable per warrant. Does not
reflect additional shares which would be issuable if the Company has not
completed a Qualifying Initial Public Offering (as defined) by September 30,
1997.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company develops, owns and operates proprietary electronic marketing
systems that are designed to give consumer products manufacturers (the
"Manufacturers") and retailers the ability to influence the purchasing behavior
of consumers moments before shopping begins and to track and analyze individual
consumer purchasing behavior on an ongoing basis. The Company's current
commercial product offering utilizes interactive "touch-screen" terminals inside
the entrance of retail supermarkets that issue individually targeted, and
immediately usable, coupons and other promotional incentives based on each
consumer's cumulative purchasing history. Since its formation in 1993, the
Company has concentrated on the development and commercialization of its systems
primarily in retail supermarkets. For the period from inception (February 25,
1993) through September 28, 1996 the Company was a development stage company,
and its activities principally related to the development, testing and initial
deployment of the IPN, capital formation and the recruitment of management and
other key employees.
To date, the Company has generated minimal operating revenue, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development. The Company had an accumulated deficit as of September 28,
1996 of $19,723,174 with net losses of $11,558,890, $4,525,722, $2,343,510 and
$1,295,052 for the years ended September 28, 1996, September 30, 1995 and 1994,
and for the period of inception through September 30, 1993, respectively. The
Company expects to incur substantial additional costs to install additional IPN
terminals in retail supermarket stores and to sponsor selected promotions to
demonstrate the utility of the IPN to consumers, retailers and Manufacturers.
The Company expects to incur net losses in fiscal 1997 and may operate at a loss
for the foreseeable future, and there can be no assurance that the Company will
ever be able to achieve profitability or, if achieved, sustain such
profitability.
During 1995, the Company installed its IPN in grocery stores under one
retail grocery store chain, offering consumers a minimal number of brand
incentive coupons. Starting in 1995, the Company conducted a pilot in 25 retail
grocery stores whereby it supported a full scale offering of brand incentives in
order to gauge customer usage levels. Although the pilot tests confirmed
substantial customer usage, the Company also recognized that a larger base of
installed stores would be necessary to secure ongoing Manufacturer
participation. To that end, the Company has more recently concentrated its
efforts on marketing its IPN to supermarket chains to gain sufficient
penetration in particular markets to make the IPN more attractive to
Manufacturers. This expansion is being financed with the net proceeds of the
Private Placement. As of December 9, 1996, the Company had contracts and letters
of intent to install and operate its IPN in approximately 3,000 stores of which
were installed and operating.
As of December 9, 1996, 19 Manufacturers representing 53 brand offerings
were under contract to participate in the IPN, most of which were short-term and
at relatively low expenditure levels to trial the effectiveness of the IPN.
OVERVIEW OF REVENUE AND EXPENSES
The Company anticipates that its primary source of revenue will continue to
be from transaction fees it charges participating Manufacturers. Each electronic
redemption of a promotion by a consumer will generate a transaction fee,
consisting of a fee for the retailer, a fee for Inter(Bullet)Act and the face
value of the coupon (which the Company passes on to the retailer).
Direct operating expenses consist primarily of (i) uncapitalized costs of
installing IPN terminals in stores, (ii) store support and various marketing
expenses, (iii) retailer processing fees and (iv) paper for "shopping list" or
coupon printing.
Selling, general and administrative expenses consist primarily of costs
associated with (i) the Company's sales force, (ii) marketing and administrative
personnel, (iii) royalties for use of patents and licenses, (iv) travel,
consulting, professional fees, business communications and other expenses and
(v) research and product development costs, composed mainly of the IPN's
hardware and software development costs. In addition, as part of its development
strategy to attract substantial retailer and Manufacturer commitments and to
encourage consumer usage of the system, the Company from time to time includes
in the IPN in certain stores a number of product
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promotions for which the Company has no contract for transaction fees from the
Manufacturer. For such products, the Company bears the full cost of each
redemption and receives no transaction fee from the Manufacturer. These costs
are included as marketing expenses in selling, general and administrative
expenses. See "Business -- Business Strategy -- Brand Strategy -- Selective
Brand Promotions by the Company."
Depreciation and amortization expenses are principally incurred in
connection with installed IPN terminals and, to a lesser extent, Company-owned
computers, development and testing equipment, office equipment, furniture,
fixtures and improvements.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 28,1996, SEPTEMBER 30,1995 AND SEPTEMBER 30,1994
AND FOR THE PERIOD FROM FEBRUARY 25,1993 (DATE OF INCEPTION) TO SEPTEMBER
30,1993.
REVENUE. Revenue was $205,459, $110,239, $2,761 and $10,600 in 1996, 1995,
1994 and for the period from February 25, 1993 (Date of Inception) to September
30, 1993, respectively. The increase was primarily attributable to the addition
of IPN terminals installed in stores in the 1996 period. As of September 28,
1996, September 30, 1995, 1994 and 1993, 328, 25, 3 and 0 stores contained IPN
terminals. Revenue did not increase proportionately to stores and terminals as
the majority of the installations occurred in the latter months of the period of
1996 and since many IPN terminals in the 1996 period were being supported
through nonpaid incentives.
DIRECT OPERATING EXPENSES. Direct operating expenses were $2,694,320,
$842,025, $262,389 and $3,349 in 1996, 1995, 1994 and for the period from
February 25, 1993 (Date of Inception) to September 30, 1993, respectively. The
increase was primarily due to (i) increased employee headcount to support new
store roll-out and maintain quality operations at current stores ($488,600
increase in 1996 and $309,500 increase in 1995 and $177,880 increase in 1994)
and (ii) increased supplies and other expenses related to IPN usage ($1,363,700
increase in 1996, $270,100 increase in 1995 and $81,200 increase in 1994.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $6,440,468, $3,504,751, $1,975,313 and $1,294,762
for the fiscal years ended 1996, 1995, 1994 and for the period from February 25,
1993 (Date of Inception) to September 30, 1993, respectively. Selling and
marketing expenses increased $1,481,065, $506,468 and $484,248, in 1996, 1995
and 1994, respectively. The increase from 1995 to 1996 was attributable to (i)
marketing costs associated with selective brand promotions sponsored by the
Company increasing from $325,000 in 1995 to $1,020,800 in 1996 and (ii) the
hiring of additional marketing and sales force personnel to support and
accelerate the marketing and roll-out of IPN terminals. The increase from 1994
to 1995 was attributable to (i) marketing costs associated with selective brand
promotions of $325,000 in 1995 and (ii) the hiring of additional marketing and
sales force personnel to support and accelerate the marketing and roll-out of
IPN terminals. The increase from February 25, 1993 (Date of Inception) to
September 30, 1993 to 1994 was attributable to the hiring of marketing and sales
force personnel. General and administrative expenses were $3,968,015,
$2,514,035, $1,491,065 and $1,294,762 for 1996, 1995, 1994 and for the period
from February 25, 1993 (Date of Inception) to September 30, 1993, respectively.
Research and development, primarily the development of hardware and software to
support the IPN terminals, accounted for $800,000 in 1996, $623,000 in 1995,
$350,000 in 1994 and $611,000 from February 25, 1993 (Date of Inception) to
September 30, 1993. The $611,000 was a one time charge for the purchased
technology. See Note 9 to the September 28, 1996 Consolidated Financial
Statements for additional discussion. The balance of the increases were due to
additional personnel and professional costs required in the progression of the
Company through its development stage.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $821,105,
$190,748, $31,604 and $7,541 in 1996, 1995, 1994, and for the period from
February 25, 1993 (Date of Inception) to September 30, 1993, respectively. The
significant increases in 1996 and 1995 were due to an increase in the number of
IPN terminals in stores, as well as computer and office equipment additions.
INTEREST EXPENSE. Interest expense was $2,743,436, $187,249, $87,808 and $0
in 1996, 1995 and 1994 and for the period from February 25, 1993 (Date of
Inception) to September 30, 1993. Interest expense increased by $2,556,187 in
1996 primarily due to the issuance of $142,000,000 of senior discount notes. See
Note 1 to the September 28, 1996 and September 30, 1995 Consolidated Financial
Statements for further discussion. In 1995
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<PAGE>
and 1994, interest expense increased by $99,441 and $87,808, respectively, due
to additional debt issued to various shareholders of the Company. See Notes 5
and 6 to the September 28, 1996 and September 30, 1995 Consolidated Financial
Statements for further discussion.
INTEREST AND DIVIDEND INCOME. Interest and dividend income was $1,009,160,
$34,565, $8,630 and $0 in 1996, 1995, 1994 and for the period from February 25,
1993 (Date of Inception) to September 30, 1993, respectively. The increases were
due to larger cash balances available for investment.
OTHER INCOME (EXPENSE), NET. Other income (expense), net was $(74,180),
$54,247, $2,213 and $0 in 1996, 1995, 1994 and for the period from February 25,
1993 (Date of Inception) to September 30, 1993, respectively. The significant
decrease in 1996 was primarily due to a loss on disposal of certain fixed
assets. The significant increase in 1995 was due to an increase of approximately
$60,000 of non-revenue derived during a test of an application of the Company's
proprietary technology.
LIQUIDITY AND CAPITAL RESOURCES
From February 25, 1993, (Date of Inception) to September 28, 1996 the net
cash used in operating activities was $13,288,322 as the Company generated
minimal revenue yet incurred expenses related to the development of its IPN
technology, test marketing the product and recruiting personnel. In addition,
cash used in investing activities was $10,723,350, primarily related to
expenditures for IPN equipment. The Company has funded its operations through
equity contributed by its stockholders and through convertible debt, which on
February 1, 1996 was converted into equity. From its inception through September
28, 1996, the Company's stockholders had contributed $27,651,071 of equity to
the Company. Of the aforementioned amount, $1,971,130 was originally issued as
debt and subsequently converted to equity. As of September 28, 1996, the Company
had cash and cash equivalents of $93,479,584 and working capital of $91,835,547.
As of December 9, 1996, the Company had contracts and letters of intent to
install and operate the IPN in approximately 3,000 stores, of which 333 stores
were installed and operating. Installation costs associated with the stores to
be installed will cost approximately $11 million and $50.3 million during
calendar years 1996 and 1997, respectively. The Company also plans to offer
product promotions for which it will bear the full cost of each redemption
without reimbursement from Manufacturers of approximately $1.9 million and $10
million during calendar years 1996 and 1997, respectively. In addition, the
Company has settled a lawsuit, and the settlement requires the Company to pay an
aggregate of $400,000 by January 1997, $350,000 of which was paid in fiscal
1996.
As of September 9, 1996, the Company sold its inventory and fixed assets
used in its terminal assembly operations in South Carolina to Coleman Resources
for a purchase price of approximately $2.6 million. In connection therewith,
Coleman Resources hired the Company's employees involved in such operations and
entered into a supply agreement whereby it will fulfill the Company's
anticipated terminal requirements for the next three years with fixed pricing
for the first 5,000 IPN terminals. No material gain or loss was realized in the
transaction.
The Company consummated the Private Placement on August 2, 1996 for which
it received net proceeds of approximately $90.9 million. The Company will
continue to use the net proceeds from the Private Placement to fund capital
expenditures, working capital requirements and operating losses incurred in
connection with the increased commercialization of its IPN during 1996 and 1997.
The Company believes that the proceeds from the Private Placement, together with
existing cash and cash equivalents will be sufficient to meet the Company's
currently anticipated operating and capital expenditure requirements both for
the short-term and through fiscal 1997. However, the Company may require
additional capital prior to the end of calendar 1997 to fund its planned
expansion and to address any liquidity needs caused by shortfalls in revenue. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company (as well as the
percentage ownership represented by the Warrants) will be reduced, stockholders
may experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to the Common Stock. If additional funds are
raised through debt financing, such financing will increase the financial
leverage of the Company and earnings would be reduced by the associated interest
expense. The Indenture permits the Company to incur additional indebtedness,
subject to certain limitations. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or at
all. If adequate funds are not available on acceptable terms, the Company may be
unable to continue its planned IPN installations, expand both the number and
dollar amount of Manufacturer commitments, or respond to competitive pressures,
any of which could have a material adverse effect on the Company's results of
operations and financial condition.
25
<PAGE>
BUSINESS
GENERAL
The Company develops, owns and operates proprietary electronic marketing
systems that are designed to give consumer products manufacturers (the
"Manufacturers") and retailers the ability to influence the purchasing behavior
of consumers moments before shopping begins and to track and analyze individual
consumer purchasing behavior on an ongoing basis. The Company's current
commercial product offering utilizes interactive "touch-screen" terminals inside
the entrance of retail supermarkets that issue individually targeted, and
immediately usable, coupons and other promotional incentives based on each
consumer's cumulative purchasing history. This automated process saves consumers
time and money while providing Manufacturers and retailers substantially more
control, efficiency and cost effectiveness than traditional mass advertising and
promotion media. The Company receives recurring revenue from transaction fees
paid by Manufacturers for each electronic redemption of their coupons and other
incentives. Since its formation in 1993, the Company has focused its system
development and commercialization efforts primarily in the retail supermarket
industry.
The Company competes in the in-store marketing segment of the $30 billion
consumer product promotion and couponing business via its proprietary,
interactive multi-media system called the Inter(Bullet)Act Promotion Network
(the "IPN"). It is estimated that more than 70% of all brand purchasing
decisions for supermarket products are made in-store, according to a 1995 study
conducted by the Point-of-Purchase Advertising Institute. Upon entering a
supermarket, consumers insert their frequent shopper cards in the Company's
ATM-like terminals, known to customers as COUPON XPRESS(REGISTER MARK) or COUPON
CENTRALTM. The IPN terminals, which are interconnected to a store's
point-of-sale system, then present a series of screens displaying full-color
icons of targeted product promotions -- usually price discounts or multiple
purchase bonuses -- that have been selected for each consumer by the Company's
proprietary Target Engine Software ("TES") based on each consumer's purchases
recorded in that store in the most recent period of up to 12 months. The TES
categorizes consumers based on their degree of loyalty to a specific brand
within a product category and provides the Manufacturer with the ability to
target its promotions accordingly. After the shopper touches the desired icons,
the terminal can deliver either individual coupons or a "shopping list" for all
selected promotions, identified by aisle so that the products can be easily
located when shopping. The entire process takes most shoppers less than 60
seconds. At checkout, the Company's automated clearing process, when used in
conjunction with the store's point-of-sale system, virtually eliminates the
problem of mistaken and fraudulent redemptions associated with the handling of
traditional paper coupons, which is estimated by industry sources to cost
Manufacturers more than $500 million per year.
The Company believes its IPN offers Manufacturers two unique competitive
advantages compared to alternative in-store marketing techniques: (1) the
ability to offer promotions targeted to each individual consumer AT THE
BEGINNING of the shopping experience and (2) the highest redemption rate,
currently averaging over 30% in retail chains where the IPN has been fully
implemented, of distributed product promotions (free standing newspaper insert
coupons ("FSIs") average under 2%). As a result of these key advantages, and
because the Company charges Manufacturers a fee only for redeemed promotions,
rather than for the distribution of promotions, the Company is positioning
itself to Manufacturers as the lowest cost, most efficient provider in the
in-store marketing industry. See " -- Benefits of IPN -- Manufacturers and Other
Brand Marketers."
The IPN capitalizes on a major trend in supermarket retailing of pursuing
loyalty-building programs, such as card-based frequent shopper programs, which
are intended to help counteract competition from other supermarkets, mass
merchandisers, warehouse clubs and specialty retailers. The IPN, as a card-based
system, is designed to benefit retailers by stimulating interest in existing
card membership and marketing programs, providing a distribution fee for every
offer redeemed and encouraging customer loyalty.
The IPN is designed to be user-friendly through its ease of use, convenient
location at the entrance of the store and a short session time of less than one
minute on average. The IPN allows consumers, who are increasingly
value-conscious and receptive to "continuity programs" (such as airline frequent
flyer programs), to avoid the inconvenience of clipping, saving and tracking
expiration dates of traditional paper coupons. It also provides consumers with
the instant gratification of on-the-spot savings.
Currently, the Company has contractual commitments and letters of intent
with retail supermarket chains to deploy the IPN in more than 3,000 stores. The
retail chains under contract with the Company to participate in the IPN include:
A&P, ACME, Food Emporium, Food Lion, Foodtown, Gerland's, Grand Union, Jewel,
Marsh, Price Chopper, Riser Foods, SuperFresh and Waldbaum's. The chains that
have entered into letters of intent with the
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Company include Kings, Spartan Stores, Lanco, Piggly Wiggly and Randalls. The
Company is in active discussions with retail grocery chains representing a large
number of potential additional stores and plans to continue a nationwide
expansion strategy over the next several years. As of December 9, 1996,
Inter(Bullet)Act had IPN terminals in commercial operation in 333 grocery stores
located in seven states.
As of December 9, 1996, 19 Manufacturers representing 53 different packaged
goods brand offerings were participating in the IPN. Participating Manufacturers
currently include, among others, General Mills, ConAgra, Keebler, Lever
Brothers, James River, Nestle, and Reynolds.
The Company's strategy is to achieve increasing recurring revenue through
the nationwide commercialization of its proprietary IPN. Accordingly, the
Company plans to accelerate the installation of the IPN in the more than 3,000
retail grocery stores under contract or letter of intent, further expand
retailer commitments, procure new commitments from Manufacturers and more
substantial commitments from Manufacturers already supporting the IPN and
increase consumer acceptance.
While the Company's primary objective is the nationwide commercialization
of the IPN in retail grocery stores in the United States, it believes that its
proprietary technology may have several other commercial applications such as
the electronic delivery of information and targeted promotions in retail
pharmacies. See " -- Other Opportunities."
Inter(Bullet)Act has received, and expects to continue receiving,
substantial business development support from its three largest shareholders:
Vanguard Cellular Systems, Inc. ("Vanguard") (NASDAQ: VCELA), one of the largest
independent operators of cellular telephone systems in the United States; the
Richardson Family, founders and former operators of the consumer products
company Richardson-Vicks, Inc.; and Toronto Dominion Investments, Inc., a wholly
owned indirect subsidiary of Toronto Dominion Bank, which is one of the largest
media finance institutions in the world.
RECENT DEVELOPMENTS
MANAGEMENT. In September 1996, Richard A. Vinchesi, Jr. began to serve as
the Company's Vice President and Chief Financial Officer. Prior thereto, Mr.
Vinchesi was a Vice President of Salomon Brothers Inc in its Media Corporate
Finance group. In November 1996, Aretas F. Stearns, President, Chief Operating
Officer and a director of the Company, reached a mutual agreement with the
Company whereby he will resign his positions effective December 31, 1996. The
search for a new Chief Operating Officer is expected to begin in 1997. Pending
the selection of a new Chief Operating Officer, Stephen R. Leeolou, Chief
Executive Officer of the Company, is assuming many of the primary
responsibilities of the position of Chief Operating Officer. In addition, to
help it in anticipating and resolving technical issues that the Company
encounters in the widespread commercialization of the IPN, the Company has
engaged an executive search firm to assist it in hiring a new executive officer
to lead the Company's technical services division. Pursuant to its two-year
management services agreement with the Company, Vanguard continues to provide
technical support to the Company.
RETAILERS. Installations of the IPN have proceeded more slowly than
expected. Substantially all of the Company's scheduled IPN installations for the
first quarter of fiscal 1997 were under its A&P and Food Lion contracts.
Unanticipated technical implementation problems have delayed such scheduled
installations. The principal problems encountered by the Company have been the
low scanning quality of certain frequent shopper cards used by A&P customers and
difficulties in integrating the IPN with Food Lion's POS systems. In beginning
test installation of the IPN in the pilot A&P stores, the Company and A&P
discovered that large numbers of personal shopping cards of A&P customers could
not be read by the IPN because of their poor quality. To address this problem,
the Company developed a numeric "keypad" feature for display on the IPN that
allows a store's customer to input his or her card number if the IPN does not
read the card after insertion into the terminal. This feature has been
implemented in 29 of the A&P pilot stores and has been approved by A&P for
rollout to all 740 stores under contract. Although the Company believes that the
numeric keypad solution will work effectively, to date there is no statistical
data available from the pilot stores to evaluate its effect on customer usage.
During the planning process for the Food Lion pilot, the Company and Food Lion
discovered that Food Lion's store POS systems needed modification to communicate
with the IPN. The Company has delivered a prototype solution of this problem to
Food Lion which includes readily available software and hardware additions to
Food Lion's equipment, and Food Lion has indicated that the prototype has
performed satisfactorily in tests run by its testing facility. The solution
would require incremental expenditures of approximately $1,100 per Food Lion
store, some or all of which may be borne by the
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Company. The Company currently has not installed the IPN in any of its
contracted Food Lion stores. See "Risk Factors -- Management of Growth; Early
State Products and Services; Accelerated Installation."
In recent weeks, the Company obtained letters of intent from Lanco, Piggly
Wiggly and Randalls.
MANUFACTURERS. Primarily as a result of this slower than expected growth in
IPN installations, the number of Manufacturers participating in the IPN has not
grown as expected. However, during each calendar quarter of 1996, the number of
Manufacturers participating on the IPN in the quarter has increased. A total of
17, 18, 22 and 25 Manufacturers participated during the first, second and third
calendar quarters and in the fourth calendar quarter to date, respectively.
Management believes that the quality of its participating Manufacturers
continues to improve. Four new clients, General Mills, Pillsbury, Georgia
Pacific and Pine Mountain, recently began their first IPN participation, and
Kraft Foods followed-up its promotion of five brands on the IPN in October with
a four-week, nine-brand promotion in November and is evaluating additional
promotions. To date, the Company's contracts with Manufacturers typically have
been for relatively low promotional dollar commitments and short-terms to trail
the IPN's effectiveness. See "Risk Factors -- Ability to Obtain Brand Contracts;
Lengthy Sales Cycle; Uncertainty of Market Acceptance." As a result, the number
of manufacturers and brand offerings participating in the IPN have varied from
time to time in each quarter.
CONSUMERS. The Company, through its IPN in the ACME retail chain, recently
completed a seven-week sweepstakes promotion sponsored by ACME in which shoppers
were able to enter a contest to win prizes and receive certain special
promotions via the IPN's touchscreen. The promotion allowed consumers to benefit
from both direct-to-consumer dollars (through the IPN) and retailer trade
dollars (through the chain's clipless coupons). During this promotion, the
Company experienced substantial increases in both the overall volume and rate of
redemptions recorded by shoppers (quantify), as well as increased redemption
rates on non-sweepstakes-related IPN promotions.
TRENDS IN INDUSTRIES AFFECTING THE COMPANY
Within the $70 billion promotional industry, more than $30 billion in 1995
was channeled toward the direct to consumer business, according to PROMO
magazine. The Company believes that increasing portions of these promotional and
couponing expenditures can be captured by in-store promotional vehicles, such as
the Company's IPN, as a result of the following trends:
BRANDS SEEKING MORE EFFICIENT PROMOTION TECHNIQUES
Brand promotional sponsors distributed over 325 billion coupons in the
United States during 1995. However, it is estimated that less than 2% of all
coupons distributed as FSIs (which constituted 89% of all coupons distributed)
were redeemed. In addition, Manufacturers face increasing numbers of competing
brands and private label products. The convergence of these trends has
compounded the cost of maintaining brand loyalty for products and has fueled the
industry's interest in efficient and targeted promotions. The Company believes
that Manufacturers are actively seeking promotional alternatives that can
selectively reward loyal consumers and identify potential new customers to whom
incentives can be offered.
In-store promotion is the fastest growing segment within Manufacturers'
consumer promotional spending, growing 20% in 1995, versus FSIs, which decreased
1% according to PROMO magazine. In-store promotion offers Manufacturers higher
redemption rates (32% on average for the Company's IPN coupons distributed at
store-entry, 17% for coupons distributed in-aisle and 9% for coupons distributed
at checkout) than those for FSIs. In addition to increased consumer response,
targeted in-store promotions allow Manufacturers to print fewer coupons and, if
desired, minimize the costs associated with redemption by consumers who would
have purchased the product regardless of the coupon offering.
RETAILER EXPANSION OF FREQUENT SHOPPER CARD PROGRAMS
According to a PROMO magazine special report (August 1995), over 30 million
consumers are now using frequent shopper cards in supermarkets. In a recent
survey conducted by SUPERMARKET NEWS (April 1, 1996), 32% of retailers surveyed
reported offering electronic card-based marketing programs and 17% had plans to
begin offering such card programs in 1996. Supermarket retailers are pursuing
loyalty-building programs using frequent
28
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shopper cards in order to counteract competition from other supermarkets, mass
merchandisers, warehouse clubs and specialty retailers. These frequent shopper
cards enable participating customers to take advantage of product discounts
offered by the local or regional retailer in the store's shopping circular
without clipping the coupon. When the store card is swiped at checkout, the
electronic cash register credits the coupon discount only if the accompanying
product is purchased. The combination of reduced prices to cardholders without
the inconvenience involved in clipping and saving coupons encourages loyalty to
the store. Retailers can then use the resulting cardholder data to selectively
offer promotions to shopper segments based on their revenue and margin
contribution to the store. Prior to the introduction of frequent shopper cards,
retailers had no proven way of offering incentives to selected customers based
on their shopping behavior or value to the store.
INCREASING CONSUMER ACCEPTANCE OF ELECTRONIC COMMERCE
The Company believes that consumers are increasingly accepting of
electronic commerce processes based on their efficiency and convenience when
compared to traditional paper-based transactions. The Company believes that the
significant increase over the past five years in the use of ATMs and debit cards
for banking and retail transactions, as illustrated in the following graph, is
indicative of potential consumer adaptation to other applications of electronic
platforms such as the Company's IPN.
AVERAGE MONTHLY TRANSACTIONS PER ELECTRONIC CARD USER
1990 1991 1992 1993 1994 1995
Purchase Goods/Services 0.9 0.9 1.4 2.0 2.2 2.7
Use at ATMs
Source: Star System 1995 Consumer Survey
In addition, the continued penetration of personal computers in the home
and the rapid increase in the use of the Internet and on-line services are
helping to fuel a demonstrable cultural shift toward automated, and away from
manual, transactions and access to information.
BUSINESS STRATEGY
Since 1993, Inter(Bullet)Act has been developing its IPN technology,
initiating customer relationships with Manufacturers and developing a
commercialization strategy for the IPN. During 1995, the Company conducted a
pilot in 25 retail grocery stores whereby Inter(Bullet)Act financially supported
a full scale promotion of brands in order to gauge customer usage levels. See
" -- Selective Brand Promotions by the Company." With positive results of the
IPN's consumer acceptance and sales impact established, and the raising of
additional capital in August 1996, the Company is now accelerating the
commercialization of the IPN.
The Company's strategy is to achieve increasing recurring revenue through
the nationwide commercialization of its proprietary IPN. Accordingly, the
Company plans to accelerate the installation of the IPN in the more than 3,000
retail grocery stores under contract or letter of intent, further expand
retailer commitments, procure new
29
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commitments from Manufacturers and more substantial commitments from
Manufacturers already supporting the IPN and increase consumer acceptance.
RETAILER STRATEGY
NATIONWIDE INSTALLATION OF IPN. As of December 9, 1996, the Company had
secured contractual commitments and letters of intent from 17 grocery chains
representing approximately 3,007 grocery stores. The Company intends to
accelerate installation of IPN terminals in such stores in order to increase the
Company's attractiveness
to Manufacturers who are considering enrolling in the IPN, as well as to
pre-empt potential competitors from entering stores with competing systems. The
Company is not aware of any interactive systems in any widespread commercial use
with the same functionality as its IPN. As of December 9, 1996, the Company had
installed its IPN in stores located in seven states.
INCREASE REGIONAL MARKET PENETRATION. There are approximately 30,000
supermarkets in the United States with annual sales of greater than $2 million
of which chain supermarkets, Inter(Bullet)Act's target markets, represent 18,500
stores. By penetrating an increasing percentage of these stores, the Company
seeks to expand its all commodity volume ("ACV") penetration (a measure of
market share in a given retail grocery market), particularly in the nation's top
markets.
Set forth below are the retailers who have entered into contracts and
letters of intent as of December 9, 1996 to use the IPN and the resulting ACV
penetration the Company will have in various markets once all such stores have
been equipped with IPN terminals.
<TABLE>
<CAPTION>
METROPOLITAN ACV PENETRATION
STATISTICAL AREA (A) CHAIN TOTAL STORES
<S> <C> <C> <C>
NEW YORK......................... 28% A&P 146
Waldbaum's 91
Grand Union South 104
Food Emporium 33
ACME 30
SuperFresh 2
Foodtown 10
Kings Super Markets (b) 20
436
PHILADELPHIA..................... 40% ACME 164
SuperFresh 70
Grand Union South 1
Laneco (b) 21
256
CHICAGO.......................... 36% Jewel Food Stores 188
ALBANY........................... 61% Grand Union North 84
Price Chopper 92
176
CHARLOTTE........................ 30% Food Lion 107
RICHMOND......................... 30% Food Lion 97
RALEIGH/GREENSBORO............... 32% Food Lion 125
INDIANAPOLIS..................... 27% Marsh 90
SOUTH CAROLINA................... 23% Piggly Wiggly Carolina (b) 91
Food Lion 101
192
CLEVELAND........................ 30% Riser Foods 57
HOUSTON.......................... 4% Gerland's 20
OTHER............................ N/A A&P -- Remaining Stores 594
Food Lion -- Remaining Stores 656
Spartan Stores (b) 100
3,094
</TABLE>
30
<PAGE>
(a) The source of the ACV computation is Information Resources, Inc.
(b) These chains have entered into letters of intent with the
Company.
BRAND STRATEGY
The Company's goal is to attain and maintain contractual commitments from
approximately 1% of the estimated 18,000 packaged goods product brands. As IPN
terminals are installed in an increasing number of supermarket chains with
greater ACV penetration, the Company believes it will attract new Manufacturers
and expand contracts with existing ones. See " -- Selective Brand Promotions by
the Company."
INCREASE MANUFACTURER PENETRATION. The Company is continually working to
increase both the breadth (number of brands per Manufacturer) and depth (dollars
committed per brand) of its Manufacturer commitments by continuing to build ACV
penetration in top markets and through its direct sales force strategy. Certain
of the Manufacturers currently under contract promote only one product offering.
The Company believes that such Manufacturers will support promotions for more
brands on the IPN as they review the sales impact and cost effectiveness of
their current IPN offerings. In addition, the Company seeks to increase
substantially the amount of money committed by each Manufacturer per contract
period and believes that such increases will become achievable as its installed
base of IPN terminals continues to grow.
INCREASE THE SCALE OF AVERAGE MANUFACTURER UNDER CONTRACT. The Company is
actively pursuing long-term contractual commitments from large, prominent
Manufacturers who control many consumer products brands. The Company believes
that a number of these multi-brand Manufacturers will serve as "charter members"
for its IPN and that their participation in turn will induce other Manufacturers
to participate. The Company intends to pursue these accounts through its direct
sales force and through consulting arrangements with professionals or
organizations who have access to senior management of such companies. See "Sales
and Marketing."
CARDHOLDER PANEL. The Inter(Bullet)Act Cardholder Panel, a consumer
purchasing behavior tracking tool currently under development by the Company,
initially will be offered to Manufacturers as an inducement to enter into long-
term contracts with the Company. Eventually, the Company intends to market ICP
as a sophisticated research and monitoring tool that will be sold for a fee
based on access and usage time. See "Products and Services -- Inter(Bullet)Act
Cardholder Panel."
SELECTIVE BRAND PROMOTIONS BY THE COMPANY. As part of its development
strategy to attract substantial retailer and Manufacturer commitments and to
encourage consumer usage of the IPN, the Company from time to time includes in
the IPN in certain stores a number of product promotions for which the Company
has no contract for transaction fees from the Manufacturer. For such products,
the Company bears the full cost of each redemption and receives no transaction
fee from the Manufacturer. However, the Company believes that this discretionary
investment in the IPN will benefit the Company as it pursues brand contracts
from Manufacturers as they review actual results that demonstrate the potential
for the redemption rate and market share improvements that are possible through
use of the IPN. The Company plans to continue such product promotions on a
selective basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
As of December 9, 1996, 19 Manufacturers representing 53 brand offerings
were participating in the IPN. The chart below sets forth the Manufacturers
currently supporting the IPN.
31
<PAGE>
<TABLE>
<CAPTION>
BRAND PARTICIPATING
MANUFACTURER OFFERINGS SINCE
<S> <C> <C>
James River............................................................... 4 6/94
Lever Brothers............................................................ 17 6/94
J.R. Simplot.............................................................. 2 9/95
Nestle Beverage........................................................... 1 10/95
SP Healthcare............................................................. 6 12/95
Reynolds Metals........................................................... 2 1/96
CPC International......................................................... 2 5/96
Pine Mountain............................................................. 2 5/96
Tetley.................................................................... 1 5/96
CPC -- Entenmann's........................................................ 1 6/96
Stroehmann................................................................ 1 6/96
Tenneco................................................................... 1 6/96
Van Den Bergh Foods....................................................... 1 6/96
Disney Publications....................................................... 1 7/96
General Mills............................................................. 6 8/96
Pillsbury................................................................. 2 8/96
Georgia Pacific........................................................... 1 10/96
ConAgra................................................................... 1 11/96
Keebler................................................................... 1 12/96
53
</TABLE>
Kraft Foods followed-up its promotion of five brands on the IPN in October
with a nine-brand promotion in November and is evaluating additional promotions.
To date, the Company's contracts with Manufacturers typically have been for
relatively low promotional dollar commitments and short terms to trial the IPN's
effectiveness. See "Risk Factors -- Ability to Obtain Brand Contracts; Lengthy
Sales Cycle; Uncertainty of Market Conditions." As a result, the number of
participating Manufacturers and brand offerings on the IPN have varied from time
to time.
CONSUMER STRATEGY
In order to pursue continuous refinement of the overall attractiveness of
the IPN to consumers, the Company intends to promote awareness of the IPN and
its benefits, minimize its time of use and highlight the instant savings
achievable.
PROMOTE AWARENESS. The Company promotes awareness of its IPN and its
benefits in several ways. Upon installation of IPN terminals in a store, the
Company often temporarily provides in-store "greeters" who highlight the IPN's
benefits to shoppers. In addition, the IPN terminals' in-store location and the
design of their marquees are continuously evaluated to ensure maximum impact.
Supermarket retailers are also encouraged by the Company to cross-promote the
use and value of the IPN through the stores' traditional advertising channels.
MINIMIZE TIME OF USE. In order to minimize the time a shopper is required
to spend at an IPN terminal, the Company limits the number of screens through
which a customer scrolls during a session while still maintaining a slate of up
to 40 promotions. In addition, the Company seeks to minimize shopper queuing
that may occur within stores by optimizing the number of installed IPN terminals
based on a store's average foot traffic. Thus, most shoppers can complete an IPN
session in less than one minute.
HIGHLIGHT INSTANT SAVINGS. The Company believes that highlighting the
immediate savings potential of its IPN for consumers is an important element of
initial consumer acceptance and repeat usage of the IPN. The Company
accomplishes this objective in two ways. First, the initial screen displayed for
a shopper illustrates the total dollar savings available based on the promotions
selected by the Company's TES for the individual on a given day. Second, as the
consumer touches each desired product icon, a special cash register graphic
(with sound effects) displays the cumulative total savings of the selected
promotions.
INSOURCE CORE ACTIVITIES/OUTSOURCE NON-CORE ACTIVITIES
The Company believes its primary focus should be in sales and marketing as
well as in the development and operation of its proprietary software and
systems. Accordingly, to the extent possible, the Company intends to outsource
to vendors certain tasks that it does not consider to be among its core business
strengths.
32
<PAGE>
Prior to September 1996, substantially all aspects of manufacturing of the
IPN terminals, including purchasing of components, assembly and testing, were
performed by employees of the Company. To allow it to concentrate on its core
business strengths, the Company sold its manufacturing operations to Coleman
Resources, which hired the employees of the Company involved in such operations.
In connection therewith, the Company and Coleman Resources entered into a supply
agreement whereby Coleman Resources is to fulfill the Company's anticipated
requirements for terminals for the next three years with fixed pricing for the
first 5,000 terminals. The Company intends to remain responsible for
installation of the terminals.
PRODUCTS AND SERVICES
INTER(BULLET)ACT PROMOTION NETWORK (IPN)
Inter(Bullet)Act developed its proprietary interactive multimedia system
for use in connection with bar-code scanner technology based on a process patent
granted by the U.S. Patent Office. See "Patents, Proprietary Information and
Trademarks." The following diagram depicts the IPN's basic technical
configuration and process flow in a typical supermarket.
INTER(Bullet)ACT PROMOTION NETWORK
IN-STORE CONFIGURATION & INTERACTION
(chart appears here depicting the Inter(Bullet)Act network)
33
<PAGE>
A customer can access the IPN by inserting his or her personal shopper
card, as issued under the store's existing card program, into the ATM-like
terminal located near the entrance to the store. The system identifies the
customer and displays full color images of promoted products on the terminal's
touch-sensitive screen based upon that customer's cumulative purchasing history.
The customer selects desired promotions, usually price discounts (brand or
retailer specific) or multiple purchase bonuses, by simply touching the desired
product icon displayed on the screen. When the selection process is complete (in
less than 60 seconds for most shoppers), the IPN terminal can deliver either
individual coupons or a "shopping list" for all selected promotions, identified
by aisle so that the products can be easily located when shopping. After
shopping, the customer's coupons are electronically scanned at checkout, at
which time the system can (i) verify that the promoted items were purchased,
(ii) notify the store register system to give the customer that day's promotion
discounts on the spot and (iii) once the customer's card is electronically
scanned, record all the customer's purchases for use in more accurately
targeting wanted/needed promotions during future visits.
The Company introduced its shopping list feature in August 1996 and intends
to utilize the list in future installations of the IPN where the retailers'
point-of-sale systems are sufficiently up to date to accept this feature. A
shopping list offers several advantages over paper coupons generated by the IPN.
The list need not be presented at checkout to receive the discounts for promoted
products. Rather, the shopping list serves as a reminder to the shopper to
purchase the promoted products and as an aide in locating them. The customer
will automatically receive the relevant discounts only if his or her personal
shopper card is scanned at checkout to verify the purchase of the promoted
products. This is a more fully automated version of the Company's current
electronic clearing process in which individual coupons can be redeemed
regardless of whether a cashier scans a shopper's card.
TARGET ENGINE SOFTWARE ("TES"). The Company's proprietary Target Engine
Software ("TES") collects and analyzes each shopper's cumulative market basket
of purchases on a rolling 12-month basis. On a daily basis, TES selects for each
potential shopper up to 40 product promotions from the larger universe of
promotions available on the IPN (approximately 300 on a fully loaded system)
based on each consumer's purchasing profile.
For each product category available on the IPN, the TES classifies each
consumer as follows:
<TABLE>
<CAPTION>
CLASSIFICATION
<S> <C> <C> <C>
Brand loyal
"Targeted" Brand switcher
$
Brand competitive
"Untargeted" Entry level
$
<CAPTION>
CONSUMER DESCRIPTION
<S> <C>
tends to purchase consistently the Manufacturer's brand within the product category
"Targeted" tends to demonstrate little brand loyalty, buying several different brands over
time within a category
tends to purchase consistently a competitor's brand
"Untargeted" a consumer who has no record of purchasing products within the product
category
</TABLE>
Customers will see different icons with varying targeted incentives
depending on their individual purchasing profiles. For example, a customer
classified as "competitive" can be offered a higher discount coupon than would a
consumer classified as a "switcher", who in turn would receive a higher discount
than would a consumer classified as "loyal". In this way, the TES offers
Manufacturers the ability to execute different promotional strategies for the
same product simultaneously. Manufacturers pay a higher fee to the Company for
targeted promotion redemptions than for entry level promotion redemptions and
have the flexibility to change the relative face values of redemptions for each
targeted category. Until a customer has a purchase history in every product
category on the IPN, he or she may also see a number of entry level promotions,
which are randomly selected by the TES. Some promotions are shown to every
consumer regardless of purchase history.
The Company maintains a computer database in each IPN store and can access
the purchasing data from its headquarters, as well as download each day's
promotion incentive information.
RECIPE PRODUCT. In addition to providing personally targeted product
promotions, the IPN can instantly deliver free recipes prominently featuring the
sponsoring brands as the key ingredients. Recipes offer two distinct benefits
for Manufacturers, whether their overall marketing strategy includes couponing
or not. First, participating Manufacturers may use the recipe feature as an
opportunity to continue reaching shoppers with a seasonal alternative to
discounting. Second, Manufacturers that do not generally offer coupons may
consider using recipes as an integral part of their marketing strategy by
implementing an on-going program of different recipes. The Company plans to
34
<PAGE>
target this program to Manufacturers that do not generally offer coupons but may
elect to use the recipe strategy to test couponing in conjunction with the
recipes offered to measure the incremental sales gained by adding coupons as a
purchase incentive.
PRICING STRUCTURE
PAY FOR PERFORMANCE. Manufacturers pay a transaction fee to the Company
only upon an electronically cleared redemption. The transaction fee is composed
of (i) a redemption fee (for Inter(Bullet)Act), (ii) a processing fee (for the
retailer) and (iii) the incentive fee (the face value of the coupon for the
consumer). Inter(Bullet)Act in turn passes through both the processing fee and
the incentive fee to the retailer, while keeping the redemption fee. The amount
of the redemption fee earned by the Company depends on whether the consumer who
redeems the promotion is an "entry-level" consumer (a shopper for whom the IPN
has insufficient data on prior purchasing activity to determine appropriate
targeted promotions) or a "targeted" consumer (one for whom the Manufacturer is
specifically directing the promotion in order to reward loyalty or to encourage
switching brands). The table below sets forth examples of the breakdown of a
typical transaction fee invoiced to a Manufacturer who has offered a "50(cents)
off" promotion:
<TABLE>
<CAPTION>
AVERAGE AVERAGE TOTAL
INCENTIVE FEE REDEMPTION FEE PROCESSING FEE INVOICED TO
TYPE OF PROMOTION (CONSUMER) (INTER(BULLET)ACT) (RETAILER) MANUFACTURER
<S> <C> <C> <C> <C>
Entry Level (Untargeted).................................. $0.50 $ 0.20 $ 0.08 $ 0.78
Targeted.................................................. 0.50 0.45 0.08 1.03
</TABLE>
RETAILER PROCESSING FEE. Retailers receive revenue based on the amount of
average daily redemptions per store, generally $0.08 per transaction. This
processing fee, when multiplied by (i) the number of redemptions per store, (ii)
the number of stores utilizing the IPN per chain and (iii) the number of days
those stores are open for business can, in the aggregate, produce a substantial
level of high-margin revenue for the retail chain while IPN terminals occupy
only minimal floor space.
BRAND CONTRACTS. The principal elements of the Company's brand contracts
with Manufacturers are brand identity, product category exclusivity, dollar
commitment and the start and end date of the promotion period. The typical
contract duration is for renewable four-to-twelve week periods or until the
total dollar commitment is exhausted. In some cases, contract duration may be
for one year. The Company offers category exclusivity to Manufacturers in the
IPN, E.G., two brands of cola will not simultaneously have promotions in the
IPN. If the dollar commitment is exhausted prior to the contract term, the
Manufacturer can choose to terminate the promotions for the duration of the
period or to increase the dollar commitment. If the contract term expires before
the dollar commitment is exhausted, the contract will terminate unless the
Manufacturer elects to continue the promotion until the original dollar
commitment is exhausted, providing the category has not been contracted by a
competing brand.
RECIPE PRICING. The Company's recipe product generates the Company's
highest margin revenue, although recipes are not projected to comprise a
significant portion of Inter(Bullet)Act revenue. Inter(Bullet)Act charges the
Manufacturer featured in the recipe an impression fee when the recipe is
displayed to the consumer and an execution fee when a customer elects to print
the recipe. No retailer processing fees are paid.
INTER(BULLET)ACT CARDHOLDER PANEL (ICP)
The Company is currently developing a consumer cardholder panel, the
Inter(Bullet)Act Cardholder Panel ("ICP"), which will be marketed to
Manufacturers. The ICP will be composed of electronically gathered and stored
data of consumer transactions collected through the IPN in the Company's
installed base of stores. The ICP will capture store-specific purchasing data,
which will reflect individual consumer purchasing behavior. The ICP is expected
to enable participating Manufacturers to monitor both brand franchise
development over time and the level of incentives required to influence consumer
behavior. In addition, the ICP will be designed to enable participants to
measure the source of changes in sales volume and the change in category share
as well as to learn the effects of other in-store promotional tools (including
consumption of competitors' coupons). The panel will be designed to be
statistically representative of shoppers in Inter(Bullet)Act's store network
through random sampling of participants.
The Company expects the ICP to have the following key advantages over the
largest commercial household panel currently available, A.C. Neilsen (40,000
households):
-- Passive monitoring of natural purchasing behavior (which is not
possible in conventional panels).
35
<PAGE>
-- Recording of all purchase data over an 18-month period, including
products purchased, payment method, price, coupons used, total dollars
spent and dates of visits.
-- Measuring and projecting consumer purchasing behavior by brand, store
and retailer.
Inter(Bullet)Act plans to launch the ICP in two phases. First, the ICP is
expected to be offered as a value-added incentive for Manufacturers to
participate in the IPN pursuant to long-term promotional contracts. Second, the
ICP is expected to be offered as a research and monitoring tool available for a
fee based on time and usage. The Company plans to provide its clients basic
services via on-line terminal access and is in discussion with third parties for
the purpose of evaluating options and opportunities to commercialize the
cardholder information business. The Company believes that Manufacturers
generally will be willing to pay for the ICP data as it is expected to provide
valuable information on consumer purchasing behavior.
BENEFITS OF IPN
Inter(Bullet)Act's IPN provides compelling benefits to its three key
constituencies -- Manufacturers and other brand marketers, retailers and
consumers.
MANUFACTURERS AND OTHER BRAND MARKETERS
STIMULATES INCREMENTAL PRODUCT SALES. As a result of its front-end location
and targeted touch-screen promotional display, management believes that the IPN
directly causes an increase in the sales volume of promoted products. Sales
increases are generally attributable to a promotion motivating consumers to
trade up in volume (e.g., buy two and get a third item free), to try a new brand
due to the value of the offered incentive or to remind consumers to buy a
specified brand due to the on-screen prompt. Substantial sales increases at the
product and category level were attributed to the Company's IPN in an
Information Resources Inc. ("IRI") matched store study (the "IRI Study")
performed for Lever Brothers, Company ("Lever"). The study showed that Lever
products promoted on the IPN enjoyed dramatic product sales increases versus the
same Lever products not promoted on the IPN in comparable stores. Moreover, the
retailer enjoyed a substantial increase in sales for the entire categories of
which the promoted Lever products were a part. The graph set forth below
illustrates the results of the IRI study for two of the three products studied.
IPN SALES IMPACT STUDY
Brand Sales Lift (product) Retailer Sales Lift (category)
in IPN Stores in IPN Stores
Bar Soap 25% 23%
Shower Gel 105% 19%
ALLOWS TARGETING OF PROMOTIONS. The Company's proprietary TES offers
Manufacturers the ability to execute different promotional strategies for the
same product simultaneously. See "Products and Services -- Inter(Bullet)Act
Promotion Network -- Target Engine Software." The Company believes that the
offering of personally customized discounts to consumers in the store
immediately prior to shopping results in the current average of approximately
36
<PAGE>
35% redemption rate of IPN's electronically offered coupons (two to five times
higher than that of other in-store vehicles and approximately 18 times higher
than that of FSIs).
PROVIDES LOW COST ALTERNATIVE. The Company believes that the IPN offers
Manufacturers the lowest cost alternative coupon promotional strategy available
as a result of a combination of factors. First, Manufacturers only "pay for
performance" (see below); second, the IPN virtually eliminates coupon fraud (see
below); and third, the Company believes it offers Manufacturers the opportunity
to offer lower face-value incentives than through other in-store competitors due
to the time and place utility of the IPN terminal.
PAY FOR PERFORMANCE. One of the principal differences between the IPN and
most other forms of promotions is that Manufacturers are only charged a fee upon
a redemption/sale and not upon distribution or impression. Therefore, the
Company is positioning itself to Manufacturers as the lowest-cost provider.
IPN VIRTUALLY ELIMINATES COUPON FRAUD. Upon checkout, the electronic
scanning of the shopper's coupons or frequent shopping card verifies that items
for which promotions were selected on the IPN were actually purchased. This
electronic clearing system will virtually eliminate the costly problem of
mistaken and fraudulent redemptions associated with the handling of paper
coupons, which is estimated by industry sources to cost Manufacturers
approximately $500 million per year.
The IPN addresses coupon fraud in two ways. First, only the individual
cardholder may redeem the coupon against specific purchases in a particular
store on the day the promotion is offered. Second, unlike other coupon
redemption vehicles that allow a coupon to be redeemed against a different
product manufactured by the same company, the IPN validates a given redemption
only if the promotion and the specified item match.
CATEGORY EXCLUSIVITY. Manufacturers who participate in the IPN enjoy
exclusive representation of their product in a given product category (e.g., a
cola company's promotions are the sole cola promotions shown on the IPN).
Participating Manufacturers therefore effectively preclude competitors from
enjoying the IPN's capabilities and potentially gain competitive advantage.
DEVELOPS MANUFACTURER/RETAILER PARTNERSHIP. The IPN's ability to channel
consumer promotional dollars to the retailer's frequent shoppers creates a
mutually rewarding relationship between Manufacturer and retailer. Conventional
promotions serve to stimulate product demand in a broad geographic area with
coupons redeemable in all stores of all retailers. The IPN, in channeling these
promotions to specific stores and specific cardholders, enhances the retailer's
position with its best shoppers while satisfying the Manufacturers' volume and
targeting requirements.
CREATES DATABASE OF CUMULATIVE PURCHASING HISTORY BY CUSTOMER.
Manufacturers will benefit from access to the extensive consumer behavior
research that is expected to be accessible through the Company's ICP. See
"Products and Services -- Inter(Bullet)Act Cardholder Panel."
RETAILERS
STIMULATES INCREMENTAL PRODUCT SALES. The IPN's location inside the front
entrance of stores and the tendency of consumers, upon viewing product icons on
the IPN screen prior to shopping, to remember products that they may have
otherwise forgotten, are both expected to generate overall incremental sales for
the retailer. The three product categories that were part of the IRI study of
Lever products enjoyed increases between 19% and 26% during the time period of
the study. Moreover, the IPN affords the retailer the opportunity to promote
high-margin perishable foods and private-label products.
STIMULATES INTEREST IN EXISTING MEMBERSHIP CARD MARKETING PROGRAMS. The
IPN, as a card-based system, is intended to help achieve customer loyalty for
retailers by generating interest in frequent shopper card programs and by
allowing retailers to plan promotions that reward frequent and high-spending
shoppers.
INCREASES EFFICIENCY. The IPN obviates the costs and inconvenience to
retailers of handling paper coupons, which typically must be stored and shipped
to a clearing center to qualify for ultimate reimbursement.
PROMOTES CONSUMER/RETAILER COMMUNICATION. The IPN adds the dimension of
one-on-one communication and feedback with the retailer's customers. In addition
to on-screen offers specifically designed for the card-carrying customer group,
retailers can use the full color, interactive video screens to communicate
special messages to
37
<PAGE>
targeted consumers or can entice consumer involvement and feedback via
interactive games, electronic sweepstakes entry, continuity promotions and
tie-in promotions with local media, charities, special events, manufacturers and
other merchandising themes promoted within the store. On screen questionnaires
can also be effectively used to gather feedback from consumers on store
improvements or customer service issues.
GENERATES HIGH-MARGIN REVENUE. Retailers receive a processing fee for each
electronic redemption. Cumulative processing fees can add high margin revenue to
a retailer's traditionally low margin grocery business.
CONSUMERS
SAVES TIME AND INCREASES PURCHASING POWER. The IPN dispenses shopping lists
or coupons for products and allows the consumer to enjoy the savings resulting
from the electronic redemption of the promotion, the average total of which
currently ranges from one to ten dollars per shopping trip. The Company expects
these average savings per shopping trip to increase as it offers a wider array
of product promotions resulting from anticipated increases in the number of
participating Manufacturers. In addition, consumers can obtain these savings by
spending only about 60 seconds at the IPN terminal compared to the
time-consuming task of clipping and sorting individual paper coupons.
PROVIDES CONVENIENCE AND INFORMATION. Unlike traditional promotional
methods, the IPN has numerous characteristics that facilitate its consumer
acceptance. First, each IPN terminal is located near the entrance of the grocery
store. Second, each terminal presents touch-screen color icons of promoted
products that offer personalized product discounts while eliminating the burden
of consumers having to locate, clip, save and remember to carry paper coupons
before they enter their local grocery store. Third, the system reminds shoppers
of products they may otherwise have forgotten during a given shopping trip and
informs them of other pertinent in-store events, such as special offerings for
perishable products.
SALES AND MARKETING
DIRECT SALES FORCE. The Company's sales efforts are conducted primarily
through its own direct sales force. Since February 1996 Inter(Bullet)Act has
employed a full-time brand sales force, which currently includes seven people,
all of whom are experienced in packaged goods sales and product promotions and
report to the Vice President of Brand Sales. The current sales force replaced an
earlier sales group consisting of five external sales agents who sold a variety
of unrelated products along with the IPN.
The Company also concentrates its marketing and sales resources on
participation in well-recognized and widely attended industry trade shows,
direct mail campaigns to prospective industry accounts and advertising in trade
publications.
The Company's sales professionals are trained in, and directed toward, the
management and renewal of existing business as well as establishing new business
with Manufacturers. Management believes that significant future recurring
revenue will come from the renewal and expansion of business with existing
clients.
MAJOR ACCOUNTS PROGRAM. In addition to its direct sales force, the Company
is implementing an executive sales strategy targeting large, multi-brand
Manufacturers by retaining the services of Lorraine Scarpa, Ph.D., former Senior
Vice President of Kraft Foods, to assist in arranging sales presentations with
prominent executives of major Manufacturers. For similar reasons, the Company
has retained the services of The Source Company, which provides distribution and
administrative services on behalf of both publishing companies and more than
50,000 retail stores nationwide. This strategy, which involves personal
participation from the Company's senior management, is designed to secure
longer-term commitments from these companies to participate on the IPN.
Management believes that the value-added inducement of access to the ICP will
assist in obtaining these accounts' business. Since inception of this sales
strategy, meetings were conducted with senior management of one of the largest
tobacco companies and a number of the largest multi-brand Manufacturers that
control many popular consumer brands, including Borden, from which the Company
has received a written indication of interest to participate in the IPN.
RETAILER PROGRAM. Retailer network development and associated sales efforts
have been based on direct mail campaigns, trade shows and one Company-employed
sales representative, supported by senior management.
38
<PAGE>
OTHER OPPORTUNITIES
In addition to grocery stores, the Company believes the IPN may have
several additional applications for promoting Manufacturers' products. More
specifically, the Company can foresee use of its electronic marketing systems in
retail pharmacy chains and possibly in convenience stores and discount
department stores. The Company has entered into a letter of intent with a third
party pursuant to which a limited liability company would be organized to pursue
the development and commercialization of a network similar to the IPN that would
deliver healthcare information and targeted promotions of healthcare products in
retail pharmacies. If a definitive agreement is reached, the Company would
become a minority owner of this business in exchange for a limited license to
use its technology but is not obligated to commit substantial amounts of capital
to the business. Significant opportunities may also exist in pursuing
international expansion of the IPN grocery store application. Although these
alternative applications may be viable for the Company in the future, the
Company's current primary objective is to complete its large-scale installation
of the IPN in retail grocery stores domestically.
COMPETITION
The consumer products advertising and promotional business is intensely
competitive. Many companies and formats compete for the advertising and
promotional dollars that Manufacturers spend to help sell their products. The
Company's promotional services compete against formats such as TV, radio,
newspapers and various point-of-entry technologies, but most directly against
coupon distribution companies. The Company competes with various traditional
coupon delivery methods that are more widely utilized, including FSIs,
in/on-packs, direct mail, newspapers and magazines, as well as a number of new
electronic marketing products and services such as check-out coupons, electronic
shelf markers, battery-powered coupon dispensers and frequent-shopper programs,
among others.
Inter(Bullet)Act competes directly for promotional dollars based on the
efficiency of its network to reach a wide base of the shopping public, its
ability to accurately target potential customers and to influence consumer
buying behavior while enabling Manufacturers to meet their strategic objectives.
Although Inter(Bullet)Act currently does not face direct competition because of
the proprietary nature of its network and its services, there are numerous
companies who compete in the same general market through a different format. In
particular, the Company competes with other companies in the in-store marketing
segment of the consumer products advertising and promotional business. One
competitor, Catalina Marketing Corporation ("Catalina"), provides an electronic
marketing network that delivers coupons to consumers at checkout lanes based on
that day's purchases. Another competitor, ActMedia, is currently the largest of
several companies that provide automatic coupon dispensers in the aisles of
supermarkets. In addition, The News Corporation, the second largest FSI
distributor in the United States, recently entered the in-store marketing
segment by providing automatic coupon dispensers in the aisles of supermarkets.
These companies have greater resources and more experience in in-store marketing
than the Company, and there is no assurance that the Company will be able to
compete effectively. Further, supermarket chains may directly develop their own
electronic promotion capabilities through their frequent shopper card programs
or otherwise. To the extent that a direct competitor has installed its
point-of-sale system in a supermarket, it may be substantially more difficult to
convince a Manufacturer to allocate advertising and promotional dollars away
from established in-store marketing systems.
EMPLOYEES
As of December 9, 1996, the Company had a total of 100 full-time employees.
Of these 100 full-time employees, 16 were engaged in sales and marketing, 34
were engaged in technical services, 40 were engaged in retail services, and ten
were engaged in finance and administration.
None of the Company's employees is represented by a labor union. The
Company considers its relations with its employees to be good. The Company's
future success will depend in significant part on the continued service of its
key technical sales and senior management personnel. Competition for such
personnel is intense and there can be no assurance that the Company can retain
its key managerial sales and technical employees. The Company anticipates that
the nationwide commercialization of the IPN will require the hiring of a
substantial number of new employees in connection with the planned expansion of
its business.
39
<PAGE>
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
A patent currently used in the Company's in-store consumer product
promotion and couponing business, United States Letters Patent No. 4,554,446
(the "'446 Patent"), is based on the interaction of multiple elements including:
(1) a computer, (2) a device capable of printing a machine-readable code onto a
document, (3) a device capable of reading a machine-readable code, and (4) a
cash register.
The IPN which utilizes the patented invention generally includes the
following: a device (the IPN terminal) issues a document that carries a
machine-readable code which is subsequently read by another device (a checkout
scanner) which feeds the information to a computer (the IPN store server) that
validates the transaction against pre-established criteria (a product purchase)
and finally instructs the cash register accordingly (subtracting the proper
amount of incentive).
The Company is licensee of the '446 Patent, which expires in November 2003,
through separate agreements with the holders of rights in this patent. With
respect to one license agreement under which the Company is assignee, the
Company is required to pay a royalty of 2% of the gross collected revenues of
the Company, to the extent derived from the Company's exploitation of the
patent, with such royalty decreasing to 1% of such revenues after $10 million in
aggregate royalties have been paid to the licensors. This license agreement
requires that certain minimum monthly payments be made to the licensors, and be
exceeded within approximately two years, in order to avoid triggering a
termination right on the part of the licensors. With respect to another license
agreement, the Company is required to pay the licensor a royalty of .8% of the
gross collected revenues of the Company to the extent derived from the Company's
exploitation of the patent, until such time as the licensor has received the
aggregate sum of $600,000 after which no additional royalty payments are
required. This license agreement requires certain minimum monthly payments to
the licensor. Additionally, the Company is required to pay royalties to a former
director of the Company who was an earlier licensee of this patent and assigned
his rights therein, in exchange for certain ongoing payments and other
consideration, to the Company's subsidiary, which in turn has assigned such
rights to the Company. See "Certain Transactions."
The Company also has filed an application for United States Letters Patent
with respect to the Company's Target Engine Software. See "Products and
Services -- Inter(Bullet)Act Promotion Network." In addition, the foregoing
license agreements include two patents that are not presently used in the
Company's business.
The Company has acquired the registered trademark COUPON
XPRESS(Register mark). In addition, the Company has applied to the United States
Patent and Trademark Office to register the following service marks, which
applications are now pending: INTER(Bullet)ACTTM and the Inter(Bullet)Act logo
graphic.
PROPERTIES
The Company is headquartered in Norwalk, Connecticut, where it leases
16,726 square feet of office space. The lease runs through December 21, 1999.
The Company also leases 2,080 square feet of warehouse storage space in
Farmingdale, New York under a month-to-month lease. The Company intends to lease
other warehouse storage space as necessary and believes that suitable space will
be readily available to meet its anticipated needs for the foreseeable future.
LEGAL PROCEEDINGS
In February 1996, the Company filed suit against Catalina Marketing
Corporation (NYSE: POS) alleging that Catalina has infringed the '446 Patent
under which the Company is licensee. The Company alleges that Catalina is
infringing the patent by making, using and offering for sale devices and systems
that incorporate and employ inventions covered by the '446 Patent. The Company
is seeking an injunction against Catalina to stop further infringement of the
patent and treble damages and the costs and expenses incurred in connection with
the suit. The parties are currently proceeding with pre-trial discovery. As with
any litigation, the ultimate outcome of the suit cannot be predicted. However,
the Company intends to pursue the action vigorously.
40
<PAGE>
MANAGEMENT
The following table sets forth certain information about each of the
Company's executive officers and directors. Each director has been elected to
serve until the next annual meeting of shareholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Stephen R. Leeolou 40 Chairman of the Board of Directors, Chief Executive Officer and
Treasurer
William F. Penwell 64 Vice Chairman of the Board of Directors; Secretary
Paul A. Nash 39 Executive Vice President, Research and Development; Director
Timothy J. W. Simmons 39 Senior Vice President, Sales and Marketing
Richard A. Vinchesi, Jr. 30 Vice President and Chief Financial Officer
Robert M. DeMichele 51 Director
William P. Emerson, Jr. 43 Director
Haynes G. Griffin 49 Director
Richard P. Ludington 49 Director
L. Richardson Preyer, Jr. 48 Director
Brian A. Rich 35 Director
Stuart S. Richardson 49 Director
Robert A. Silverberg 61 Director
</TABLE>
STEPHEN R. LEEOLOU has been a director of the Company since its inception
in 1993 and Chairman of the Board of Directors and Treasurer of the Company
since 1995. In June 1996, Mr. Leeolou became Chief Executive Officer of the
Company. Mr. Leeolou is a co-founder of Vanguard, one of the largest independent
nonwireline cellular telephone companies in the country, and has served as its
Executive Vice President, Chief Operating Officer, Secretary and a director
since its inception in 1984. From 1983 to 1984, Mr. Leeolou was President of
Caro-Cell Communications, Inc. ("Caro-Cell") and from 1974 until 1983 was a
journalist in the print, radio and television media. Mr. Leeolou also serves as
a director and is past Chairman of the Board of Directors of International
Wireless Communications, Inc., a California-based company involved in wireless
telecommunications licensing, construction and operations primarily in Asia and
Latin America. Since 1994, Mr. Leeolou has been a charter Director of the North
Carolina Electronics and Information Technology Association.
WILLIAM F. PENWELL has been Vice Chairman of the Board of Directors of the
Company since 1995 and Secretary since June 1996. Mr. Penwell served as
President and Chief Executive Officer and Director of the Company from 1993 to
1996 and has served as a director of the Company since 1994. Prior to joining
Inter(Bullet)Act in 1993, Mr. Penwell was Chairman of TSS Ltd., a publicly
traded company engaged in the manufacture and deployment of terminals used to
dispense coupons. Prior thereto, Mr. Penwell was Chairman and Chief Executive
Officer of the Sperry & Hutchinson Co., Inc. (issuers of S&H green stamps) and
President and Chief Executive Officer of its Counter Intelligence Division which
operated a frequent shopper and database marketing business (1978 to 1992),
President of Carlson Marketing's incentive and travel operations in Minneapolis,
MN (1970 to 1978) and an employee of Top Value Enterprises in Dayton, OH (1958
to 1970).
PAUL A. NASH has been a director of the Company since its inception and has
been a Vice President of the Company since 1993. From 1994 to January 1996, Mr.
Nash also served as the Company's Chief Operating Officer. Prior thereto, he was
Chairman and Chief Executive Officer for Advanced Technical Services, Inc. (1983
to 1992), a nationwide ATM manufacturing, maintenance and support company, ATM
Project Implementation Manager for Peoples Bank of Connecticut (1978 to 1980),
responsible for ATM and EFT project management, and Senior Systems Consultant at
Docutel Corporation (1980 to 1983) where he served as the key international ATM
systems support person.
TIMOTHY J. W. SIMMONS has been Senior Vice President of Sales and Marketing
of the Company since 1995. Prior thereto, from 1992 to 1995, Mr. Simmons was
Vice President, Sales and Marketing for Advanced Promotion Technologies, an
in-store electronic marketing company. From 1984 to 1992, Mr. Simmons served in
various capacities, most recently as Vice President, Strategic Planning for the
food retailer sector, with A.C. Nielsen, a leading research and information firm
and served in various marketing and management positions with Gillette U.K. from
1977 to 1984.
41
<PAGE>
RICHARD A. VINCHESI, JR. was elected Vice President and Chief Financial
Officer in September 1996. Prior thereto, from 1988 to 1990 and 1991 to 1996,
Mr. Vinchesi served in various capacities in the Corporate Finance department of
Salomon Brothers Inc, most recently as a Vice President in the Media group. Mr.
Vinchesi earned an M.B.A. from the J.L. Kellogg Graduate School of Management at
Northwestern University in an accelerated one-year program from 1990-1991.
ROBERT M. DEMICHELE has been a director of the Company since 1995 and has
served as President, Chief Executive Officer and a director of Lexington Global
Asset Managers, Inc., a diversified financial services holding company, since
1995. From 1981 to 1995, Mr. DeMichele was President, Chief Executive Officer
and a director of Piedmont Management Company, Inc., formerly the parent
corporation of Lexington Global Asset Managers, Inc. Prior to 1981, Mr.
DeMichele was in executive management at A. G. Becker (1974 to 1981), an
investment banking company, and Richardson-Vicks, Inc. (1968 to 1974), an
international consumer products company now owned by Proctor & Gamble. Mr.
DeMichele also serves as a director of Vanguard, Chartwell Reinsurance Co. and
the Navigators Group, Inc.
WILLIAM P. EMERSON, JR. has been a director of the Company since its
inception and has served as the President and Chief Executive Officer of all
divisions of Wilmington Shipping Company since 1991. During 1995, Mr. Emerson
served as Chairman of the Company's Board of Directors. Wilmington Shipping
Company services the international trade community through divisions which
include steamship line agents, customs brokers and freight forwarders, a
warehouse and a container maintenance and repair station.
HAYNES G. GRIFFIN has been a director of the Company since its inception
and from 1993 to 1995 Mr. Griffin served as Chairman of the Board of Directors
of the Company. Mr. Griffin is a co-founder of Vanguard and has served as its
President and Chief Executive Officer since its inception in 1983. Mr. Griffin
also serves as Chairman of the Board of Directors of International Wireless
Communications, Inc., a California-based company involved in wireless
telecommunications licensing, construction and operations primarily in Asia and
Latin America. Mr. Griffin also is a member of the Boards of Directors of
Lexington Global Asset Managers, Inc. and Geotek Communication, Inc. and
recently served on the United States Advisory Council on the National
Information Infrastructure. He is a past Chairman of the Cellular
Telecommunications Industry Association.
RICHARD P. LUDINGTON has been a director of the Company since 1993.
Effective December 20, 1996, Mr. Ludington will become Vice President-Real
Estate of Forest Land Group, L.L.C., a timberland investment corporation. Since
1993, Mr. Ludington has served as Southeast Regional Director for The
Conservation Fund, a nonprofit organization that creates partnerships with
private and public sector corporations and organizations to help protect
America's outdoor environment. Prior thereto, Mr. Ludington served as a Director
in various capacities for The Nature Conservancy (1982 to 1987) and as the first
Director of the State Lands Division of Florida's Department of Natural
Resources (1979 to 1982).
L. RICHARDSON PREYER, JR. has been a director of the Company since its
inception. Mr. Preyer is a co-founder of Vanguard and has served as its Vice
Chairman of the Board, Executive Vice President and Treasurer since its
inception in 1983. Prior to the formation of Vanguard, Mr. Preyer was Vice
President of Caro-Cell which was engaged in the formation of partnerships to
fund and apply for cellular telephone authorizations. Mr. Preyer also serves as
Administrative Trustee of Piedmont Associates and Southeastern Associates,
investment partnerships.
BRIAN A. RICH has been a director of the Company since June 1996. Mr. Rich
has served as Managing Director and Group Head of Toronto Dominion Capital, the
U.S. merchant bank affiliate of Toronto Dominion Bank, since July 1995. Prior
thereto, since September 1990 Mr. Rich was a managing director of the
Communications Finance Group of Toronto Dominion Bank in New York where he
focused on transactions in the wireless communications, cable and broadcast
industries. Prior to joining Toronto Dominion Bank in September 1990, Mr. Rich
was a principal in a micro computer products distributor based in San Francisco,
which he ultimately sold. Mr. Rich also serves as a director of Teletrac, Inc.
and International Wireless Communications, Inc.
STUART S. RICHARDSON has been a director of the Company since 1995 and has
served as Chairman of Lexington Global Asset Managers, Inc., a diversified
financial services holding company, since 1995. From 1985 to 1995, Mr.
Richardson was an executive of Piedmont Management Company, Inc., formerly the
parent corporation of Lexington Global Asset Managers, Inc., and served as its
Vice Chairman from 1986 to 1995. Mr. Richardson also is the former Chairman of
the Board of Richardson-Vicks, Inc. and serves as Chairman of the Board of
Vanguard and a director of Chartwell Reinsurance Co.
42
<PAGE>
ROBERT A. SILVERBERG has been a director of the Company since June 1996.
Mr. Silverberg has been Executive Vice President and Director of Vectra Bank
since 1995. Form 1981 to 1995, Mr. Silverberg was Chairman of the Board and
President of First Denver Corporation and Chairman of the Board of its
subsidiary, First National Bank of Denver. Mr. Silverberg has also been
President and Chairman of the Board of 181 Realty Company, a commercial real
estate holding company, since 1968 and a director of Vanguard since 1984. Mr.
Silverberg is also a past Chairman of the Anti-Defamation League-Western
Division.
There are no family relationships among the directors and executive
officers of the Company other than between Messrs. Preyer and Richardson who are
cousins.
Directors are elected to serve for one-year terms or until their successors
are duly elected and qualified. All officers serve at the pleasure of the Board
of Directors.
In connection with Vanguard's most recent investment in the Company, an
amendment to the Company's bylaws has been effected to set the maximum number of
directors at 12 and it is anticipated that the holders of a majority of the
Company's Common Stock will enter into an agreement whereby Vanguard will be
entitled to designate six of the 12 directors until such time as the Company has
completed an initial public offering of its Common Stock.
DIRECTOR COMPENSATION
Directors of the Company have received options to purchase Common Stock in
lieu of any cash compensation for serving on the Board of Directors or its
committees. See " -- Executive Compensation -- Stock Options."
COMMITTEES
The Compensation and Stock Option Committee of the Board of Directors
consists of Messrs. Griffin (Chairman), Richardson, Preyer and Emerson. This
Committee recommends employee salaries and incentive compensation to the Board
of Directors and administers the Company's stock option plans.
The Audit Committee of the Board of Directors consists of Messrs.
Silverberg (Chairman), Emerson, Ludington and Penwell. The Audit Committee makes
recommendations to the Board of Directors concerning its review of the Company's
internal controls and accounting system and its review of the annual audit, and
regarding the selection of independent auditors.
43
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth all compensation
received for services rendered to the Company in all capacities for the fiscal
year ended September 28, 1996 by William F. Penwell, who served as the Company's
Chief Executive Officer for a portion of such fiscal year, Stephen R. Leeolou,
who served as the Company's Chief Executive Officer for the remainder of such
fiscal year and currently so serves, and the Company's other executive officers
whose total salary and bonus for such fiscal year exceeded $100,000 (together,
the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS-
STOCK
ANNUAL COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION SALARY BONUS (SHARES)
<S> <C> <C> <C>
Stephen R. Leeolou
Chairman of the Board of Directors, Chief Executive Officer and Treasurer......... $ 50,000 $ -- 192,600
Aretas E. Stearns
President, Chief Operating Officer and Director................................... $105,177* 50,000
William F. Penwell
Vice Chairman of the Board of Directors and Secretary............................. $ 96,338 $ -- 24,000
Paul A. Nash
Vice President, Product Development and Technology................................ $141,712 $ -- 14,000
Timothy J.W. Simmons
Vice President, Sales and Marketing............................................... $144,167 $ -- 10,000
</TABLE>
* Mr. Stearns became President and Chief Operating Officer of the Company on
January 30, 1996. Until June 1996, Mr. Stearns served in such capacity under
the Company's consulting agreement with Vanguard pursuant to which Mr. Stearns
remained an employee of Vanguard and the Company reimbursed Vanguard for its
costs of providing Mr. Stearns. Effective June 1996, Mr. Stearns became an
employee of the Company. The amount shown as Mr. Stearns' annual compensation
includes $ paid to him directly by Vanguard for which it was reimbursed by
the Company. In November 1996, Mr. Stearns resigned his positions with the
Company effective December 31, 1996.
Effective June 12, 1996, Stephen R. Leeolou was elected Chief Executive
Officer of the Company and serves at the pleasure of the Board of Directors.
While continuing to serve as a salaried executive officer of Vanguard, Mr.
Leeolou receives an annual salary of $50,000 from the Company.
OPTION GRANTS, EXERCISES AND HOLDINGS AND FISCAL YEAR-END OPTION VALUES.
The following table summarizes all option grants during the year ended September
28, 1996 to the Named Officers.
OPTION GRANTS DURING YEAR ENDING SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
% OF
TOTAL
OPTIONS POTENTIAL REALIZABLE
NUMBER OF GRANTED VALUE AT ASSUMED
SHARES TO EXERCISE ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION FOR
OPTIONS IN FISCAL PRICE PER EXPIRATION OPTION TERM (3)
NAME GRANTED YEAR 1996 SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Leeolou........................... 192,600(1) 31.63% $5.50 6/13/2006 $666,188 $1,688,251
Aretas E. Stearns............................ 25,000(2) 4.1% $5.50 1/30/2006 $ 86,473 $ 219,140
25,000(1) 4.1% $5.50 6/13/2006 $ -- $ --
William F. Penwell........................... 20,000(2) 3.28% $5.50 1/30/2006 $ 69,178 $ 175,312
4,000(1) 0.66% $5.50 6/13/2006 $ 13,836 $ 35,062
Paul A. Nash................................. 14,000(1) 2.30% $5.50 6/13/2006 $ 48,425 $ 122,718
Timothy J.W. Simmons......................... 10,000(1) 1.64% $5.50 6/13/2006 $ 34,589 $ 87,656
</TABLE>
(1) Nonqualified stock options granted June 14, 1996 under the Company's 1996
Nonqualified Stock Option Plan. 42,600 of Mr. Leeolou's options vested
immediately upon grant and 50,000 additional options will vest on each of
the next three anniversaries of the grant. Mr. Stearns' nonqualified options
will not vest as a result of his resignation from his positions with the
Company. Mr. Penwell's options are all vested. 4,000 of Mr. Nash's options
are vested and 2,000 additional options will vest on each of the next five
anniversaries of the grant.
44
<PAGE>
(2) Incentive stock options granted January 30, 1996 under the Company's 1994
Stock Compensation Plan. 5,000 of Mr. Stearns' options vested immediately
upon grant and the remainder will not vest as a result of his resignation
from his positions with the Company. 4,000 of Mr. Penwell's options will
vest on each of the next five anniversaries of the grant.
(3) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation required by
the rules of the Commission. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock. The amounts
reflected in this table may not necessarily be achieved.
No Named Officers exercised any stock options during the fiscal year ended
September 28, 1996. The following table sets forth information concerning all
option holdings for the fiscal year ended September 28, 1996, with respect to
the Named Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 28, 1996 SEPTEMBER 28, 1996 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Stephen R. Leeolou.............................................. 42,600 150,000 $ 1,001,100 $ 3,525,000
Aretas E. Stearns............................................... 5,000 45,000(2) $ 117,500 $ 1,057,500(2)
William F. Penwell.............................................. 4,000 20,000 $ 94,000 $ 470,000
Paul A. Nash.................................................... 4,000 10,000 $ 94,000 $ 235,000
Timothy J.W. Simmons............................................ 0 10,000 $ -- $ 235,000
</TABLE>
(1) Calculated on the basis of $23.50 per share, the implied price at which the
Company valued the warrants issued in the Private Placement less the
exercise price payable for such shares, multiplied by the number of shares
underlying the option.
(2) These options will not vest as a result of the resignation of Mr. Stearns
from his positions with the Company.
STOCK COMPENSATION PLANS. The Company has a 1994 Stock Compensation Plan
that provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of Common Stock
that may be issued pursuant to the plan may not exceed 430,000 shares, subject
to adjustment upon occurence of certain events affecting the Company's
capitalization. An aggregate of 130,900 shares remain available for future
grants under the 1994 Stock Compensation Plan.
The Company also has a 1996 Nonqualified Stock Option Plan that provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to nonqualified stock options. All options must be granted at
an exercise price not less than $5.50 per share. The aggregate number of shares
of Common Stock that may be issued pursuant to the plan may not exceed 500,000
shares of Common Stock, subject to adjustment upon occurence of certain events
affecting the Company's capitalization. This plan is subject to shareholder
approval. An aggregate of 29,000 shares remain available for future grants under
the 1996 Nonqualified Stock Option Plan.
The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the Plan, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.
For additional information regarding stock options granted under the
foregoing plans, see Notes 14 and 15 of the Company's audited Consolidated
Financial Statements. No options have been granted in fiscal 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Haynes G. Griffin, L. Richardson Preyer, Jr. and Stuart S. Richardson,
members of the Company's Compensation and Stock Option Committee, are each
directors and executive officers of Vanguard. Stephen R. Leeolou, Chief
Executive Officer of the Company, also is a director and executive officer of
Vanguard. Each of the foregoing persons and Vanguard, as well as William P.
Emerson, Jr., who is also a member of the Compensation and Stock
45
<PAGE>
Option Committee, have provided capital to the Company and engaged in related
transactions. In addition, Vanguard has provided and continues to provide
certain services to the Company pursuant to consulting and management services
agreements entered into in 1995 and 1996. See "Certain Transactions."
INDEMNIFICATION MATTERS
The North Carolina Business Corporation Act (the "Business Corporation
Act") provides for mandatory indemnification against reasonable expenses for a
director or officer who is wholly successful in the defense of any proceeding to
which he is a party because he is or was a director or officer of a corporation.
Additionally, as permitted by the Business Corporation Act, the Company's Bylaws
provide for indemnification of the Company's directors and Indemnified Officers
(executive officers who are also directors and any other officer who is
designated by the Board as an Indemnified Officer) against any and all liability
and expenses in any proceeding, including reasonable attorneys' fees, arising
out of their status or activities as directors and officers, except for
liability or litigation expense incurred on account of activities that at the
time taken were not in good faith or were known or reasonably should have been
known by such director or officer or employee to be clearly in conflict with the
best interests of the Company or that such director or officer had reason to
believe were unlawful.
At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
PRINCIPAL SHAREHOLDERS
The following table sets forth the ownership of the Company's Common Stock
by each person known by the Company to be the owner of 5% or more of the Common
Stock, by each person who is a director or named officer of the Company and by
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
NAME SHARES (1)(2) PERCENT (1)(2)
<S> <C> <C>
Vanguard Cellular Systems, Inc................................................................. 2,764,659(3) 32.26%
Piedmont Acorn Investors Limited Partnership................................................... 786,286(4) 10.25%
Clearing Systems, Inc.......................................................................... 816,902(5) 10.65%
Toronto Dominion Investments, Inc.............................................................. 363,636 4.74%
Stephen R. Leeolou............................................................................. 351,562(6) 4.58%
William F. Penwell............................................................................. 33,952(7) *
Paul A. Nash................................................................................... 820,702(8) 10.70%
Timothy J.W. Simmons........................................................................... 4,000(9) *
Richard A. Vinchesi............................................................................ 10,000 *
Richard P. Ludington........................................................................... 102,567(10) 1.34%
Robert M. DeMichele............................................................................ 60,000(11) *
William P. Emerson, Jr......................................................................... 266,237(12) 3.46%
Haynes G. Griffin.............................................................................. 437,264(13) 5.70%
L. Richardson Preyer, Jr....................................................................... 351,562(14) 4.58%
Stuart S. Richardson........................................................................... 100,000(15) 1.30%
Brian A. Rich.................................................................................. --(16) --
Robert A. Silverberg........................................................................... 20,000 *
All Directors and Officers as a group (14 persons)............................................. 2,562,846(17) 33.08%
</TABLE>
* Owns less than 1% of the total outstanding Common Stock.
(1) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
corporations in which they have interests and charitable organizations
established by such descendants (collectively referred to as the
"Richardson Family") beneficially own approximately 1,237,848 shares or
16.12% of the Company's Common Stock as of June 19, 1996. Such number of
shares includes 786,286 shares owned by Piedmont Acorn Investors Limited
Partnership, 50,000 shares held by the Smith Richardson Foundation, Inc.,
50,000 shares held by Piedmont Harbor-Piedmont Associates Limited
Partnership, 342,162 shares held directly by L. Richardson Preyer, Jr. and
9,400 shares which he has the right to acquire under presently exercisable
options granted to him under the Company's 1994 Stock Compensation Plan.
The individuals and institutions constituting the Richardson Family have
differing interests and may not necessarily vote their shares in the same
manner.
46
<PAGE>
Furthermore, trustees and directors have fiduciary obligations (either
individually or jointly with other fiduciaries) under which they must act
on the basis of fiduciary requirements which may dictate positions that
differ from their personal interests.
(2) Unless otherwise indicated, all share ownership is given as of September
10, 1996 and all shares are owned of record by the persons named and
beneficial ownership consists of sole voting power and sole investment
power.
(3) Includes 900,113 shares that Vanguard has the right to acquire under a
warrant at $23.50 per share. See "Certain Transactions." Excludes 132,027
shares (or 169,741 shares in the event that a Qualifying Initial Public
Offering has not been consummated by September 30, 1997) that Vanguard will
have the right to purchase under the Warrants acquired by Vanguard in the
Private Placement, which shares can be purchased at an exercise price of
$0.01 per share, subject to certain adjustments. These shares may also be
deemed beneficially owned by Messrs. Leeolou, Griffin, Preyer and
Richardson, each of whom is a director and executive officer of Vanguard.
(4) These shares are owned of record by Piedmont Acorn Investors Limited
Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont
Acorn Investors Limited Partnership and may also be deemed to beneficially
own such shares.
(5) These shares are owned of record by Clearing Systems, Inc. ("CSI"), Paul A.
Nash, a director and executive officer of the Company, and Michael R.
Jones, a former director of the Company, are principal shareholders of CSI
and may also be deemed to beneficially own such shares.
(6) Includes 9,400 shares that Mr. Leeolou has the right to acquire under
presently exercisable stock options granted to him under the Company's 1994
Stock Compensation Plan. Does not include shares owned by Vanguard, for
which Mr. Leeolou serves as a director and executive officer. Mr. Leeolou
disclaims beneficial ownership of such shares.
(7) Includes 10,450 shares that Mr. Penwell has the right to acquire under
presently exercisable stock options granted to him under the Company's 1994
Stock Compensation Plan.
(8) Includes 3,800 shares that Mr. Nash has the right to acquire under
presently exercisable stock options granted to him under the Company's 1994
Stock Compensation Plan. Also includes 816,902 shares owned of record by
CSI that may be deemed beneficially owned by Mr. Nash.
(9) Includes 4,000 shares that Mr. Simmons has the right to acquire under
presently exercisable stock options granted to him under the Company's 1994
Stock Compensation Plan.
(10) Includes 7,000 shares that Mr. Ludington has the right to acquire under
presently exercisable stock options granted to him under the Company's 1994
Stock Compensation Plan and 17,113 shares held by a trust for the benefit
of his children.
(11) Includes 50,000 shares held by the Smith Richardson Foundation, of which
Mr. DeMichele serves as one of eight trustees. The shares held by the Smith
Richardson Foundation are also reported as beneficially owned by Stuart S.
Richardson. Mr. DeMichele disclaims beneficial ownership of the shares held
by such foundation.
(12) Includes 20,200 shares that Mr. Emerson has the right to acquire under
presently exercisable options granted to him under the Company's 1994 Stock
Compensation Plan, 5,000 shares held by members of his immediate family and
5,000 shares held by an entity controlled by Mr. Emerson.
(13) Includes 9,400 shares that Mr. Griffin has the right to acquire under
presently exercisable options granted to him under the Company's 1994 Stock
Compensation Plan and 85,702 shares owned by a partnership of which his
brother is general partner. Does not include shares owned by Vanguard, for
which Mr. Griffin serves as a director and executive officer. Mr. Griffin
disclaims beneficial ownership of such shares.
(14) Includes 9,400 shares that Mr. Preyer has the right to acquire under
presently exercisable options granted to him under the Company's 1994 Stock
Compensation Plan. Does not include shares owned by Vanguard, for which Mr.
Preyer serves as a director and executive officer. Mr. Preyer disclaims
beneficial ownership of such shares.
(15) Represents 50,000 shares held by the Smith Richardson Foundation, of which
Mr. Richardson serves as one of eight trustees and 50,000 shares held by
Piedmont Harbor-Piedmont Associates Limited Partnership, of which Mr.
Richardson is a general partner. The shares held by the Smith Richardson
Foundation are also reported as beneficially owned by Robert M. DeMichele.
Mr. Richardson disclaims beneficial ownership of the shares held by such
foundation and partnership. Does not include shares owned by Vanguard, for
which Mr. Richardson serves as a director and executive officer. Mr.
Richardson disclaims beneficial ownership of such shares.
(16) Does not include the shares shown as beneficially owned by Toronto Dominion
Investments, Inc., an affiliate of Mr. Rich's employer, Toronto Dominion
Bank.
(17) Includes 78,650 shares that may be purchased under presently exercisable
options granted to directors and officers under the Company's 1994 Stock
Compensation Plan.
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CERTAIN TRANSACTIONS
The Company was incorporated in 1993 and in April of that year purchased
certain technology and other assets, including software and trademarks and
service marks under which the IPN was developed, and assumed certain
liabilities, including $610,000 in indebtedness and trade payables of
approximately $150,000 of Clearing Systems, Inc. ("CSI") in exchange for 816,902
shares of the Company's authorized Common Stock. CSI is a Delaware corporation
founded in 1992 whose principal shareholders are Paul A. Nash, a director of the
Company, and Michael R. Jones, a former director of the Company. CSI was the
shell corporation under which certain of the Company's technology was first
developed and has had no business operations.
From time to time after such purchase, the Company has obtained capital for
its business by issuing shares of its Common Stock in private transactions and
directors, officers, and principal shareholders of the Company and members of
their immediate families and certain related entities have purchased shares. The
first of these transactions was consummated on April 16, 1993, whereby the
Company issued 1,999,998 shares of its Common Stock at a purchase price of
approximately $1.02 per share to certain individual investors including the
following: Mr. Preyer, 233,434 shares; Mr. Griffin, 233,434 shares; Mr. Leeolou,
233,434 shares; Mr. Emerson, 210,090 shares; and Mr. Ludington, 77,811 shares.
On June 15, 1993, Mr. Jones assigned to the Company his rights as licensee
of certain patent rights, including the patent presently used in the Company's
business. See "Business -- Patents, Proprietary Information and Trademarks."
Pursuant to such assignment, Mr. Jones received royalty payments of $20,000,
$61,000 and $114,000 in fiscal 1993, 1994 and 1995, respectively, and currently
receives a royalty payment in the amount of $10,000 per month, such payment to
continue until the Common Stock of the Company attains a value of $32 per share.
In June 1994, the Board of Directors authorized a partial refund of the
purchase price paid for shares of common stock purchased on April 16, 1993 by
certain investors who were North Carolina residents and purchased such shares in
reliance on the Company's then existing plan to relocate its headquarters to
North Carolina which would make available to such investors a North Carolina
investment tax credit with respect to their investment. The refund was made in
the form of a promissory note in principal amount equal to the investment tax
credit each eligible investor would have received and was issued in
consideration of the release by such investor from any claim relating to the
failure of the Company to maintain the qualification for the investment tax
credit. Recipients of such promissory notes and their respective note principal
amounts included the following: Mr. Emerson, $53,378; Mr. Griffin, $59,309; Mr.
Leeolou, $59,309; Mr. Preyer, $59,309; and Mr. Ludington, $19,770. Principal and
accrued interest on such notes (at the rate of prime plus 2% per annum) would
have been payable in eight equal quarterly installments beginning on July 1,
1997. Effective May 31, 1996, these notes, including accrued interest, were
exchanged for shares of the corporation's common stock at the rate of $5.50 per
share. Shares issued to exchanging noteholders pursuant to such exchange
included the following: Mr. Emerson, 11,169 shares; Mr. Griffin, 12,410 shares;
Mr. Leeolou, 12,410 shares; Mr. Preyer, 12,410 shares; and Mr. Ludington, 4,136
shares.
In connection with their April 1993 purchases of Common Stock, the initial
investors agreed to lend the Company an aggregate of $1.6 million. These loans
were made to the Company in 1994 and included loans made by the following
investors in the amounts indicated: Mr. Preyer, $196,722; Mr. Griffin, $196,722;
Mr. Leeolou, $196,722; Mr. Emerson, $177,050; and Mr. Ludington, $65,574. Also
included were loans made by Alonzo Family Partners, Ltd., a limited partnership
owned by the brother of Haynes G. Griffin and certain members of the brother's
immediate family ($35,886) and Mr. Penwell, who each purchased part of an
initial investor's interest and agreed to fulfill a portion his loan commitment.
The promissory notes issued for such loans, bearing interest with rates from
prime plus 2% to 15%, were exchanged for 8.5% convertible notes in 1995 in the
same principal amount and with a conversion price of $5.00 per share. Effective
February 1, 1996, the holders of the convertible notes converted the principal
thereof into shares of common stock at the conversion price of $5.00 per share
and accepted common stock in lieu of one-half of the accrued interest thereon at
the rate of $5.50 per share. Shares issued to converting noteholders pursuant to
this conversion and interest payment included the following: Mr. Preyer, 40,864
shares; Mr. Griffin, 40,864 shares; Mr. Leeolou, 40,864 shares; Mr. Emerson,
36,778 shares; Mr. Ludington, 13,620 shares; Mr. Penwell, 3,500 shares; and
Alonzo Family Partners, Ltd., 7,350 shares.
In 1994 and 1995, the Company issued additional shares of its Common Stock
in a series of private offerings at a purchase price of $5.00 per share.
Purchasers in these offerings included the following: Mr. Preyer, 10,000
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shares; Mr. Griffin, 10,000 shares; Mr. Leeolou, 10,000 shares; and Mr. Emerson,
10,000 shares. In addition, entities affiliated with Piedmont Acorn Investors
Limited Partnership, a principal shareholder of the Company, purchased shares in
these offerings, including Smith Richardson Foundation, Inc., 50,000 shares, and
Piedmont Harbor-Piedmont Associates Limited Partnership, 50,000 shares.
In May 1995, Vanguard, through a subsidiary, purchased 400,000 shares of
Common Stock of the Company at a purchase price of $5.00 per share. In
connection with such investment, Vanguard received a warrant to purchase up to
an additional 10.27% of the Common Stock of the Company at an exercise price
equal to the fair market value of the Common Stock at the time of the exercise
(the "Vanguard Warrant"). The Vanguard Warrant was exercisable at any time prior
to the earlier of an underwritten initial public offering or May 5, 2005. The
Vanguard Warrant was restructured immediately prior to consummation of the
Private Placement to provide that Vanguard has the right to buy 900,113 shares
at any time before May 5, 2005 at $23.50 per share. The restructured Vanguard
Warrant also provides that Vanguard may pay the exercise price either in cash
or, if the fair market value of the Common Stock at the time of exercise is
greater than the exercise price, by surrendering any unexercised portion of the
Vanguard Warrant and receiving the number of shares equal to (i) the excess of
fair market value per share at the time of exercise over the exercise price per
share multiplied by (ii) the number of shares surrendered. Stephen R. Leeolou, a
director and Chief Executive Officer of the Company, and Haynes G. Griffin and
L. Richardson Preyer, Jr., directors of the Company, are each directors,
executive officers and shareholders of Vanguard. In addition, Stuart S.
Richardson is Chairman of the Board and a shareholder of Vanguard and Robert M.
DeMichele and Robert A. Silverberg are directors and shareholders of Vanguard.
On October 13, 1995, the Board of Directors approved a private offering of
Common Stock at a purchase price of $5.50 per share, pursuant to which $18.1
million of Common Stock was sold. Purchasers of Common Stock in this offering
included directors Preyer (45,454 shares), Griffin (45,454 shares), Leeolou
(45,454 shares) and DeMichele (10,000 shares), and Alonzo Family Partners, Ltd.
(36,363 shares) and Shipyard Associates, a general partnership of which certain
of Mr. Emerson's family members and an entity affiliated with Mr. Emerson were
general partners. Other purchasers in the offering included Vanguard (1,454,546
shares), Toronto Dominion Investments, Inc. ("TDI") (363,636 shares), and
Piedmont Acorn Investors Limited Partnership (786,286 shares). In connection
with this offering, purchasers of $250,000 or more of Common Stock received
warrants to purchase a number of shares of Common Stock equal to 5% of the
shares purchased in the offering and purchasers of $1,000,000 or more of Common
Stock received warrants to purchase a number of shares of Common Stock equal to
10% of the shares purchased in the offering. Also in connection with this
offering, purchasers of Common Stock in the 1994 and earlier 1995 offerings
(excluding Vanguard) were offered warrants (at a purchase price of $.01 per
warrant share). The exercise price of all warrants issued or sold in connection
with this offering will equal the sales price of the next $2 million of Common
Stock sold in a separate offering. Recipients or purchasers of warrants in this
offering included Mr. Preyer (2,773 shares), Mr. Griffin (2,773 shares), Mr.
Leeolou (2,773 shares), Mr. DeMichele (1,000 shares), Vanguard (45,455 shares),
Piedmont Acorn Investors Limited Partnership (78,629 shares) and TDI (36,364
shares). Also included were Shipyard Associates (13,750 shares), Smith
Richardson Foundation, Inc. (2,500 shares) and Piedmont Harbor-Piedmont
Associates Limited Partnership (2,500 shares). These warrants expire on December
31, 2000.
On December 28, 1995, the Company issued to CSI a $375,000 note,
convertible into shares of Common Stock at the rate of $5.50 per share and
bearing interest at the rate of 8.5% per annum, in satisfaction of certain
obligations of the Company to CSI for consulting services rendered. These
obligations initially arose under a consulting agreement entered into in April
1993 pursuant to which CSI agreed to consult on matters pertaining to the
Company's technology, vendor relations, customer contacts and strategic planning
and be paid a fee when and if the Company installed 50 IPN terminals or achieved
$1,000,000 in revenues. In view of the Company's anticipated cash situation, the
parties amended the consulting agreement to provide that CSI would receive the
convertible note on the due date for the payment of the consulting fee. In
January 1996, at CSI's request, the convertible note was partitioned and
distributed to certain creditors of CSI, including Mr. Nash ($90,000) and Mr.
Jones ($216,000). In connection with Mr. Nash's agreement to assign his interest
in a terminal design to the Company, Mr. Nash's note was prepaid by the Company
in January 1996.
Stock options have been granted under the Company's 1994 Stock Compensation
Plan and 1996 Nonqualified Stock Option Plan to its directors and officers.
Included within such grants were nonqualified stock options granted in fiscal
1994 and fiscal 1995 to certain nonemployee directors in payment for services
rendered to the Company each at an exercise price of $5.00 per share and fully
vested (Mr. Ludington, 7,000 shares; Mr. Preyer,
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9,400 shares; Mr. Nash, 1,000 shares; Mr. Penwell, 1,000 shares; Mr. Leeolou,
9,400 shares; Mr. Emerson, 20,200 shares; and Mr. Griffin, 9,400 shares) and
incentive stock options vesting over five years granted to certain employees who
are directors (Mr. Penwell, 25,000 shares at an exercise price of $1.86 per
share and 16,000 shares at an exercise price of $5.00 per share; Mr. Nash,
14,000 shares at an exercise price of $5.00 per share; and Mr. Simmons, 20,000
shares at an exercise price of $5.50 per share). See "Management -- Executive
Compensation."
As of January 30, 1996, the Company entered into a consulting agreement
with Vanguard pursuant to which Mr. Stearns, an employee of Vanguard, began to
serve as Chief Operating Officer of the Company and Vanguard provided other
consulting services requested by the Company. Pursuant to the agreement, the
Company reimbursed Vanguard for its costs of providing such services and expects
to pay Vanguard approximately $75,000 during 1996. The consulting agreement was
terminated and replaced by a management services agreement (the "Management
Services Agreement") as of June 17, 1996. The Management Services Agreement,
which has a term of two years, provides that Vanguard will provide services to
the Company from time to time during the term of the agreement in assisting the
Company in developing accounting, human resources, information management, legal
compliance, sales training, research and development, business development and
operation procedures, systems and programs. For such services the Company will
issue Vanguard 10,000 shares of Common Stock per year and will reimburse
Vanguard for its out-of-pocket expenses incurred in rendering such services.
In connection with their respective investments, Vanguard and TDI each
entered into agreements providing certain rights to have their shares of the
Company's Common Stock registered under the Securities Act. If the Company
proposes to make a registered public offering of any of its securities under the
Securities Act, other than certain specified types of offerings, the Company
will be obligated to give written notice of the proposed registration to
Vanguard and TDI. Upon receipt of such written notice of the proposed
registration, Vanguard and TDI will be entitled to request that all or a portion
of their Common Stock be included in such registration offering (a "Piggyback
Registration") except in certain specified circumstances. The agreements also
provide that, at any time after six months from the date the first registration
statement filed under the Securities Act by the Company becomes effective, the
shareholder is entitled to request registration for sale under the Securities
Act of all or portion of its Common Stock (a "Demand Registration"), provided
that the shareholder shall not be entitled to request any Demand Registration
within the 12-month period immediately following the date of any previous
request for a Demand Registration. These rights to Piggyback and Demand
Registrations expire at such time as the recipient's shares may be sold pursuant
to Rule 144(k) of the Securities Act.
Vanguard purchased 18,000 of the Units sold in the Private Placement.
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DESCRIPTION OF NEW NOTES
The Old Notes were, and the New Notes will be, issued under an indenture
dated as of August 1, 1996 (the "Indenture"), between the Company and Fleet
National Bank, as Trustee (the "Trustee"). The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject, and
are qualified in their entirety by reference, to the provisions of the New Notes
and the Indenture, including the definitions therein of certain terms. Wherever
particular Sections or defined terms of the Indenture are referred to herein,
such Sections or defined terms are incorporated by reference herein. For
purposes of this Description of New Notes, references to the "Company" shall
mean Inter(Bullet)Act Systems, Incorporated, excluding its subsidiaries. Certain
terms used in this Description of New Notes are defined under " -- Certain
Definitions."
GENERAL
The New Notes will mature on August 1, 2003, and will be limited to an
aggregate principal amount at maturity of $142,000,000. Although for Federal
income tax purposes a significant amount of original issue discount, taxable as
ordinary income, will be recognized by a Holder as such discount accrues, no
interest will be payable on the New Notes prior to February 1, 2000. From and
after August 1, 1999, cash interest will accrue at the rate set forth on the
cover page of this Prospectus or from the most recent interest payment date to
which interest has been paid, payable semiannually on February 1 and August 1 of
each year, beginning on February 1, 2000, to the persons who are registered
holders of the New Notes (or any predecessor Notes) at the close of business on
the preceding January 15 or July 15, as the case may be.
Principal of, premium, if any, and interest on the New Notes will be
payable in immediately available funds, and the New Notes will be exchangeable
and transferable, at an office or agency of the Company, one of which will be
maintained for such purpose in The City of New York (which initially will be the
corporate trust office of the Trustee) or such other office or agency permitted
under the Indenture; provided, however, that payment of interest may be made at
the option of the Company by check mailed to the person entitled thereto as
shown on the Security Register. The New Notes will be issued only in fully
registered form without coupons, in denominations of $1,000 or any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of New Notes, except for any tax or other governmental
charge that may be imposed in connection therewith.
All payments of principal to the Depositary will be made by the Company in
immediately available funds. The Global Notes are expected to trade in The
Depository Trust Company's Same-Day Funds Settlement System until maturity, and
secondary market trading activity in the Global Notes will therefore settle in
immediately available funds on trading activity in the New Notes.
RANKING
The New Notes will be senior unsecured obligations of the Company, will
rank PARI PASSU in right of payment with all existing and future senior
indebtedness of the Company and will be senior in right of payment to all future
subordinated indebtedness of the Company. As of September 28, 1996, the total
consolidated indebtedness of the Company was $73.2 million, including 236,500 of
subordinated indebtedness owed to shareholders of the Company.
In addition, all indebtedness and other liabilities of present and future
Subsidiaries of the Company will be effectively senior in right of payment to
the New Notes. At the Issue Date, the Company had one Subsidiary. Although the
Indenture contains limitations on the amount of additional Indebtedness which
the Company and its Restricted Subsidiaries may Incur, the amounts of such
Indebtedness could be substantial and, in any case, all of such Indebtedness of
Subsidiaries will be effectively senior in right of payment to the Notes. See
" -- Certain Covenants" below. Moreover, claims of creditors of the Company's
Subsidiaries, including trade creditors, and holders of Preferred Stock of the
Company's Subsidiaries (if any), will generally have a priority as to the assets
of such Subsidiaries over the claims of the Company.
OPTIONAL REDEMPTION
The New Notes are not redeemable prior to August 1, 2000. At any time on or
after August 1, 2000, the New Notes are redeemable at the option of the Company,
in whole or in part, on not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of Accreted Value), plus
accrued and unpaid interest (if any) to the date of redemption:
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If redeemed during the 12-month period commencing August 1 of the year
indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2000.................................................................................... 107.0 %
2001.................................................................................... 103.5 %
2002 and thereafter..................................................................... 100.0 %
</TABLE>
Notwithstanding the foregoing, at any time and from time to time prior to
August 1, 1999, the Company may redeem in the aggregate up to $30 million of the
principal amount at maturity of the Old and/or New Notes with the proceeds of
one or more Public Equity Offerings, at a redemption price (expressed as a
percentage of Accreted Value) of 114%; PROVIDED, HOWEVER, that at least $112
million aggregate principal amount at maturity of Notes must remain outstanding
after each such redemption.
In the event of redemption of fewer than all the Notes, the Trustee shall
select by lot or in such manner as it shall deem fair and equitable the Notes to
be redeemed. On and after any redemption date, interest will cease to accrete or
accrue on the Notes or portions thereof called for redemption unless the Company
shall fail to redeem any such Notes.
SINKING FUND
There will be no mandatory sinking fund payments for the New Notes.
PURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at a purchase price
equal to 101% of Accreted Value thereof, plus accrued and unpaid interest
thereon, if any, to the purchase date (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company shall (i) cause
a notice of the Change of Control Offer to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and
(ii) mail a notice to each holder of New Notes stating: (1) that a Change of
Control has occurred and a Change of Control Offer is being made pursuant to the
covenant entitled "Purchase at the Option of Holders Upon a Change of Control"
and that all New Notes timely tendered will be accepted for payment; (2) the
purchase price and the purchase date, which shall be, subject to any contrary
requirements of applicable law, no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"); (3)
that any New Note (or portion thereof) accepted for payment (and duly paid on
the Change of Control Payment Date) pursuant to the Change of Control Offer
shall cease to accrete or accrue interest after the Change of Control Payment
Date; (4) that any New Notes (or portions thereof) not tendered will continue to
accrete or accrue interest; (5) a description of the transaction or transactions
constituting the Change of Control; and (6) the procedures that holders of New
Notes must follow in order to tender their New Notes (or portions thereof) for
payment and the procedures that holders of New Notes must follow in order to
withdraw an election to tender New Notes (or portions thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act, and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of New Notes in connection with a Change of Control. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions relating to the Change of Control Offer, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations described above by virtue thereof.
Except as described above with respect to a Change of Control, the
Indenture does not contain any provisions that permit the holders of the New
Notes to require that the Company purchase or redeem the New Notes in the event
of a takeover, recapitalization or similar restructuring.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. There can be no assurance
that the Company
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will have the financial resources necessary to purchase the New Notes upon a
Change of Control. Subject to the limitations discussed below, the Company
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of Indebtedness
outstanding at such time or otherwise affect the Company's capital structure or
credit ratings. Restrictions on the ability of the Company to Incur additional
Indebtedness are contained in the covenants described under " -- Certain
Covenants -- Limitation on Indebtedness" and " -- Certain
Covenants -- Limitation on Liens." Such restrictions can only be waived with the
consent of the registered holders of a majority in principal amount of the New
and Old Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford holders of the New Notes protection in the event of a highly
leveraged transaction.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness, except
that the Company may Incur Indebtedness if, either (a) after giving pro forma
effect to the application of the proceeds thereof, no Default or Event of
Default would occur as a consequence of such Incurrence or be continuing
following such Incurrence and after giving effect to the Incurrence of such
Indebtedness and the receipt and application of the proceeds thereof, the
Consolidated Leverage Ratio of the Company and its Restricted Subsidiaries would
not exceed (i) 7.0 to 1.0 from the Issue Date until August 1, 1999, and (ii) 5.0
to 1.0 after August 1, 1999, or (b) such Indebtedness is Permitted Indebtedness.
Permitted Indebtedness is defined to include any and all of the following:
(i) Indebtedness Incurred for working capital purposes pursuant to a revolving
credit facility in an aggregate principal amount which, when taken together with
the principal amount of all other Indebtedness Incurred pursuant to this clause
(i) and then outstanding, does not exceed $10 million; (ii) Indebtedness
Incurred to finance the purchase and installation (including all associated
capitalized costs) of IPN Terminals, PROVIDED, HOWEVER, that (x) the aggregate
principal amount of such Indebtedness does not exceed 100% of the Fair Market
Value (on the date of such Incurrence) of the IPN Terminals acquired and (y) the
Company had already budgeted as of August 2, 1996 in writing to expend the
proceeds from the Private Placement in the manner described under "Use of
Proceeds;" (iii) Indebtedness of the Company evidenced by the Notes; (iv)
Indebtedness of the Company owing to and held by a Wholly Owned Subsidiary and
Indebtedness of a Wholly Owned Subsidiary owing to and held by the Company or
any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any event that results in
any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of any such Indebtedness (except to the Company or a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
such Indebtedness by the issuer thereof; (v) Indebtedness (other than
Indebtedness permitted by the immediately preceding paragraph or elsewhere in
this paragraph) in an aggregate principal amount which does not exceed at any
one time outstanding $10 million; (vi) Indebtedness under Interest Rate
Agreements entered into for the purpose of limiting interest rate risks;
PROVIDED, HOWEVER, that the obligations under such agreements are related to
payment obligations of the Company in respect of Indebtedness otherwise
permitted by the terms of the covenant described hereunder; (vii) Indebtedness
in connection with one or more standby letters of credit or performance bonds
issued in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the obtaining
of advances or credit; (viii) Indebtedness Incurred by the Company and owing to
either Vanguard Cellular Systems, Inc., or any Strategic Equity Investor;
PROVIDED, HOWEVER, that the aggregate principal amount of Indebtedness at any
time outstanding pursuant to this clause (viii) shall not exceed $10 million;
PROVIDED FURTHER, HOWEVER, that such Indebtedness shall (x) not by its terms
provide for the payment of any cash interest thereon or for any payments of
principal thereof (whether pursuant to sinking fund or otherwise) at any time
prior to the first anniversary of the Stated Maturity of the Notes; (y) be
expressly subordinated in right of payment to the Notes; and (z) not have in the
documentation evidencing such Indebtedness any term, covenant, provision or
default or event of default which is materially more favorable to the holder
thereof than the terms, covenants, provisions or defaults or events of default
set forth in the Notes (or in the documentation relating thereto) as in effect
on the Issue Date (it being expressly understood that any such Indebtedness
Incurred under this clause (viii) may have an interest rate and interest terms
different from the Notes); (ix) Indebtedness outstanding on the Issue Date not
otherwise described in clauses (i) through (viii) above; and (x) Permitted
Refinancing Indebtedness Incurred in respect of Indebtedness Incurred pursuant
to clause (a) of the immediately preceding paragraph and clauses (ii), (iii) and
(ix) above.
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LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED SUBSIDIARIES.
The Company shall not permit any Restricted Subsidiary to, directly or
indirectly, Incur any Indebtedness or issue any Preferred Stock, except that a
Restricted Subsidiary may Incur the following Indebtedness:
(i) Indebtedness owing to the Company or a Wholly Owned Subsidiary;
PROVIDED, HOWEVER, that any event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of any such Indebtedness (except to the Company or another Wholly
Owned Subsidiary) shall be deemed to constitute the Incurrence of such
Indebtedness by the issuer thereof;
(ii) Indebtedness outstanding on the Issue Date;
(iii) Indebtedness Incurred and outstanding on or prior to the date on
which such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred in anticipation of, or in connection with, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Restricted Subsidiary or was acquired by the Company);
provided, however, that either (a) such Indebtedness does not exceed at any
one time outstanding $5 million or (b) the Company would be permitted to
Incur $1.00 of Indebtedness pursuant to clause (a) of the first paragraph
of " -- Limitation on Indebtedness";
(iv) Indebtedness under Interest Rate Agreements entered into for the
purpose of limiting interest rate risks, provided that the obligations
under such agreements are related to payment obligations of such Restricted
Subsidiary in respect of Indebtedness otherwise permitted by the terms of
the covenant described hereunder;
(v) Indebtedness in connection with one or more standby letters of
credit or performance bonds issued in the ordinary course of business or
pursuant to self-insurance obligations and not in connection with the
borrowing of money or the obtaining of advances or credit; and
(vi) Permitted Refinancing Indebtedness Incurred in respect of
Indebtedness Incurred pursuant to clauses (ii) and (iii) above.
LIMITATION ON RESTRICTED PAYMENTS. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make any Restricted
Payment if at the time of, and after giving effect to, such proposed Restricted
Payment, (a) a Default or Event of Default shall have occurred and be
continuing, (b) the Company could not Incur at least $1.00 of additional
Indebtedness pursuant to clause (a) of the first paragraph of " -- Limitation on
Indebtedness" or (c) the aggregate amount of such Restricted Payment and all
other Restricted Payments made since the Issue Date (the amount of any
Restricted Payment, if made other than in cash, to be based upon Fair Market
Value) would exceed an amount equal to the sum of (i) the excess of (A)
Cumulative EBITDA over (B) the product of 1.5 and Cumulative Interest Expense,
(ii) Capital Stock Sale Proceeds, (iii) the amount by which Indebtedness of the
Company or its Restricted Subsidiaries is reduced on the balance sheet of the
Company upon the conversion or exchange (other than by a Subsidiary) subsequent
to the Issue Date of any Indebtedness of the Company or any Restricted
Subsidiary convertible or exchangeable for Capital Stock (other than Redeemable
Stock) of the Company (less the amount of any cash or other Property distributed
by the Company or any Restricted Subsidiary upon conversion or exchange) and
(iv) an amount equal to the net reduction in Investments made by the Company and
its Restricted Subsidiaries subsequent to the Issue Date in any Person resulting
from (A) dividends, repayment of loans or advances, or other transfers or
distributions of Property (but only to the extent the Company excludes such
transfers or distributions from the calculation of Cumulative EBITDA for
purposes of clause (c) (i) above), in each case to the Company or any Restricted
Subsidiary from any Person or (B) the redesignation of any Unrestricted
Subsidiary as a Restricted Subsidiary, not to exceed, in the case of (A) or (B),
the amount of such Investments previously made by the Company and its Restricted
Subsidiaries in such Person which were treated as Restricted Payments.
Notwithstanding the foregoing limitation, the Company may (a) pay dividends
on its Capital Stock within 60 days of the declaration thereof if, on the
declaration date, such dividends could have been paid in compliance with the
Indenture, (b) redeem, repurchase, defease, acquire or retire for value, any
Indebtedness subordinate (whether pursuant to its terms or by operation of law)
in right of payment to the Notes with the proceeds of any Permitted Refinancing
Indebtedness, (c) acquire, redeem or retire Capital Stock of the Company or
Indebtedness subordinate (whether pursuant to its terms or by operation of law)
in right of payment to the Notes in exchange for, or in connection with a
substantially concurrent issuance of, Capital Stock of the Company (other than
Redeemable Stock and other than Capital Stock issued or sold to a Subsidiary or
an employee stock ownership plan or
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other trust established by the Company or any Subsidiary), and (d) make
Investments in Persons the primary businesses of which are Related Businesses
(other than Investments in the Capital Stock of the Company) in an amount at any
time outstanding not to exceed $10 million in the aggregate.
Any payments made pursuant to clauses (b) and (c) of the immediately
preceding paragraph shall be excluded from the calculation of the aggregate
amount of Restricted Payments made after the Issue Date; PROVIDED, HOWEVER, that
the proceeds from the issuance of Capital Stock pursuant to clause (c) of the
immediately preceding paragraph shall not constitute Capital Stock Sale Proceeds
for purposes of clause (c) (ii) of the first paragraph of the covenant described
hereunder.
LIMITATION ON LIENS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any
Lien (other than Permitted Liens) upon any of its Property, whether now owned or
hereafter acquired, including any Lien on any interest in, or any income or
profits from, its Property, unless effective provision has been or will be made
whereby the Notes will be secured equally and ratably with (or prior to) such
obligation; PROVIDED, HOWEVER, that no Lien may be granted with respect to
Indebtedness of the Company that is subordinated to the Notes.
LIMITATION ON ASSET SALES. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
after the Issue Date unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the Property subject to such Asset Sale and
(ii) at least 80% of the consideration paid to the Company or such Restricted
Subsidiary in connection with such Asset Sale is in the form of cash or cash
equivalents.
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by the Company or a Restricted Subsidiary, to the extent the Company or
such Restricted Subsidiary elects, (A) to prepay, repay or purchase Indebtedness
of a Restricted Subsidiary (excluding Indebtedness owed to the Company or an
Affiliate of the Company); or (B) to reinvest in Additional Assets (including by
means of an Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted Subsidiary).
Any Net Available Cash from an Asset Sale not applied in accordance with
the preceding paragraph within 270 days from the date of such Asset Sale or the
receipt of such Net Available Cash shall constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10 million (taking into account
income earned on such Excess Proceeds), the Company will be required to make an
offer to purchase (the "Prepayment Offer") the Notes, on a pro rata basis
according to principal amount at maturity, at a purchase price equal to 100% of
the Accreted Value thereof plus accrued and unpaid interest thereon (if any) to
the date of purchase in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
Accreted Value of Notes surrendered for purchase by holders thereof exceeds the
amount of Excess Proceeds, then the Trustee shall select the Notes to be
purchased pro rata according to Accreted Value or by lot with such adjustments
as may be deemed appropriate by the Company so that only Notes having a
principal amount at maturity of $1,000, or integral multiples thereof, shall be
purchased. To the extent that any portion of the amount of Net Available Cash
remains after compliance with the preceding sentence and provided that all
holders of Notes have been given the opportunity to tender their Notes for
purchase as described in the following paragraph in accordance with the
Indenture, the Company or such Restricted Subsidiary may use such remaining
amount for general corporate purposes and the amount of Excess Proceeds will be
reset to zero.
Within five Business Days after the Excess Proceeds exceeds $10 million,
the Company shall send a written notice, by first-class mail, to the holders of
the Notes (the "Prepayment Offer Notice"), accompanied by such information
regarding the Company and its Subsidiaries as the Company in good faith believes
will enable such holders of the Notes to make an informed decision with respect
to the Prepayment Offer. The Prepayment Offer Notice will state, among other
things, (a) that the Company is offering to purchase Notes pursuant to the
provisions of the Indenture described herein under " -- Limitation on Asset
Sales," (b) that any Note (or any portion thereof) accepted for payment (and
duly paid on the Purchase Date) pursuant to the Prepayment Offer shall cease to
accrete original issue discount or accrue interest after the Purchase Date, (c)
the purchase price and purchase date, which shall be, subject to any contrary
requirements of applicable law, no less than 30 days nor more than 60 days from
the date the Prepayment Offer Notice is mailed (the "Purchase Date"), (d) the
aggregate Accreted Value of Notes (or portions thereof) to be purchased and (e)
a description of the procedure which holders of Notes must follow in order to
tender their Notes (or portions thereof) and the procedures that holders of
Notes must follow in order to withdraw an election to tender their Notes (or
portions thereof) for payment.
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The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws or regulations
thereunder to the extent such laws and regulations are applicable in connection
with the purchase of Notes as described above. To the extent that the provisions
of any securities laws or regulations conflict with the provisions relating to
the Prepayment Offer, the Company will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
described above by virtue thereof.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective, or enter into any agreement with any Person that
would cause to become effective, any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock, or pay any Indebtedness or other obligation owed, to the Company or any
other Restricted Subsidiary, (b) make any loans or advances to the Company or
any other Restricted Subsidiary or (c) transfer any of its Property to the
Company or any other Restricted Subsidiary. Such limitation will not apply (1)
with respect to clauses (a), (b) and (c), to encumbrances and restrictions (i)
in existence under or by reason of any agreements in effect on the Issue Date,
(ii) relating to Indebtedness of a Restricted Subsidiary and existing at such
Restricted Subsidiary at the time it became a Restricted Subsidiary if such
encumbrance or restriction was not created in connection with or in anticipation
of the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company, or (iii) which result from the renewal, refinancing, extension or
amendment of an agreement referred to in the immediately preceding clauses (1)
(i) and (ii) above and in clauses (2) (i) and (ii) below, provided, such
encumbrance or restriction is no more restrictive to such Restricted Subsidiary
than those under or pursuant to the agreement evidencing the Indebtedness so
extended, renewed, refinanced or replaced, and (2) with respect to clause (c)
only, to (i) any encumbrance or restriction relating to Indebtedness that is
permitted to be Incurred and secured pursuant to the provisions under
" -- Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries"
and " -- Limitation on Liens" that limits the right of the debtor to dispose of
the assets or Property securing such Indebtedness, (ii) any encumbrance or
restriction in connection with an acquisition of Property, so long as such
encumbrance or restriction relates solely to the Property so acquired and was
not created in connection with or in anticipation of such acquisition, (iii)
customary provisions restricting subletting or assignment of leases and
customary provisions in other agreements that restrict assignment of such
agreements or rights thereunder or (iv) customary restrictions contained in
asset sale agreements limiting the transfer of such assets pending the closing
of such sale.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, lease or exchange of any
Property or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (an "Affiliate Transaction") unless (a) the terms of
such Affiliate Transaction are (i) set forth in writing, (ii) in the best
interest of the Company or such Restricted Subsidiary, as the case may be, and
(iii) no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable arm's-length
transaction with a Person that is not an Affiliate of the Company or such
Restricted Subsidiary, (b) with respect to an Affiliate Transaction involving
aggregate payments or value in excess of $1 million, the Board of Directors of
the Company (including a majority of the disinterested members of the Board of
Directors of the Company) approves such Affiliate Transaction and, in its good
faith judgment, believes that such Affiliate Transaction complies with clauses
(a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution and (c)
with respect to an Affiliate Transaction involving aggregate payments or value
in excess of $10 million, the Company obtains a written opinion from an
independent appraisal firm to the effect that such Affiliate Transaction is fair
from a financial point of view.
Notwithstanding the foregoing limitation, the Company may enter into or
suffer to exist the following: (i) any transaction pursuant to any contract in
existence on the Issue Date; (ii) any transaction or series of transactions
between the Company and one or more of its Restricted Subsidiaries or between
two or more of its Restricted Subsidiaries; (iii) any Restricted Payment
permitted to be made pursuant to " -- Limitation on Restricted Payments;" (iv)
the payment of compensation (including amounts paid pursuant to employee benefit
plans) for the personal services of officers, directors and employees of the
Company or any of its Restricted Subsidiaries, so long as the Board of Directors
of the Company in good faith shall have approved the terms thereof and deemed
the services theretofore or thereafter to be performed for such compensation or
fees to be fair consideration therefor;
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(v) loans and advances to employees made in the ordinary course of business and
consistent with past practice of the Company or such Restricted Subsidiary, as
the case may be, provided, that such loans and advances do not exceed $5 million
at any one time outstanding; (vi) employment arrangements entered into in the
ordinary course of business with officers of the Company approved by a majority
of the disinterested members of the Board of Directors of the Company; and (vii)
the Management Services Agreement.
LIMITATION ON LINES OF BUSINESS. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, engage in any
business other than a Related Business.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not merge or consolidate with or into any other entity
(other than a merger of a Restricted Subsidiary into the Company) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially all
of its Property in any one transaction or series of transactions unless: (a) the
entity formed by or surviving any such consolidation or merger (if the Company
is not the surviving entity) or the Person to which such sale, transfer,
assignment, lease or conveyance is made (the "Surviving Entity") shall be a
corporation organized and existing under the laws of the United States of
America or a State thereof or the District of Columbia and such corporation
expressly assumes, by supplemental indenture in form satisfactory to the
Trustee, executed and delivered to the Trustee by such corporation, the due and
punctual payment of the principal of, premium, if any, and interest on all the
Notes, according to their tenor, and the due and punctual performance and
observance of all the covenants and conditions of the Indenture to be performed
by the Company; (b) in the case of a sale, transfer, assignment, lease,
conveyance or other disposition of all or substantially all the Company's
Property, such Property shall have been transferred as an entirety or virtually
as an entirety to one Person; (c) immediately before and after giving effect to
such transaction or series of transactions, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including any
Indebtedness Incurred or anticipated to be Incurred in connection with such
transaction or series of transactions), the Company or the Surviving Entity, as
the case may be, would be able to Incur at least $1.00 of additional
Indebtedness under clause (a) of the first paragraph of " -- Certain
Covenants -- Limitation on Indebtedness."
In connection with any consolidation, merger or transfer contemplated by
this provision, the Company shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
with the Commission and provide the Trustee and holders of the Notes with such
annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
EVENTS OF DEFAULT
Events of Default in respect of the New Notes as set forth in the Indenture
include: (i) failure to make the payment of any principal of, or premium, if
any, on any of the Notes when the same becomes due and payable at maturity, upon
acceleration, redemption, optional redemption, required purchase or otherwise;
(ii) failure to make the payment of any interest on the Notes when the same
becomes due and payable, and such failure continues for a period of 30 days;
(iii) failure to comply with any other covenant in the Notes or in the Indenture
and such failure continues for 30 days after written notice from the Trustee or
the registered holders of not less than 25% in aggregate principal amount of the
Notes then outstanding; (iv) a default under any Indebtedness for borrowed money
by the Company or any Restricted Subsidiary which results in acceleration of the
maturity of such Indebtedness, or failure to pay principal on any such
Indebtedness, in an amount greater than $5 million (the "cross acceleration
provisions"); (v) any judgment or judgments for the payment of money in an
uninsured aggregate amount in excess of $5 million shall be rendered against the
Company or any Restricted Subsidiary and shall not be waived, satisfied
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or discharged for any period of 30 consecutive days during which a stay of
enforcement shall not be in effect (the "judgment default provisions"); and (vi)
certain events involving bankruptcy, insolvency or reorganization of the Company
or any Restricted Subsidiary (the "bankruptcy provisions"). The Indenture
provides that the Trustee may withhold notice to the holders of the Notes of any
default (except in payment of principal or premium, if any, or interest) if the
Trustee considers it to be in the best interest of the holders of the Notes to
do so.
The Indenture provides that if an Event of Default with respect to the
Notes (other than an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization with respect to the Company or any
Restricted Subsidiary) shall have occurred and be continuing, the Trustee or the
registered holders of not less than 25% in aggregate principal amount of the
Notes then outstanding may declare to be immediately due and payable the
principal amount of all the Notes then outstanding, plus accrued but unpaid
interest to the date of acceleration; PROVIDED, HOWEVER, that after such
acceleration but before a judgment or decree based on acceleration is obtained
by the Trustee, the registered holders of a majority in aggregate principal
amount of the Notes then outstanding, may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the nonpayment
of accelerated principal, premium or interest on the Notes, have been cured or
waived as provided in the Indenture. In case an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization with respect to the
Company or a Restricted Subsidiary shall occur, such amount with respect to all
the Notes shall be due and payable immediately without any declaration or other
act on the part of the Trustee or the holders of the Notes.
The registered holders of a majority in principal amount of the Notes then
outstanding shall have the right to waive any existing Default with respect to
the Notes or compliance with any provision of the Indenture and to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, subject to certain limitations specified in the Indenture.
No holder of the Notes will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the registered holders of at least 25% in aggregate
principal amount of the Notes then outstanding shall have made written request
and offered reasonable indemnity to the Trustee to institute such proceeding as
a trustee, and unless the Trustee shall not have received from the registered
holders of a majority in aggregate principal amount of the Notes then
outstanding a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not apply
to a suit instituted by a holder of any Note for enforcement of payment of the
principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
AMENDMENTS AND WAIVERS
The Indenture may be amended with the consent of the registered holders of
a majority in principal amount of the Notes to be affected then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for the Notes) and any past default or compliance with any provisions may also
be waived with the consent of the registered holders of a majority in principal
amount of the Notes to be affected then outstanding. However, without the
consent of each holder of an outstanding Note to be affected, no amendment may,
among other things, (i) reduce the amount of Notes whose holders must consent to
an amendment, (ii) reduce the rate of or extend the time for payment of interest
on any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) make any Note payable in money other than that stated in the Note,
(v) impair the right of any holder of the Notes to receive payment of principal
of and interest on such holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
holder's Notes, (vi) subordinate in right of payment, or otherwise subordinate,
the Notes to any other obligation of the Company, (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions or (viii) reduce the premium payable upon the redemption of any Note
or change the time at which any Note may or shall be redeemed as described under
" -- Optional Redemption."
Without the consent of any holder of the Notes, the Company and the Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or in a
manner such that the uncertificated
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Notes are described in Section 163(f)(2)(B) of the Code), to add Guarantees with
respect to the Notes, to secure the Notes, to add to the covenants of the
Company for the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company, to make any change that does not adversely
affect the rights of any holder of the Notes or to comply with any requirement
of the Commission in connection with the qualification of the Indenture under
the Trust Indenture Act of 1939.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to registered holders of the Notes affected a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the Notes, or any defect therein, will not impair or affect the
validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under " -- Certain Covenants" (but not the covenant described under
" -- Merger, Consolidation and Sale of Assets"), the operation of the cross
acceleration provisions, the bankruptcy provisions with respect to Restricted
Subsidiaries and the judgment default provisions described under " -- Events of
Default" above and the limitation contained in clause (d) under " -- Merger,
Consolidation and Sale of Assets" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iii) (with respect to the covenants
described under " -- Certain Covenants," but not the covenant described under
" -- Merger, Consolidation and Sale of Assets" above), (iv), (v) or (vi) (with
respect only to Restricted Subsidiaries) under " -- Events of Default" above or
because of the failure of the Company to comply with clause (d) under
" -- Merger, Consolidation and Sale of Assets" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
maturity or an earlier redemption in accordance with the terms of the Indenture
and must comply with certain other conditions, including delivery to the Trustee
of an Opinion of Counsel to the effect that holders of the Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Exchange and
Registration Rights Agreement prior to the Private Placement. Pursuant to the
Exchange and Registration Rights Agreement, the Company agreed to (i) file with
the Commission on or prior to 45 days after the Issue Date a registration
statement on Form S-1 or Form S-4 (the "Exchange Offer Registration Statement")
relating to a registered exchange offer for the Old Notes under the Securities
Act and (ii) use its best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act by no later than 120
days after the original issuance of the Old Notes. As soon as practicable after
the effectiveness of the Exchange Offer Registration Statement, the Company
agreed to offer to the holders of Transfer Restricted Securities (as defined
below) who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their Transfer
Restricted Securities for an issue of a second series of notes (the "New
Notes"), identical in all material respects to the Old Notes (except that the
New Notes will not contain terms with respect to transfer restrictions), that
would be registered under the Securities Act. The Company agreed to keep the
Exchange Offer open for not less than 30
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days (or longer, if required by applicable law) after the date notice of the
Exchange Offer is mailed to the holders of the Old Notes.
The Company has filed this Registration Statement and will commence the
Exchange Offer pursuant to the Exchange and Registration Rights Agreement. In
the event that applicable interpretations of the staff of the Commission do not
permit the Company to effect the Exchange Offer or do not permit any holder of
the Old Notes (including the Initial Purchasers) to participate in the Exchange
Offer and receive freely transferable New Notes and under certain other
circumstances, the Company agreed to file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales of
Transfer Restricted Securities by such holders who satisfy certain conditions
relating to, among other things, the provision of information in connection with
the Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Note until (i) the date on which such Transfer
Restricted Security has been exchanged by a person other than a broker-dealer
for a freely transferable New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of a Transfer Restricted
Security for an New Note, the date on which such New Note is sold to a purchaser
who receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement, (iii)
the date on which such Transfer Restricted Security has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Transfer Restricted
Security is distributed to the public pursuant to Rule 144 under the Securities
Act or is saleable pursuant to Rule 144(k) under the Securities Act.
The Company agreed to use its best efforts to have the Exchange Offer
Registration Statement and, if applicable, a Shelf Registration Statement (each
a "Registration Statement") declared effective by the Commission as promptly as
practicable after the filing thereof. Unless the Exchange Offer would not be
permitted by a policy of the Commission, the Company agreed to commence the
Exchange Offer and use its best efforts to consummate the Exchange Offer as
promptly as practicable, but in any event within 150 days of the original
issuance of the Old Notes. If applicable, the Company agreed to use its best
efforts to keep the Shelf Registration Statement effective for a period of three
years after the Issue Date. If (i) the applicable Registration Statement had not
been filed with the Commission on or prior to 45 days after the Issue Date, (ii)
unless the Exchange Offer would not have been permitted by a policy of the
Commission, the Registration Statement had not been declared effective within
120 days of the Issue Date, (iii) neither the Exchange Offer is consummated nor
the Shelf Registration Statement is declared effective within 150 days of the
Issue Date, or (iv) after a Registration Statement is declared effective, such
Registration Statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Transfer Restricted Securities
during the periods specified in the Exchange and Registration Rights Agreement
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), additional cash interest will accrue on the Notes at the rate of
0.50% per annum from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured, calculated on the Accreted Value of the Notes, as the case may
be, as of the Specified Date on which such interest is payable. Such interest is
payable in addition to any other interest payable on each February 1 and August
1, commencing February 1, 1997. The Registration Statement had not been declared
effective until the day following Issue Date and as a result approximately
$1,000 of cash interest is being accrued daily and will be payable on February
1, 1997 for the Notes.
The Exchange and Registration Rights Agreement also provides that the
Company (i) shall make available for a period of 90 days after the consummation
of the Exchange Offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any such New
Notes and (ii) shall pay all expenses incident to the Exchange Offer and the
Shelf Registration Statement (including the expenses of one counsel to the
holders of the Notes) and will indemnify certain holders of the New Notes
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act. A broker-dealer which delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Exchange and Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the
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Company, or if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder is a broker-dealer that will receive New Notes for its
own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
Holders of the Old Notes will be required to make certain representations
to the Company (as described above) in order to participate in the Exchange
Offer and will be required to deliver information to be used in connection with
the Shelf Registration Statement in order to have their Old Notes included in
the Shelf Registration Statement. A holder who sells Old Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a Holder (including certain indemnification obligations).
For so long as the Notes are outstanding, the Company will continue to
provide to holders of the Notes and to prospective purchasers of the Notes the
information required by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the Exchange and Registration Rights Agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the Exchange and Registration Rights
Agreement.
BOOK-ENTRY SYSTEM; DELIVERY AND FORM
Each of the Old Notes offered and sold to "qualified institutional buyers"
("QIBs") in reliance on Rule 144A under the Securities Act were issued in the
form of one or more Notes in global form ("Rule 144A Global Notes") and each of
the Notes or Warrants sold to institutional "accredited investors" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) were delivered in
certificated fully registered form only and bear a legend containing
restrictions on transfers. All New Notes issued in the Exchange Offer for Old
Notes represented by Rule 144A Global Notes will be represented by one or more
Notes in global form (the "Global Notes"), which will be deposited with the
Trustee as custodian for the Depositary, and registered in the name of the
Depositary or of a nominee of the Depositary.
Upon issuance of the Global Notes, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the number of New
Notes represented by such Global Notes to the accounts of institutions that have
accounts with the Depositary or its nominee ("participants"). Ownership of
beneficial interests in the Global Notes will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interest in such Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depositary or
its nominee (with respect to participants' interests) for such Global Notes, or
by participants or persons that hold interests through participants (with
respect to interests of persons other than participants). The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
to transfer beneficial interests in the Global Notes.
So long as DTC is the registered holder of any Global Notes, DTC will be
considered the sole owner and holder of such Notes represented by such Global
Notes for all purposes under the Indenture and the New Notes. No beneficial
owners of an interest in any Global Notes will be able to transfer that interest
except in accordance with DTC's applicable procedures (in addition to those
under the Indenture referred to herein).
Except in the limited circumstances referred to below, owners of beneficial
interests in Global Notes will not be entitled to have such Global Notes
represented thereby registered in their names, will not receive or be entitled
to receive physical delivery of Certificated Securities in exchange therefor and
will not be considered to be the owners or holders of such Global Notes
represented thereby for any purpose under the New Notes or the Indenture.
Upon transfer of Certificated Notes to a QIB, such Certificated Notes may
be transferred to the corresponding Global Notes. Global Notes shall be
exchangeable for corresponding Certificated Notes registered in the name of
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persons other than the Depositary or its nominee only if (A) the Depositary (i)
notifies the Company that it is unwilling or unable to continue as Depositary
for any of the Global Notes or (ii) at any time ceases to be a clearing agency
registered under the Exchange Act, (B) there shall have occurred and be
continuing an Event of Default (as defined in the Indenture) with respect to the
Notes, or (C) and the Company executes and delivers to the Trustee an order that
the Global Notes shall be so exchangeable. Any Certificated Notes will be issued
only in fully registered form and shall be issued without coupons in
denominations of $1,000 and integral multiples thereof. Any Certificated Notes
so issued will be registered in such names and in such denominations as DTC
shall request.
Any payment of principal or interest due on the New Notes on any interest
payment date or at maturity will be made available by the Company to the Trustee
by such date. As soon as possible thereafter, the Trustee will make such
payments to the Depositary or its nominee, as the case may be, as the registered
owner of the Global Notes representing such New Notes in accordance with
existing arrangements between the Trustee and the Depositary. The Company
expects that the Depositary or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Notes, will credit immediately
the accounts of the related participants with payments in amounts proportionate
to their respective beneficial interests in the principal amount of such Global
Note as shown on the records of the Depositary. The Company also expects that
payments by participants to owners of beneficial interests in the Global Notes
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants. None of the Company, the Trustee, or any
payment agent for the Global Notes will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in any of the Global Notes or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Unless and until exchanged in whole or in part for New Notes in definitive
form in accordance with the terms of the New Notes, the Global Notes may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary of any such nominee to a successor of the
Depositary or a nominee of each successor.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, 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. The Depositary was created to hold securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry exchanges in
accounts of the participants, thereby eliminating the need for physical
movements of securities certificates. The Depositary's participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives) own
the Depositary. Indirect access to the Depositary's book-entry system is also
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 Depositary agrees with and represents to its
participants that it will administer its book-entry system in accordance with
its rules and by-laws and requirements of law.
Investors electing to hold their New Notes through DTC will follow
settlement practices applicable to United States corporate debt obligations. The
securities custody accounts of investors will be credited with their holdings
against payment in same-day funds on the settlement date.
All payments of principal and interest on the New Notes will be made by the
Company in same-day funds. The Global Notes will trade in the Same-Day Funds
Settlement System of the Depositary until maturity. Secondary market trading of
the Notes between DTC participants (other than the depositories) will be settled
in same-day funds using the procedures applicable to United States corporate
debt obligations.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"ACCRETED VALUE" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Notes:
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(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth
below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
<S> <C>
February 1, 1997..................................................................... $ 712.98
August 1, 1997....................................................................... $ 762.89
February 1, 1998..................................................................... $ 816.29
August 1, 1998....................................................................... $ 873.44
February 1, 1999..................................................................... $ 934.58
August 1, 1999....................................................................... $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price and
(b) an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less the original issue price MULTIPLIED BY (2) a
fraction, the numerator of which is the number of days from the Issue Date to
the Specified Date, using a 360-day year of 12 30-day months, and the
denominator of which is the number of days elapsed from the Issue Date to the
first Semi-Annual Accrual Date, using a 360-day year of 12 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of 12 30-day months,
and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual Date,
the Accreted Value will equal $1,000.
"ADDITIONAL ASSETS" means (i) any Property (other than cash, cash
equivalents or securities) to be owned by the Company or a Restricted Subsidiary
and used in a Related Business, (ii) the costs of improving or developing any
Property owned by the Company or a Restricted Subsidiary which is used in a
Related Business and (iii) Investments in any other Person engaged primarily in
a Related Business (including the acquisition from third parties of Capital
Stock of such Person) as a result of which such other Person becomes a Wholly
Owned Subsidiary or is merged or consolidated with or into the Company or any
Wholly Owned Subsidiary.
"AFFILIATE" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer (a) of such specified Person, (b) of any Subsidiary of such
specified Person or (c) of any Person described in clause (i) above. For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. "Affiliate" shall also mean any beneficial owner
of shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"ASSET SALE" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger or a Sale and Leaseback Transaction) by
such Person or any of its Restricted Subsidiaries in any single transaction or
series of transactions of (a) shares of Capital Stock or other ownership
interests in another Person (including, with respect to the Company and its
Restricted Subsidiaries, Capital Stock of Unrestricted Subsidiaries) or (b) any
other Property of such Person or any of its Restricted Subsidiaries; PROVIDED,
HOWEVER, that the term "Asset Sale" shall not include: (i) the sale or transfer
of Temporary Cash Investments, inventory, accounts receivable or other Property
in the ordinary course of business; (ii) the liquidation of Property received in
settlement of debts owing to such Person or any of its Restricted Subsidiaries
as a result of foreclosure, perfection or enforcement of any Lien or debt, which
debts were owing to such Person or any of its Restricted Subsidiaries in the
ordinary course of business; (iii) when used with respect to the Company, any
asset disposition permitted pursuant to " -- Merger, Consolidation and Sale of
Assets" which constitutes a disposition of all or substantially all of the
Company's Property; (iv) the sale or transfer of any Property by such Person or
any of its Restricted Subsidiaries to such Person or any of its Wholly Owned
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Subsidiaries; (v) a disposition in the form of a Restricted Payment permitted to
be made pursuant to " -- Certain Covenants Limitation on Restricted Payments;"
(vi) the sale of the manufacturing facility for IPN Terminals to Coleman
Resources; or (vii) a disposition with a Fair Market Value and a sale price of
less than $500,000.
"ATTRIBUTABLE INDEBTEDNESS" means Indebtedness deemed to be incurred in
respect of a Sale and Leaseback Transaction and shall be, at the date of
determination, the present value (discounted at the actual rate of interest
implicit in such transaction, compounded annually), of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale and Leaseback Transaction (including any period for which such
lease has been extended).
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years (rounded to the nearest one-twelfth of
one year) from the date of determination to the dates of each successive
scheduled principal payment of such Indebtedness or redemption or similar
payment with respect to such Preferred Stock multiplied by the amount of such
payment by (ii) the sum of all such payments.
"BOARD RESOLUTION" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, to be in full force and effect on the date of such certification
and delivered to the Trustee.
"CAPITAL LEASE OBLIGATIONS" means Indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP and the amount of such Indebtedness shall be
the capitalized amount of such obligations determined in accordance with GAAP.
For purposes of
" -- Certain Covenants -- Limitation on Liens," a Capital Lease Obligation shall
be deemed secured by a Lien on the property being leased.
"CAPITAL STOCK" means, with respect to any Person, any and all shares or
other equivalents (however designated) of corporate stock, partnership interests
or any other participation, right, warrant, option or other interest in the
nature of an equity interest in such Person, but excluding any debt security
convertible or exchangeable into such equity interest.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate Net Cash Proceeds
received by the Company from the issue or sale (other than to a Subsidiary or an
employee stock ownership plan or trust established by the Company or any
Subsidiary) by the Company of any class of its Capital Stock (other than
Redeemable Stock) after the Issue Date.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(i) any "person" or "group" (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act) other than one or more of the Permitted Holders is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of 40% or more of the total voting power of the Voting Stock (on
a fully diluted basis) of the Company, (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board of Directors of the Company or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the directors
of the Company then still in office who were either 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 Board of
Directors of the Company then in office, (iii) the Company consolidates or
merges with or into any other Person (other than one or more Permitted Holders)
or any other Person (other than one or more Permitted Holders) consolidates or
merges with or into the Company, in either case, other than (a) a consolidation
or merger with a Wholly Owned Subsidiary in which all of the Voting Stock of the
Company outstanding immediately prior to the effectiveness thereof is changed
into or exchanged for substantially the same consideration or (b) pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other Property with the effect that the
"beneficial owners" (as such term is used in Section 13(d) of the Exchange Act)
of the outstanding Voting Stock of the Company immediately prior to such
transaction, beneficially own, directly or indirectly, more than 50% of the
total voting power of the fully diluted Voting Stock of the surviving
corporation immediately following such transaction in substantially the same
proportions as owned prior to such transaction or (iv) the Company sells,
conveys, transfers or leases, directly or indirectly, all or substantially all
of its assets (other
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than a transfer of such assets as an entirety or virtually as an entirety to a
Wholly Owned Subsidiary or one or more Permitted Holders).
"CONSOLIDATED INTEREST EXPENSE" means, for any Person (or in the case of
the Company, the Company and its Restricted Subsidiaries), for any period, the
amount of interest in respect of Indebtedness (excluding amortization of
original issue discount resulting from the allocation of a portion of the
Indebtedness from the Offering attributable to the Warrants, but including
amortization of original issue discount in all other instances and fees payable
in connection with financings, including commitment, availability and similar
fees, and amortization of debt issuance costs, noncash interest payments on any
Indebtedness and the interest portion of any deferred payment obligation and
after taking into account the effect of elections made under, and the net costs
associated with, any Interest Rate Agreement, however denominated, with respect
to such Indebtedness), the amount of Redeemable Dividends, the amount of
Preferred Stock dividends in respect of all Preferred Stock of Subsidiaries of
such Person held other than by such Person or a Subsidiary of such Person,
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, and the interest component of
rentals in respect of any Capital Lease Obligation or Sale and Leaseback
Transaction paid, accrued or scheduled to be paid or accrued by such Person
during such period, determined on a consolidated basis in accordance with GAAP.
For purposes of this definition, interest on a Capital Lease Obligation or a
Sale and Leaseback Transaction shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in such
Capital Lease Obligation or Sale and Leaseback Transaction in accordance with
GAAP consistently applied.
"CONSOLIDATED LEVERAGE RATIO" is defined as the ratio of (i) the
outstanding Indebtedness of a Person and its Subsidiaries (or in the case of the
Company, its Restricted Subsidiaries) divided by (ii) the Pro Forma EBITDA of
such Person.
"CONSOLIDATED NET INCOME" of a Person means for any period, the net income
(loss) of such Person and its Subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income (i) with respect to the Company,
any net income (loss) of any Person if such Person is not a Restricted
Subsidiary, except that (a) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (b) the Company's equity in a
net loss of any such Person (other than an Unrestricted Subsidiary) for such
period shall be included in determining such Consolidated Net Income, (ii) any
net income (loss) of any Person acquired by such Person or a Subsidiary of such
Person in a pooling of interests transaction for any period prior to the date of
such acquisition, (iii) with respect to the Company, any net income (loss) of
any Restricted Subsidiary if such Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (a) subject to the limitations contained in clause (iv)
below, the Company's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company or another Restricted Subsidiary as
a dividend (subject, in the case of a dividend to another Restricted Subsidiary,
to the limitation contained in this clause) and (b) the Company's equity in a
net loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income, (iv) any gain (but not loss) realized
upon the sale or other disposition of any Property of such Person or its
consolidated Subsid-iaries (including pursuant to any Sale and Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary course
of business, (v) any extraordinary gain or loss and (vi) the cumulative effect
of a change in accounting principles.
"CUMULATIVE EBITDA" means at any date of determination the cumulative
EBITDA of the Company from and after the last day of the fiscal quarter of the
Company immediately preceding the Issue Date to the end of the fiscal quarter
immediately preceding the date of determination or, if such cumulative EBITDA
for such period is negative, the amount (expressed as a negative number) by
which such cumulative EBITDA is less than zero.
"CUMULATIVE INTEREST EXPENSE" means at any date of determination the
aggregate amount of Consolidated Interest Expense paid, accrued or scheduled to
be paid or accrued by the Company and its Restricted Subsidiaries
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from the last day of the fiscal quarter of the Company immediately preceding the
Issue Date to the end of the fiscal quarter immediately preceding the date of
determination.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"EBITDA" means, for any Person, for any period, an amount equal to (A) the
sum of (i) Consolidated Net Income for such period, plus, to the extent deducted
in the calculation of Consolidated Net Income, (ii) the provision for taxes for
such period based on income or profits to the extent such income or profits were
included in computing Consolidated Net Income and any provision for taxes
utilized in computing net loss under clause (i) hereof, plus (iii) Consolidated
Interest Expense for such period, plus (iv) depreciation for such period on a
consolidated basis, plus (v) amortization of intangibles for such period on a
consolidated basis, plus (vi) any other non cash items reducing Consolidated Net
Income for such period, minus (B) all non-cash items increasing Consolidated Net
Income for such period, all for such Person and its Subsidiaries determined in
accordance with GAAP consistently applied, except that with respect to the
Company each of the foregoing items shall be determined on a consolidated basis
with respect to the Company and its Restricted Subsidiaries only.
"EVENT OF DEFAULT" has the meaning set forth under " -- Events of Default."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (i) if such property or asset has a
Fair Market Value of less than $5 million, by any Officer of the Company or (ii)
if such property or asset has a Fair Market Value in excess of $5 million, by a
majority of the Board of Directors of the Company and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, unless stated otherwise.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"HEDGING OBLIGATION" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, foreign exchange contract, currency
swap agreement, currency option or any other similar agreement or arrangement.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by merger, conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); PROVIDED, HOWEVER, that a change in GAAP that
results in an obligation of such Person that exists at such time, and is not
theretofore classified as Indebtedness, becoming Indebtedness shall not be
deemed an Incurrence of such Indebtedness; PROVIDED FURTHER, HOWEVER, that
solely for purposes of determining compliance with " -- Certain
Covenants -- Limitation on Indebtedness," amortization of debt discount shall
not be deemed to be the Incurrence of Indebtedness; PROVIDED that in the case of
Indebtedness sold at a discount, the amount of such Indebtedness Incurred shall
at all times be the aggregate principal amount at Stated Maturity.
"INDEBTEDNESS" means (without duplication), with respect to any Person, any
indebtedness, secured or unsecured, contingent or otherwise, which is for
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), or evidenced by bonds,
notes, debentures or
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similar instruments or representing the balance deferred and unpaid of the
purchase price of any property (excluding any balances that constitute customer
advance payments and deposits, accounts payable or trade payables, and other
accrued liabilities arising in the ordinary course of business) if and to the
extent any of the foregoing indebtedness would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, and shall also
include, to the extent not otherwise included (i) any Capital Lease Obligations,
(ii) Indebtedness of other Persons secured by a Lien to which the Property owned
or held by such first Person is subject, whether or not the obligation or
obligation secured thereby shall have been assumed (the amount of such
Indebtedness being deemed to be the lesser of the value of such property or
assets or the amount of the Indebtedness so secured), (iii) Guarantees of
Indebtedness of other Persons, (iv) the maximum fixed repurchase price of any
Redeemable Stock (PROVIDED, HOWEVER, that Redeemable Stock of the Company shall
not constitute Indebtedness if such Redeemable Stock may not be redeemed prior
to the first anniversary of the Stated Maturity of the Notes), (v) any
Attributable Indebtedness, (vi) all reimbursement obligations of such Person in
respect of letters of credit, bankers' acceptances or other similar instruments
or credit transactions issued for the account of such Person, (vii) in the case
of the Company, the maximum fixed repurchase price of Preferred Stock of its
Restricted Subsidiaries and (viii) to the extent not otherwise included in
clauses (i) through (vii) of this paragraph, any payment obligations of any such
Person at the time of determination under any Hedging Obligation. For purposes
of this definition, the maximum fixed repurchase price of any Redeemable Stock
or Preferred Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock or Preferred
Stock as if such Redeemable Stock or Preferred Stock were repurchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture; PROVIDED, HOWEVER, that if such Redeemable Stock or Preferred Stock
is not then permitted to be repurchased, the repurchase price shall be the book
value of such Redeemable Stock or Preferred Stock. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
contingent obligations in respect thereof at such date. For purposes of this
definition, the amount of the payment obligation with respect to any Hedging
Obligation shall be an amount equal to (i) zero, if such obligation is an
Interest Rate Obligation permitted pursuant to clause (vi) of the second
paragraph of " -- Certain Covenants -- Limitation on Indebtedness" or (ii) the
notional amount of such Hedging Obligation, if such Hedging Obligation is not an
Interest Rate Agreement so permitted.
"INTEREST RATE AGREEMENT" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement.
"INVESTMENT" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, or Incurrence of a Guarantee of any
obligation of, or purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities or evidence of Indebtedness issued by, any other
Person. In determining the amount of any Investment made by transfer of any
Property other than cash, such Property shall be valued at its Fair Market Value
at the time of such Investment.
"INVESTMENT GRADE RATING" means both a rating equal to or higher than Baa3
(or the equivalent) by Moody's Investors Service, Inc. (or any successor to the
rating agency business thereof) and a rating equal to or higher than BBB- (or
the equivalent) by Standard & Poor's Ratings Group (or any successor to the
rating agency business thereof).
"IPN TERMINALS" means the interactive terminals through which the Company's
Inter(Bullet)Act Promotion Network can be accessed in supermarkets and the
supporting network equipment and computer servers for such terminals along with
the component parts thereof.
"ISSUE DATE" means the date on which the Old Notes were initially issued.
"LIEN" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority, or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
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"MANAGEMENT SERVICES AGREEMENT" means the management services agreement
between the Company and Vanguard dated as of June 17, 1996, the material terms
of which are summarized under "Certain Transactions."
"NET AVAILABLE CASH" from an Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to such Properties or assets or received in any other noncash form) in each case
net of all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP, as a consequence of such
Asset Sale, and in each case net of all payments made on any Indebtedness which
is secured by any assets subject to such Asset Sale, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law be repaid out of the proceeds
from such Asset Sale, and net of all distributions and other payments required
to be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Sale.
"NET CASH PROCEEDS" with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"OFFICER" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer or the Treasurer of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by the Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Trustee.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be counsel to the Company or the
Trustee.
"PERMITTED HOLDERS" means (i) the descendants of Lunsford Richardson, Sr,
their spouses, trusts, and corporations in which they have interests and
charitable organizations established by such descendants, (ii) Vanguard Cellular
Operating Corp. and its controlling Affiliates, and (iii) Stephen R. Leeolou and
Aretas E. Stearns, their estates, spouses, ancestors, and lineal descendants,
the legal representatives of any of the foregoing and the trustee of any bona
fide trust of which the foregoing are the sole beneficiaries or the grantors, or
any Person of which the foregoing "beneficially owns" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) voting securities representing at least
66-2/3% of the total voting power of all classes of Capital Stock of such Person
(exclusive of any matters as to which class voting rights exist).
"PERMITTED INVESTMENT" means an Investment by the Company or any Restricted
Subsidiary in (i) a Wholly Owned Subsidiary or a Person which will, upon the
making of such Investment, become a Wholly Owned Subsidiary; PROVIDED, HOWEVER,
that such Person's primary business is a Related Business; (ii) another Person
if as a result of such Investment such other Person is merged or consolidated
with or into, or transfers or conveys all or substantially all its assets to,
the Company or a Wholly Owned Subsidiary; PROVIDED, HOWEVER, that such Person's
primary business is a Related Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any Restricted Subsidiary, if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (v) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans and advances to employees made in the ordinary
course of business consistent with past practice of the Company or such
Restricted Subsidiary, as the case may be; PROVIDED, HOWEVER, that such loans
and advances do not exceed $5 million at any one time outstanding; and (vii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments.
"PERMITTED LIENS" means (i) Liens on the Property of the Company or any
Restricted Subsidiary existing on the Issue Date; (ii) Liens on inventory,
accounts receivable and any IPN Terminals owned, or cash held (other than cash
raised in the Offering), on the Issue Date to secure Indebtedness permitted to
be Incurred under clause (i) of the second paragraph of " -- Certain
Covenants -- Limitation on Indebtedness;" (iii) Liens on IPN Terminals acquired
with the proceeds of Indebtedness permitted to be Incurred under clause (ii) of
the second paragraph of
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" -- Certain Covenants -- Limitation on Indebtedness" to secure such
Indebtedness; (iv) Liens on the Property of the Company or any Restricted
Subsidiary to secure any extension, renewal, refinancing, replacement or
refunding (or successive extensions, renewals, refinancings, replacements or
refundings), in whole or in part, of any Indebtedness secured by Liens referred
to in any of clauses (i), (ii), (iii), (viii) or (xi); PROVIDED, HOWEVER, that
any such Lien will be limited to all or part of the same Property that secured
the original Lien (plus improvements on such Property) and the aggregate
principal amount of Indebtedness that is secured by such Lien will not be
increased to an amount greater than the sum of (A) the outstanding principal
amount, or, if greater, the committed amount, of the Indebtedness secured by
Liens described under clauses (i), (ii), (iii), (viii) or (xi) at the time the
original Lien became a Permitted Lien under the Indenture and (B) an amount
necessary to pay any premiums, fees and other expenses incurred by the Company
in connection with such refinancing, refunding, extension, renewal or
replacement; (v) Liens for taxes, assessments or governmental charges or levies
on the Property of the Company or any Restricted Subsidiary if the same shall
not at the time be delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings; (vi) Liens imposed
by law, such as carriers', warehousemen's and mechanics' Liens and other similar
Liens on the Property of the Company or any Restricted Subsidiary arising in the
ordinary course of business and securing payment of obligations which are not
more than 60 days past due or are being contested in good faith and by
appropriate proceedings; (vii) Liens on the Property of the Company or any
Restricted Subsidiary Incurred in the ordinary course of business to secure
performance of obligations with respect to statutory or regulatory requirements,
performance or return-of-money bonds, surety bonds or other obligations of a
like nature and Incurred in a manner consistent with industry practice; (viii)
Liens on Property at the time the Company or any Restricted Subsidiary acquired
such Property, including any acquisition by means of a merger or consolidation
with or into the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that
such Lien shall not have been Incurred in anticipation of or in connection with
such transaction or series of related transactions pursuant to which such
Property was acquired by the Company or any Restricted Subsidiary; (ix) other
Liens on the Property of the Company or any Restricted Subsidiary incidental to
the conduct of their respective businesses or the ownership of their respective
Properties which were not created in connection with the Incurrence of
Indebtedness or the obtaining of advances or credit and which do not in the
aggregate materially detract from the value of their respective Properties or
materially impair the use thereof in the operation of their respective
businesses; (x) pledges or deposits by the Company or any Restricted Subsidiary
under workmen's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders, contracts
(other than for the payment of Indebtedness) or leases to which the Company or
any Restricted Subsidiary is party, or deposits to secure public or statutory
obligations of the Company, or deposits for the payment of rent, in each case
Incurred in the ordinary course of business; (xi) Liens on the Property of a
Person at the time such Person becomes a Restricted Subsidiary; PROVIDED,
HOWEVER, that any such Lien may not extend to any other Property of the Company
or any other Restricted Subsidiary which is not a direct Subsidiary of such
Person; PROVIDED FURTHER, HOWEVER, that any such Lien was not Incurred in
anticipation of or in connection with the transaction or series of related
transactions pursuant to which such Person became a Restricted Subsidiary; (xii)
utility easements, building restrictions and such other encumbrances or charges
against real property as are of a nature generally existing with respect to
properties of a similar character; or (xiii) Liens to secure Interest Rate
Agreements permitted to be incurred under clause (vi) of the second paragraph of
" -- Certain Covenants -- Limitation on Indebtedness."
"PERMITTED REFINANCING INDEBTEDNESS" means any renewals, extensions,
substitutions, refinancings or replacements of any Indebtedness, including any
successive extensions, renewals, substitutions, refinancings or replacements so
long as (i) the aggregate amount of Indebtedness represented thereby is not
increased by such renewal, extension, substitution, refinancing or replacement
(other than to finance fees and expenses associated with such refinancing,
including any premium and defeasance costs), (ii) the Average Life of such
Indebtedness is equal to or greater than the Average Life of the Indebtedness
being refinanced, (iii) the Stated Maturity of such Indebtedness is no earlier
than the Stated Maturity of the Indebtedness being refinanced and (iv) the new
Indebtedness shall not be senior in right of payment to the Indebtedness that is
being extended, renewed, substituted, refinanced or replaced; PROVIDED, HOWEVER,
that Permitted Refinancing Indebtedness shall not include (a) Indebtedness of a
Subsidiary that refinances Indebtedness of the Company or (b) Indebtedness of
the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary.
"PERSON" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
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"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PRO FORMA EBITDA" means, for any Person at any date of determination, the
EBITDA of such Person for the four most recent full fiscal quarters preceding
such date for which financial statements are available as determined on a
consolidated basis in accordance with GAAP consistently applied after giving
effect to the following: (i) if, during or after such period, such Person or any
of its Subsidiaries shall have made any disposition of any Person or business,
Pro Forma EBITDA of such Person and its Subsidiaries shall be computed so as to
give pro forma effect to such disposition and (ii) if, during or after such
period, such Person or any of its Subsidiaries completes an acquisition of any
Person or business which immediately after such acquisition is a Subsidiary of
such Person or whose assets are held directly by such Person or a Subsidiary of
such Person, Pro Forma EBITDA shall be computed so as to give pro forma effect
to the acquisition of such Person or business; PROVIDED, HOWEVER, that, with
respect to the Company, all the foregoing references to "Subsidiary" or
"Subsidiaries" shall be deemed to refer only to the "Restricted Subsidiaries" of
the Company.
"PROPERTY" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock in, and other
securities of, any other Person (but excluding Capital Stock or other securities
issued by such first mentioned Person).
"PUBLIC EQUITY OFFERING" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
"REDEEMABLE DIVIDEND" means, for any dividend with regard to Redeemable
Stock, the quotient of the dividend divided by the difference between one and
the maximum statutory federal income tax rate (expressed as a decimal number
between 1 and 0) then applicable to the issuer of such Redeemable Stock.
"REDEEMABLE STOCK" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (i) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, (ii) is or may
become redeemable or repurchasable at the option of the holder thereof, in whole
or in part, or (iii) is convertible or exchangeable for Indebtedness.
"RELATED BUSINESS" means any business related to the consumer product
promotion business (including any interactive, multi-media and
telecommunications aspects thereof).
"RESTRICTED PAYMENT" means (i) any dividend or distribution (whether made
in cash, Property or securities) declared or paid on or with respect to any
shares of Capital Stock of the Company or Capital Stock of any Restricted
Subsidiary except for any dividend or distribution which is made solely to the
Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a
Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary
on a pro rata basis) or dividends or distributions payable solely in shares of
Capital Stock (other than Redeemable Stock) of the Company; (ii) a payment made
by the Company or any Restricted Subsidiary to purchase, redeem, acquire or
retire any Capital Stock of the Company or Capital Stock of any Affiliate of the
Company (other than a Restricted Subsidiary) or any warrants, rights or options
to directly or indirectly purchase or acquire any such Capital Stock or any
securities exchangeable for or convertible into any such Capital Stock; (iii) a
payment made by the Company or any Restricted Subsidiary to redeem, repurchase,
defease or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment (other than the
purchase, repurchase, or other acquisition of any Indebtedness subordinate in
right of payment to the Notes purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition), Indebtedness of the Company which
is subordinate (whether pursuant to its terms or by operation of law) in right
of payment to the Notes; or (iv) an Investment (other than Permitted
Investments) in any Person.
"RESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company after the
Issue Date unless such Subsidiary shall have been designated an Unrestricted
Subsidiary as permitted or required pursuant to the definition of "Unrestricted
Subsidiary" and (ii) an Unrestricted Subsidiary which is redesignated as a
Restricted Subsidiary as permitted pursuant to the definition of "Unrestricted
Subsidiary."
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"SALE AND LEASEBACK TRANSACTION" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Subsidiary of such Person and is thereafter leased back from
the purchaser or transferee thereof by such Person or one of its Subsidiaries.
"STATED MATURITY" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemp-tion
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"STRATEGIC EQUITY INVESTOR" means (i) any Person engaged principally in the
consumer products manufacturing business which has an Investment Grade Rating
and (ii) any Person which is wholly owned and controlled by any Person or
Persons referred to in clause (i) of this definition.
"SUBSIDIARY" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which at
least 50% of the total voting power of the Voting Stock is held by such
first-named Person or any of its Subsidiaries and such first-named Person or any
of its Subsidiaries has the power to direct the management, policies and affairs
thereof; or (ii) in the case of a partnership, joint venture, association, or
other business entity, with respect to which such first-named Person or any of
its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise if in accordance
with generally accepted accounting principles such entity is consolidated with
the first-named Person for financial statement purposes.
"TEMPORARY CASH INVESTMENTS" means any of the following: (i) Investments in
U.S. Government Obligations maturing within 90 days of the date of acquisition
thereof, (ii) Investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America or any state thereof having capital, surplus and
undivided profits aggregating in excess of $500,000,000 and whose long-term debt
is rate "A-3" or "A-" or higher according to Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group (or such similar equivalent rating by at least
one "nationally recognized statistical rating organization" (as defined in Rule
436 under the Securities Act)), (iii) repurchase obligations with a term of not
more than 7 days for underlying securities of the types described in clause (i)
entered into with a bank meeting the qualifications described in clause (ii)
above, and (iv) Investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America with a rating at the time as of which any Investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's Ratings Group (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)).
"UNRESTRICTED SUBSIDIARY" means (a) any Subsidiary of the Company in
existence on the Issue Date that is not a Restricted Subsidiary and (b) any
Subsidiary of an Unrestricted Subsidiary. The Company's Board of Directors may
designate any Subsidiary of the Company or any Restricted Subsidiary to be an
Unrestricted Subsidiary if (i) the Subsidiary to be so designated does not own
any Capital Stock or Indebtedness of, or own or hold any Lien on any Property
of, the Company or any other Restricted Subsidiary, (ii) the Subsidiary to be so
designated is not obligated under any Indebtedness or other obligation that, if
in default, would result (with the passage of time or notice or otherwise) in a
default on any Indebtedness of the Company or any Restricted Subsidiary and
(iii) either (A) the Subsidiary to be so designated has total assets of $1,000
or less or (B) such designation is effective immediately upon such entity
becoming a Subsidiary of the Company or any Restricted Subsidiary. Unless so
designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary
of the Company or of any Restricted Subsidiary will be classified as a
Restricted Subsidiary; PROVIDED, HOWEVER, that such Subsidiary shall not be
designated a Restricted Subsidiary and shall be automatically classified as an
Unrestricted Subsidiary if the Company would be unable to Incur at least $1.00
of additional Indebtedness pursuant to clause (a) of the first paragraph of
" -- Certain Covenants -- Limitation on Indebtedness." Except as provided in the
second sentence of this paragraph, no Restricted Subsidiary may be redesignated
as an Unrestricted Subsidiary. The Company's Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after
giving pro forma effect to such designation, (x) the Company could Incur at
least $1.00 of additional Indebtedness pursuant to clause (a) of the first
paragraph of " -- Certain Covenants -- Limitation on Indebtedness" and (y) no
Default or Event of Default shall have occurred and be continuing or would
result therefrom. Any such designation by the Company's Board of Directors will
be evidenced to the Trustee by filing with the Trustee a copy of the Board
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Resolution giving effect to such designation and an Officers' Certificate
certifying (i) that such designation complies with the foregoing provisions and
(ii) giving the effective date of such designation, such filing with the Trustee
to occur within 75 days after the end of the fiscal quarter of the Company in
which such designation is made (or in the case of a designation made during the
last fiscal quarter of the Company's fiscal year, within 120 days after the end
of such fiscal year).
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
NOTICES
Notices to holders of Notes will be given by mail to the addresses of such
holders as they may appear in the Security Register.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance
with the internal laws of the State of New York without reference to principles
of conflicts of law.
THE TRUSTEE
Fleet National Bank is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such of the rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary represents the opinion of Schell Bray Aycock Abel &
Livingston P.L.L.C., counsel to the Company, as to certain material Federal
income tax consequences to holders ("Holders") of Old Notes of the exchange of
Old Notes for New Notes pursuant to the Exchange Offer and of the ownership and
disposition of New Notes. This summary is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), its legislative history, existing regulations
thereunder (including regulations concerning the treatment of debt instruments
issued with original issue discount (the "OID Regulations")), published rulings
and court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time (possibly with retroactive effect) and
to different interpretations.
This summary applies only to those persons who are holders of the Old Notes
and who hold Old Notes as "Capital Assets" within the meaning of Section 1221 of
the Code. As used herein, the term "U.S. Person" means (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any state or political
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source. As used
herein, the term "Foreign Person" means a person other than a U.S. Person.
This summary does not purport to deal with all aspects of Federal income
taxation that may be relevant to Holders and does not address the tax
consequences to Holders who are subject to special rules (such as financial
institutions, tax-exempt organizations, dealers in securities and insurance
companies) or aspects of Federal income taxation that may be relevant to a
Holder's particular tax situation. Holders should note that an opinion
represents only counsel's best legal judgment and neither the opinion nor this
summary is binding on the Internal Revenue Service (the "Service"). There can be
no assurance that the Service will take a similar view with respect to the tax
consequences described below. No ruling has been or will be requested from the
Service on any tax matters relating to the Old Notes or New Notes.
ALL HOLDERS (IN PARTICULAR, THOSE WHO ARE NOT U.S. PERSONS) ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW NOTES, AND OWNERSHIP AND
DISPOSITION OF NEW NOTES AS WELL AS THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
AND OTHER TAX LAWS.
THE EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer does
not constitute a material modification of the terms of the Old Notes and,
therefore, such exchange should not constitute an "exchange" for Federal income
tax purposes. Accordingly, each New Note should be viewed as a continuation of
the corresponding Old Note, a Holder exchanging an Old Note for a New Note
should not recognize any gain or loss as a result of the exchange pursuant to
the Exchange Offer and the Federal income tax consequences to a Holder should be
the same for the New Notes as for the Old Notes.
TAX CONSEQUENCES TO U.S. PERSONS OF OWNERSHIP AND DISPOSITION OF NEW NOTES
THE UNITS. The Old Notes were sold as part of a unit (the "Units") that
also included warrants (the "Warrants") to purchase common stock. Consequently,
the issue price of a Unit was allocated between the Old Notes and the Warrants
based on their relative fair market values. Under the OID Regulations, the
portion of the issue price of the Units allocated to the Old Notes was the issue
price of the Old Notes. The Company treated each Old Note as having been issued
with an original issue price of $494.31 per $1,000 principal amount (which will
be treated as the issue price of the New Note), based upon each Warrant having a
fair market value of $172.28. No assurance can be given, however, that the
Service will not challenge the Company's determination of the issue price of the
Old Notes and the fair market value of the Warrants.
Under the OID Regulations, the Company's allocation of the issue price of
the Units will be binding on a Holder, unless the Holder discloses the use of a
different allocation on the applicable form attached to the Holder's Federal
income tax return for the year of acquisition of such Unit. If a Holder uses an
allocation different from that of the Company, or a Holder acquires a Unit at a
price different from that on which the Company's allocation is based, the Holder
will be treated as having acquired the New Note for a greater or lesser amount
than the New
73
<PAGE>
Note's issue price, thereby resulting in "acquisition premium" or "market
discount," as defined below. Holders intending to use an issue price allocation
different from that used by the Company should consult their tax advisors as to
the consequences to them of their particular allocation of the issue price of
the Unit.
ORIGINAL ISSUE DISCOUNT. Because the Old Notes were issued at a discount
from their "stated redemption price at maturity," the OID on the Old Notes for
Federal income tax purposes will be carried over to the New Notes. For Federal
income tax purposes, OID on a New Note will be the excess of the stated
redemption price at maturity of the New Note over the issue price of the Old
Note (determined as described above under " -- The Units," which will be treated
as the issue price of the New Note). The stated redemption price at maturity of
a New Note will be the sum of all payments to be made on such New Note,
regardless of whether denominated as interest or principal. As a result, each
New Note will bear OID in an amount equal to the excess of (i) the sum of its
principal amount and all stated interest payments over (ii) its issue price.
A Holder generally will be required to include OID in income periodically
over the term of a New Note and before receipt of the cash attributable to such
income. In general, a Holder must include in gross income for Federal income tax
purposes the sum of the daily portions of OID with respect to the New Note for
each day during the taxable year or portion of a taxable year on which such
Holder holds the New Note ("Accrued OID"). The daily portion is determined by
allocating to each day of any accrual period within a taxable year a pro rata
portion of an amount equal to the adjusted issue price of the New Note at the
beginning of the accrual period multiplied by the yield to maturity of the New
Note. For purposes of computing OID, the Company will use six-month accrual
periods that end on the days in the calendar year corresponding to the maturity
date of the New Notes and the date six months prior to such maturity date, with
the exception of an initial short accrual period. The adjusted issue price of a
New Note at the beginning of any accrual period is the issue price of the New
Note increased by the Accrued OID for all prior accrual periods and decreased by
any cash payments on the New Notes. Each payment made under a New Note will be
treated first as a payment of OID (which was previously includable in income) to
the extent of OID that has accrued as of the date of payment and has not been
allocated to prior payments and second as a payment of principal.
IN GENERAL, U.S. PERSONS WHO HOLD NEW NOTES WILL HAVE TO INCLUDE IN INCOME
INCREASINGLY GREATER AMOUNTS OF OID OVER THE LIFE OF THE NEW NOTES.
A Change in Control of the Company may cause additional interest to be paid
on the New Notes in the manner described in this Prospectus. Under the OID
Regulations, the possibility of such additional interest will not affect the
accrual of OID or the yield to maturity on the New Notes unless, based on all
the facts and circumstances as of the issue date, it is more likely than not
that such a payment will occur. The Company does not intend to treat the
possibility of additional interest as affecting the computation of OID or the
yield to maturity.
Under the OID Regulations, a Holder may make an election to include in
gross income all interest that accrues on a New Note (including stated interest,
acquisition discount, OID, DE MINIMIS OID, market discount, DE MINIMIS market
discount, and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) in accordance with a constant yield method calculated by
treating the New Note as being issued on the Holder's acquisition date at an
issue price equal to the Holder's adjusted basis in the New Note immediately
after its acquisition.
MARKET DISCOUNT. A Holder who purchases a New Note for an amount that is
less than its adjusted issue price will be treated as having purchased the New
Note at a "market discount" for Federal income tax purposes, unless such
difference is less than a specified DE MINIMIS amount. Under the market discount
rules, a Holder will be required to treat any principal payment on, or any gain
on the sale, exchange, retirement or other disposition of, a New Note as
ordinary income to the extent of the market discount that accrued on such New
Note (but was not previously included in income) at the time of such payment or
disposition. Any market discount will be considered to accrue on a straight-line
basis during the period from the date of acquisition to the maturity date of the
New Note, unless the Holder makes an irrevocable election to accrue on a
constant yield method. If such New Note is disposed of in a nontaxable
transaction (other than a nonrecognition transaction described in Section
1276(c) of the Code), accrued market discount will be includible as ordinary
income to the Holder as if such holder had sold the New Note at its fair market
value. In addition, the Holder may be required to defer, until the maturity of
the New Note or its earlier disposition (including a nontaxable transaction
other than a transaction described in Section 1276(c) of the Code), the
deduction of all or a portion of the interest expense of any indebtedness
incurred or continued to purchase or carry such New Note.
74
<PAGE>
A Holder of a New Note may elect to include market discount in income
currently, as it accrues (on either a straight-line or constant yield basis), in
which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first day of the first taxable year to which the election applies, and may not
be revoked without the consent of the IRS.
ACQUISITION PREMIUM. A Holder who purchases a New Note for an amount that
is greater than its adjusted issue price but equal to or less than the stated
redemption price at maturity will be considered to have purchased such New Note
at an "acquisition premium." Under the acquisition premium rules, the amount of
OID which such Holder must include in its gross income with respect to such New
Note for any taxable year will be reduced by the portion of such acquisition
premium properly allocable to such year.
DISPOSITION OF THE NOTES. Generally, any sale or redemption of New Notes
will result in taxable gain or loss equal to the difference between the amount
of cash or fair market value of other property received and the Holder's
adjusted tax basis in the New Note. A Holder's adjusted tax basis for
determining gain or loss on the sale or other disposition of a New Note will
initially equal the cost of the New Note to such Holder and will be increased by
any Accrued OID (as reduced by amortized acquisition premium) and market
discount previously included in such Holder's gross income and decreased by the
amount of any cash payments received by such Holder, regardless of whether such
payments are denominated as principal or interest. For these purposes, the
amount realized does not include any amount attributable to accrued stated
interest on the New Note. Except as described above under " -- Market Discount,"
any gain or loss upon a sale or other disposition of a New Note generally will
be capital gain or loss, and will be long-term capital gain or loss if the New
Note will have been held by the Holder for more than one year at the time of
such sale or other disposition (including any period during which a Holder held
the Old Note).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE
HOLDERS. The New Notes constitute applicable high yield discount obligations
(AHYDOs). As a result, a portion of the tax deductions that otherwise would be
available to the Company in respect of the New Notes will be deferred and
potentially disallowed, which, in turn, may reduce the after-tax cash flows of
the Company. The New Notes constitute AHYDOs because (i) the yield to maturity
of the Old Notes is equal to or greater than the sum of the relevant mid-term
applicable federal rate (the AFR) in the month of issue of the Old Notes (which
is 6.63% compounded semi-annually for July 1996, assuming a weighted average
maturity of the Old Notes in excess of seven years), plus five percentage
points, and (ii) the Old Notes were issued with significant OID. A debt
instrument is issued with significant OID if the aggregate amount includable in
income of a Holder in respect of such instrument before the close of any accrual
period ending after the fifth anniversary of its issuance exceeds the sum of (a)
the aggregate amount of interest to be paid under the instrument before such
date and (b) the product of the issue price of the such instrument and its yield
to maturity.
Under the AHYDO rules, the Company will not be entitled to deduct OID that
accrues with respect to the New Notes until amounts attributable to OID are paid
in cash or property (other than stock or debt instruments of the Company or of a
related party). In addition, since the yield to maturity of the New Notes
exceeds the sum of the relevant AFR plus six percentage points (the Excess
Yield), the disqualified portion of the OID accruing on the New Notes will be
permanently nondeductible. In general, the Disqualified portion of OID for any
accrual period will be equal to the product of (i) a percentage determined by
dividing the Excess Yield by the yield to maturity and (ii) the OID for the
accrual period. Subject to otherwise applicable limitations, a corporate Holder
generally will be entitled to a 70% dividends received deduction with respect to
the disqualified portion of the accrued OID if the Company has sufficient
current or accumulated earnings and profits. To the extent that the Company's
earnings and profits are insufficient, any portion of the OID that otherwise
would have been recharacterized as a dividend for purposes of the dividends
received deduction will continue to be taxed as ordinary OID income in
accordance with the rules described above under " -- Original Issue Discount."
Treatment of the New Notes as AHYDOs will not disqualify interest or OID with
respect to the New Notes from the portfolio interest exception described below
under " -- Tax Consequences to Foreign Persons of Ownership and Disposition of
New Notes," provided the applicable requirements for the exception are otherwise
satisfied.
TAX CONSEQUENCES TO FOREIGN PERSONS OF OWNERSHIP AND DISPOSITION OF NEW NOTES
The following discussion is a summary of certain United States Federal
income tax consequences to a Foreign Person that holds a New Note. If the income
or gain on the New Note is effectively connected with the conduct
75
<PAGE>
of a trade or business within the United States then, unless a different result
is provided under an applicable tax treaty between the United States and the
country of which the Foreign Person is a resident, the Foreign Person will be
subject to tax on such income or gain in essentially the same manner as a U.S.
person, as discussed above, and in the case of a foreign corporation, may also
be subject to the branch profits tax. The balance of this discussion assumes
that Foreign Persons holding New Notes are not engaged in a trade or business in
the United States with which income or gain derived from the New Notes would be
effectively connected.
Under the portfolio interest exception to the general rules for the
withholding of tax on payment of interest (including OID) to a Foreign Person, a
Foreign Person will not be subject to United States tax (or to withholding) on
interest or OID on a New Note, provided that (i) the Foreign Person does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote, is not a controlled
foreign corporation that is related to the Company through stock ownership and
is not a bank receiving certain types of interest, and (ii) the Company, its
paying agent or the person who would otherwise be required to withhold tax
receives either (A) a statement (an "Owner's Statement") signed under penalties
of perjury by the beneficial owner of the New Note in which the owner certifies
that the owner is a Foreign Person and which provides the owner's name and
address or (B) a statement signed under penalties of perjury by the financial
institution holding the New Note on behalf of the beneficial owner that it has
received such Owner's Statement, together with a copy of the Owner's Statement.
As used herein, the term "financial institution" means a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business and that holds a New
Note on behalf of the owner of the New Note. A Foreign Person who does not
qualify for the portfolio interest exception generally would be subject to
United States withholding tax at a flat rate of 30% (or a lower applicable
treaty rate) on interest payments and payments (including redemption proceeds)
attributable to OID on the New Notes.
In general, gain recognized by a Foreign Person upon the redemption, sale
or exchange of a New Note will not be subject to United States Federal income
tax unless such Foreign Person is an individual present in the United States for
183 days or more during the taxable year in which the New Note is redeemed, sold
or exchanged, and certain other requirements are met.
A New Note held by an individual who is a Foreign Person at the time of his
death will not be subject to U.S. federal estate tax as a result of such
individual's death, provided that the individual does not own, actually or
constructively, 10 percent or more of the total combined voting power of all
classes of stock of the Company entitled to vote and, at the time of such
individual's death, payments with respect to such New Notes would not have been
effectively connected to the conduct by such individual of a trade or business
in the U.S.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to payments received with respect to the New Notes
and the proceeds from the sale or redemption thereof. This withholding generally
applies only if the Holder (i) fails to furnish his or her social security or
other taxpayer identification number ("TIN"), (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS that he or she has failed to report properly
payments of interest and dividends and the IRS has notified the Company that he
or she is subject to backup withholding, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is his or her correct number and that he or she
is not subject to backup withholding. Any amount withheld from a payment to a
Holder under the backup withholding rules is allowable as a credit against such
Holder's Federal income tax liability, provided that the required information is
furnished to the IRS. Certain Holders (including, among others, corporations and
foreign individuals who comply with certain certification requirements described
under " -- Tax Consequences to Foreign Persons of Ownership and Disposition of
New Notes") are not subject to backup withholding. Holders should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER SHOULD CONSULT WITH ITS OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OF OLD NOTES FOR NEW
NOTES, AND OWNERSHIP AND DISPOSITION OF NEW NOTES, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
76
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Notes where such
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date, and
ending on the close of business 90 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 199 ,
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
The Company has been advised by Salomon Brothers Inc, BT Securities
Corporation and Toronto Dominion Securities (the "Initial Purchasers") that they
currently intend to make a market in the Notes. However, the Initial Purchasers
are not obligated to do so and may discontinue any market making activities at
any time without notice.
LEGAL OPINIONS
Certain legal matters regarding the New Notes will be passed upon for the
Company by Schell Bray Aycock Abel & Livingston P.L.L.C., Greensboro, North
Carolina. As of December 9, 1996, certain partners of Schell Bray Aycock Abel &
Livingston P.L.L.C., beneficially owned an aggregate of 20,000 Shares of the
Company's Common Stock.
INDEPENDENT AUDITORS
The audited financial statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
77
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants........................................................................ F-2
Consolidated Balance Sheets as of September 28, 1996 and September 30, 1995..................................... F-3
Consolidated Statements of Operations for the years ended September 28, 1996, September 30, 1995 and September
30, 1994, and for the period from February 25, 1993 (Date of Inception) to September 28, 1996................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from February 25, 1993 (Date of
Inception) to September 28, 1996.............................................................................. F-5
Consolidated Statements of Cash Flows for the years ended September 28, 1996, September 30, 1995 and September
30, 1994, and for the period from February 25, 1993 (Date of Inception) to September 28, 1996................. F-6-F-7
Notes to Consolidated Financial Statements...................................................................... F-8-F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY:
We have audited the accompanying consolidated balance sheets of
Inter(Bullet)Act Systems, Incorporated (a North Carolina corporation in the
development stage) and Subsidiary as of September 28, 1996 and September 30,
1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three fiscal years in the period
ended September 28, 1996 and for the period from inception (February 25, 1993)
to September 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inter(Bullet)Act Systems,
Incorporated and Subsidiary as of September 28, 1996 and September 30, 1995, and
the results of their operations and their cash flows for each of the three
fiscal years ended September 28, 1996 and for the period from inception
(February 25, 1993) to September 28, 1996, in conformity with generally accepted
accounting principles.
Melville, New York
November 18, 1996
F-2
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
<S> <C> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 93,479,584 $ 65,676
Accounts receivable, net of allowance for doubtful accounts of $10,000 and $3,550,
respectively.......................................................................... 243,848 62,302
Prepaid expenses and other............................................................... 253,885 82,914
Notes receivable from stockholders (Note 4).............................................. -- 70,474
Accrued interest receivable.............................................................. -- 12,984
Total current assets................................................................ 93,977,317 294,350
PROPERTY AND EQUIPMENT, net (Note 3)....................................................... 9,858,111 1,776,912
OTHER ASSETS:
Bond issuance costs, net of accumulated amortization of $67,422 and $0, respectively
(Note 2).............................................................................. 3,723,656 --
Deposits................................................................................. 35,000 37,275
Organization costs, net of accumulated amortization of $28,158 and $20,300,
respectively.......................................................................... 11,132 18,990
Patents, licenses and trademarks, net of accumulated amortization of $24,202 and $2,972,
respectively (Note 2)................................................................. 126,175 18,228
Other intangibles, net of accumulated amortization of $8,836 and $2,301, respectively.... 25,677 32,212
Total other assets.................................................................. 3,921,640 106,705
Total assets........................................................................ $ 107,757,068 $ 2,177,967
Liabilities and Stockholders' Equity (Deficit)
CURRENT LIABILITIES:
Current portion of long-term debt........................................................ $ 67,709 $ --
Accounts payable......................................................................... 1,285,919 408,784
Accrued expenses......................................................................... 509,119 345,939
Deferred revenue......................................................................... 229,023 21,712
Note payable (Note 12)................................................................... 50,000 --
Notes payable to related party (Note 5).................................................. -- 200,000
Notes payable to stockholders-current portion (Note 6)................................... -- 70,474
Total current liabilities........................................................... 2,141,770 1,046,909
NOTES PAYABLE TO STOCKHOLDERS (Note 6)..................................................... 236,500 1,971,130
LONG-TERM DEBT, net of discount (Note 7)................................................... 72,922,617 --
OTHER LONG-TERM LIABILITIES................................................................ 58,124 70,247
Total liabilities................................................................... 75,359,011 3,088,286
COMMITMENTS AND CONTINGENCIES (Note 17)
COMMON STOCK PURCHASE WARRANTS (Note 8).................................................... 24,463,760 --
STOCKHOLDERS' EQUITY (DEFICIT:)
Common stock, no par value; 20,000,000 shares authorized; 7,668,555 and 3,930,900 shares
issued and outstanding, respectively.................................................. 27,651,071 7,253,965
Additional paid-in capital............................................................... 768,000 --
Deferred compensation (Note 10).......................................................... (761,600) --
Deficit accumulated during the development stage......................................... (19,723,174) (8,164,284)
Total stockholders' equity (deficit)................................................ 7,934,297 (910,319)
Total liabilities and stockholders' equity (deficit)................................ $ 107,757,068 $ 2,177,967
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from
February 25, 1993
For the For the For the (Date of Inception)
Year Ended Year Ended Year Ended to September 28,
September 28, 1996 September 30, 1995 September 30, 1994 1996
<S> <C> <C> <C> <C>
Gross sales............................ $ 492,439 $ 254,714 $ 6,573 $ 764,326
Less: Retailer reimbursements.......... (286,980) (144,475) (3,812) (435,267)
Net sales........................ 205,459 110,239 2,761 329,059
Direct operating expenses.............. 2,694,320 842,025 262,389 3,802,083
Gross deficit.......................... (2,488,861) (731,786) (259,628) (3,473,024)
Selling, general and administrative
expenses............................. (6,440,468) (3,504,751) (1,975,313) (13,215,294)
Depreciation and amortization.......... (821,105) (190,748) (31,604) (1,050,998)
Loss from operations................... (9,750,434) (4,427,285) (2,266,545) (17,739,316)
Interest expense....................... (2,743,436) (187,249) (87,808) (3,018,493)
Interest and dividend income........... 1,009,160 34,565 8,630 1,052,355
Other income (expense), net............ (74,180) 54,247 2,213 (17,720)
Net loss........................ $(11,558,890) $ (4,525,722) $ (2,343,510) $ (19,723,174)
PER SHARE INFORMATION:
Net loss per share (Note 2)..... $ (1.91) $ (1.27) $ (0.83)
Weighted average common shares
outstanding.................. 6,038,070 3,555,904 2,830,307
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
From February 25, 1993 (Date of Inception) To September 28, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Total
Common Stock Paid-in Deferred Development Stockholders'
Shares Amount Capital Compensation Stage Equity (Deficit)
<S> <C> <C> <C> <C> <C> <C>
April 1993, the Company issued 816,902
shares of common stock to Clearing
Systems, Inc. for certain
technological information and
processes. Consideration for the
shares, after assumption of certain
liabilities, was approximately $.012
per share (Note 9).................. 816,902 $ 10,000 $ -- $ -- $ -- $ 10,000
April 1993, the Company issued
1,898,592 shares to various
stockholders in exchange for cash
and notes payable to the Company
valued at approximately $1.016 per
share............................... 1,898,592 1,929,526 -- -- -- 1,929,526
April 1993, the Company issued 101,406
shares to three stockholders in
consideration for investment
services and notes payable to the
Company valued at approximately
$1.016 per share.................... 101,406 103,059 -- -- -- 103,059
Net loss for the period............... -- -- -- -- (1,295,052 ) (1,295,052)
BALANCE AT SEPTEMBER 30, 1993......... 2,816,900 2,042,585 -- -- (1,295,052 ) 747,533
August 1994, return of capital to
stockholders...................... -- (371,130) -- -- -- (371,130)
Issuance of common stock............ 100,000 500,000 -- -- -- 500,000
Forfeiture of common stock (Note
18)............................... (10,000) -- -- -- -- --
Issuance of previously forfeited
common stock (Note 18)............ 10,000 50,000 -- -- -- 50,000
Net loss for the year............... -- -- -- -- (2,343,510 ) (2,343,510)
BALANCE AT SEPTEMBER 30, 1994......... 2,916,900 2,221,455 -- -- (3,638,562 ) (1,417,107)
Issuance of common stock............ 632,000 3,172,510 -- -- -- 3,172,510
Forfeiture of common stock (Note
18)............................... (18,000) (140,000) -- -- -- (140,000)
Issuance of common stock (Note 16).. 400,000 2,000,000 -- -- -- 2,000,000
Net loss for the year............... -- -- -- -- (4,525,722 ) (4,525,722)
BALANCE AT SEPTEMBER 30, 1995......... 3,930,900 7,253,965 -- -- (8,164,284 ) (910,319)
Issuance of common stock............ 3,319,338 18,256,359 -- -- -- 18,256,359
Conversion of $1.6 million of debt
to common stock (Note 6).......... 319,993 1,599,965 -- -- -- 1,599,965
Conversion of accrued interest to
common stock (Note 6)............. 12,356 67,958 -- -- -- 67,958
Conversion of notes payable to
stockholders and related accrued
interest to common stock (Note
6)................................ 75,968 417,824 -- -- -- 417,824
Issuance of common stock in payment
of consulting fees (Note 17)...... 10,000 55,000 -- -- -- 55,000
Deferred Compensation related to
stock options granted............. -- -- 768,000 (768,000) -- --
Amortization of deferred
compensation...................... -- -- -- 6,400 -- 6,400
Net loss for the year............... -- -- -- -- (11,558,890 ) (11,558,890)
BALANCE AT SEPTEMBER 28, 1996......... 7,668,555 $27,651,071 $768,000 $ (761,600) $(19,723,174) $ 7,934,297
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period from
For the For the For the February 25, 1993
Year Ended Year Ended Year Ended (Date of Inception)
September 28, 1996 September 30, 1995 September 30, 1994 to September 28, 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $(11,558,890) $ (4,525,722) $ (2,343,510) $ (19,723,174)
Adjustments to reconcile net loss
to net cash used in operating
activities --
Issuance of convertible note
payable to related party in
payment of royalties (Note
17)........................... 375,000 -- -- 375,000
Non-cash interest on discounted
bonds......................... 2,626,161 -- -- 2,626,161
Amortization of deferred
compensation.................. 6,400 -- -- 6,400
Depreciation and amortization... 821,105 190,748 31,604 1,050,998
Loss on asset disposal.......... 74,268 10,463 -- 84,731
Issuance of note payable to
settle litigation (Note 12)... 50,000 -- -- 50,000
Acquired research and
development expenses.......... -- -- -- 611,471
Expiration of acquired prepaid
expenses...................... -- -- -- 30,000
Stock issued in payment of
investment service fees....... -- -- -- 32,582
Increase in accounts receivable
and accrued interest
receivable.................... (168,562) (59,218) (7,468) (243,848)
Increase in prepaid expenses and
other......................... (115,971) (74,843) 32,649 (198,790)
Increase in other assets........ (126,902) (39,775) (6,886) (186,690)
Increase in accounts payable.... 877,135 370,244 (51,584) 1,285,919
Increase in accrued expenses.... 277,832 216,916 78,216 623,771
Increase in deferred revenue.... 207,311 21,712 -- 229,023
(Decrease) increase in other
long-term liabilities......... (12,123) 70,247 -- 58,124
Net cash used in operating
activities................. (6,667,236) (3,819,228) (2,266,979) (13,288,322)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Organization costs incurred....... -- -- -- (39,290)
Patents and licensing
agreements...................... -- -- -- (18,700)
Purchases of property and
equipment....................... (743,274) (337,368) (266,893) (1,362,144)
Increase in product equipment in
process of manufacturing........ (1,615,526) (451,770) -- (2,067,296)
Cost of manufacturing of product
and test equipment.............. (6,379,833) (912,995) -- (7,292,828)
Proceeds from sale of property and
equipment....................... 56,908 -- -- 56,908
Net cash used in investing
activities................. (8,681,725) (1,702,133) (266,893) (10,723,350)
</TABLE>
F-6
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Period from
For the For the For the February 25, 1993
Year Ended Year Ended Year Ended (Date of Inception)
September 28, 1996 September 30, 1995 September 30, 1994 to September 28, 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of convertible notes not
converted to equity............. (35) -- -- (35)
Proceeds from private placement
(Note 1)........................ 94,655,780 -- -- 94,655,780
Payment of bond issuance costs.... (3,791,078) -- -- (3,791,078)
Repayment of notes payable to
related party................... (200,000) -- -- (200,000)
Payment of notes payable.......... -- -- (3,368) (4,575)
Proceeds from repayment of notes
receivable from stockholders.... 70,474 -- -- 70,474
Proceeds from notes payable to
related party................... -- 200,000 -- 200,000
Proceeds from notes payable to
stockholders.................... -- 148,362 912,112 1,060,474
Repayment of long-term debt....... (19,657) -- -- (19,657)
Payment of assumed liabilities.... -- -- -- (40,000)
Repayment of convertible notes
payable to related parties...... (138,500) -- -- (138,500)
Proceeds from common stock
issuance, net of forfeitures.... 18,256,359 5,032,510 550,000 24,717,287
Repayment of notes payable to
stockholders.................... (70,474) -- -- (70,474)
Repayment of accounts receivable
from stockholders............... -- -- 1,051,560 1,051,560
Net cash provided by financing
activities................. 108,762,869 5,380,872 2,510,304 117,491,256
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 93,413,908 (140,489) (23,568) 93,479,584
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................. 65,676 206,165 229,733 --
CASH AND CASH EQUIVALENTS AT END OF
YEAR.............................. $ 93,479,584 $ 65,676 $ 206,165 $ 93,479,584
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Conversion of debt to common stock
(Note 6)........................ $ 1,599,965 $ -- $ -- $ 1,599,965
Conversion of accrued interest to
common stock (Note 6)........... $ 67,958 $ -- $ -- $ 67,958
Conversion of notes payable to
stockholders and related accrued
interest to common stock (Note
6).............................. $ 417,824 $ -- $ -- $ 417,824
Issuance of common stock in
payment of consulting fees (Note
17)............................. $ 55,000 $ -- $ -- $ 55,000
Deferred compensation related to
stock options granted........... $ 768,000 $ -- $ -- $ 768,000
Capital lease obligations
incurred........................ $ 259,224 $ -- $ -- $ 259,224
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995 and SEPTEMBER 30, 1994
1. ORGANIZATION
Inter(Bullet)Act Systems, Incorporated and Subsidiary (together, the
"Company") develops, owns and operates proprietary electronic marketing systems
("IPN") that are designed to give consumer products manufacturers (the
"Manufacturers") and retailers the ability to influence the purchasing behavior
of consumers moments before shopping begins and to track and analyze individual
consumer purchasing behavior on an ongoing basis. The Company's current
commercial product offering utilizes interactive "touch-screen" terminals inside
the entrance of retail supermarkets that issue individually targeted, and
immediately usable, coupons and other promotional incentives based on each
consumer's cumulative purchasing history. Since its formation in 1993, the
Company has focused its system development and commercialization efforts
primarily in the retail supermarket industry. Although it has been tested in
commercial and noncommercial environments, the IPN is in the early stages of
implementation and is subject to the risks inherent in the commercialization of
new products. The Company has limited experience in installing and operating
substantial numbers of IPN terminals and has encountered technical
implementation problems as it installs IPN terminals on a greater scale, which
have delayed a substantial number of the Company's scheduled IPN installations.
There can be no assurance that these or other problems associated with new
product commercialization will not continue to occur. As the Company continues
to install terminals on a greater scale, there are likely to be other technical
implementation problems, some of which may be material. The continuing
occurrence of difficulities in installing and operating a large number of
terminals could have a material adverse effect on the Company's prospects,
operating results and financial condition.
The Company was incorporated on February 25, 1993 and issued common stock
to stockholders of CSI (Note 9) on April 14, 1993 and to fifteen additional
stockholders on April 16, 1993. Activities from the date of inception to
September 28, 1996 have been directed primarily to raising capital, developing
the software and cabinetry for placement of interactive terminals and network
equipment in stores, test marketing the service, advertising and promoting the
services offered and performing administrative functions.
From inception to September 28, 1996, the Company has had minimal revenues
and there is no assurance that the product which has been developed will achieve
success in the marketplace. The success of future operations will be dependent
primarily upon the acceptance of the Company's flagship product. The Company may
require additional capital subsequent to September 30, 1997 to fund its planned
expansion or to address liquidity needs caused by shortfalls in revenue. If
additional funds are raised through debt financing, such financing will increase
the financial leverage of the Company and earnings would be reduced by the
associated interest expense. Furthermore, if the product gains market
acceptance, there is no assurance that the Company will generate sufficient
revenues to recognize a profit or that other products will not be developed by
other companies that will render the Company's product obsolete.
Since inception, the Company has incurred recurring losses and experienced
negative operating cash flow. Through July 1996, the Company relied primarily on
equity financing to fund its operations. In October 1995, the Company approved
an offering of its common stock at $5.50 per share. In connection with this
offering, the Company issued warrants to the investors in the offering to
purchase an aggregate of 323,217 additional common shares. Investors in this
offering have purchased common shares for net proceeds in the amount of
approximately $18.1 million. Holders of convertible notes in the principal
amount of approximately $1,600,000 converted both principal and one-half of
accrued interest ($67,958) to shares of the Company's common stock and the
Company has revised the payment terms of certain commitments (Note 17) and
exchanged notes payable to stockholders (Note 6) and accrued interest thereon
for equity in the amount of $417,824.
In August 1996, the Company, through a private placement offering
memorandum ("Private Placement"), issued 142,000 units, each consisting of a 14%
senior discount note due 2003 with a principal amount at maturity of $1,000 and
one warrant to purchase 7.334 shares of common stock of the Company at $.01 per
share. However, if the Company has not completed an initial public offering by
September 30, 1997, each warrant that has not been exercised will entitle the
respective holder to purchase 9.429 shares of the Company's common stock at $.01
F-8
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. ORGANIZATION -- Continued
per share. Net proceeds of this offering were approximately $94.7 million
(before deducting costs of the offering of approximately $3.8 million). In the
opinion of the Company's management, the impact of the equity and debt raised
and the debt and commitments restructured will provide the Company with the
liquidity and capital resources to fund its operations through the end of fiscal
1997. However, the Company may require additional capital prior to December 31,
1997 to fund its planned expansion and to address any liquidity needs caused by
shortfalls in revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the consolidated accounts of the Company
and its wholly-owned subsidiary, Network Licensing, Inc. ("NLI"). All
significant intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company's 1996 and 1995 fiscal years ended on the Saturday closest to
September 30. Fiscal 1994 ended on September 30, 1994. The financial statements
for fiscal 1996, 1995 and 1994 each contain activity for fifty-two weeks.
Revenue Recognition
The Company recognizes revenue as coupons are redeemed at terminals. Brand
manufacturers pay a fee to the Company for each redemption. The fee is composed
of 1) a retailer processing fee, 2) a redemption fee and 3) the face value of
the coupon. The Company in turn passes through both the retailer processing fee,
which is included in direct operating expenses, and the face value of the coupon
to the retailer, while retaining the redemption fee. The Company records as net
sales the redemption fee and the retailer processing fee paid by the
manufacturers. Certain manufacturers pay the Company in advance for a portion of
anticipated redemptions, and these amounts are recorded as deferred revenue
until earned through redemptions.
Cash and Cash Equivalents
Cash equivalents, which at September 28, 1996 were primarily comprised of
money market funds and overnight repurchase agreements, are stated at cost,
which approximates market value. Highly liquid investments with maturities of
three months or less are considered cash equivalents for purposes of the balance
sheets and statements of cash flows.
Accounts Receivable -- Allowance Method
The Company uses the allowance method to account for uncollectable accounts
receivable. The accounts receivable of the Company at September 28, 1996 and
September 30, 1995 consist of receivables accumulated during the test marketing
stage of the enterprise.
Product Equipment in Process of Manufacturing
The Company's product equipment in process of manufacturing consists of
components and spare parts used in the manufacturing of interactive terminals
and network equipment, and the assembly of store servers. Upon installation of
interactive terminals and network equipment, and store servers, accumulated
incurred costs (consisting of direct materials, direct labor and overhead
directly attributable to the manufacturing of these items) are capitalized as
product equipment and depreciated accordingly. Spare parts are expensed to
repairs and maintenance as they are used. Subsequent to the sale of the
Company's product equipment manufacturing function (Note 11), the Company will
purchase finished product equipment from an unrelated third party. The Company
will continue to own certain components and spare parts for use in repairs and
maintenance.
F-9
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are determined using the straight-line method and are based on estimated useful
lives of assets and improvements of five to ten years for both book and income
tax purposes. Depreciation and amortization expense for fiscal years 1996, 1995
and 1994 and for the period from February 25, 1993 (Date of Inception) to
September 28, 1996 was $785,482, $179,175, $22,500 and $989,802, respectively.
Research and Development Costs
Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for fiscal 1996, 1995
and 1994, and for the period from February 25, 1993 (Date of Inception) to
September 28, 1996 were $799,645, $622,862, $350,130 and $2,384,108 (Note 9),
respectively.
Bond Issuance Costs
Bond issuance costs incurred by the Company are costs associated with the
Private Placement (Note 1) and are being amortized over seven years using the
effective interest method. Amortization of these costs is included in interest
expense and was $67,422 for fiscal 1996.
Organization Costs
Organization costs, principally legal fees, have been deferred and are
being amortized over five years using the straight-line method. Amortization
expense for fiscal 1996, 1995 and 1994, and for the period from February 25,
1993 (Date of Inception) to September 28, 1996 was $7,858, $7,858, $7,858 and
$28,158, respectively.
Patents, Licenses and Trademarks
Legal fees incurred for the improvement and protection of the Company's
patents, licenses and trademarks have been deferred and are being amortized over
fifteen years or the remaining life of the patent, license or trademark,
whichever is less, using the straight-line method. Amortization expense for
fiscal 1996, 1995 and 1994, and for the period from February 25, 1993 (Date of
Inception) to September 28, 1996 was $21,230, $1,414, $1,246 and $24,202,
respectively.
Net Loss Per Share
Net loss per share was computed by dividing net loss by the weighted
average number of common shares outstanding during the respective years. Fully
diluted net loss per common share has not been presented since the inclusion of
the impact of stock options and warrants outstanding (Notes 8, 10, 14, 15 and
16) would be antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-
F-10
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
lived assets and certain identifiable intangibles to be disposed of. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1995, although earlier application is encouraged. It is the
Company's policy to account for these assets at the lower of amortized cost or
fair value. As part of an ongoing review of the valuation and amortization of
such assets, management assesses the carrying value of such assets on a
continuing basis. If this review indicates that the assets will not be
recoverable as determined by a nondiscounted cash flow analysis over the
remaining amortization period, the carrying value of these assets would be
reduced to their estimated fair market values. The Company does not expect the
impact of the adoption of this pronouncement to be material.
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages entities to adopt a fair value based
method of accounting for stock compensation plans. However, SFAS No. 123 also
permits the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires pro forma disclosures of net income (loss) and
net income (loss) per common share in the notes to consolidated financial
statements. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995,
though they may be adopted on issuance. The disclosure requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost. The Company will adopt the
provisions of the SFAS No. 123 in fiscal 1997 by providing the pro forma
disclosure.
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of September 28, 1996
and September 30, 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
PRODUCT EQUIPMENT:
Store interactive terminals and network equipment.................... $5,293,904 $ 652,032
Store interactive terminals and network equipment components......... 1,802,462 353,866
7,096,366 1,005,898
Less: Accumulated depreciation....................................... (753,295) (123,795)
6,343,071 882,103
OFFICE AND COMPUTER EQUIPMENT, VEHICLES AND LEASEHOLD IMPROVEMENTS:
Office equipment..................................................... 78,016 42,432
Computer equipment................................................... 1,106,705 352,225
Furniture and fixtures............................................... 175,854 115,536
Vehicles............................................................. 278,559 --
Leasehold improvements............................................... 13,084 10,089
1,652,218 520,282
</TABLE>
F-11
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
3. PROPERTY AND EQUIPMENT, NET -- Continued
<TABLE>
<S> <C> <C>
Less: Accumulated depreciation and amortization...................... (204,474) (77,243)
1,447,744 443,039
PRODUCT EQUIPMENT IN PROCESS OF MANUFACTURING.......................... 2,067,296 451,770
$9,858,111 $1,776,912
</TABLE>
4. NOTES RECEIVABLE FROM STOCKHOLDERS
The Company had notes receivable from three stockholders in the amount of
$70,474, bearing interest at 4.5%. Both principal and interest were due in full
on July 15, 1996 and, accordingly, are classified as current assets in the
accompanying consolidated balance sheet at September 30, 1995. These notes were
repaid during fiscal 1996.
5. NOTES PAYABLE TO RELATED PARTY
At September 30, 1995, the Company had two notes payable to a company which
is significantly owned by stockholders of the Company, each in the amount of
$100,000 and bearing interest at 15%. Both notes were repaid during fiscal 1996.
6. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consists of the following:
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
<S> <C> <C>
Notes payable to related parties relating to agreement with Clearing
Systems, Inc. (Note 17)............................................ $ 236,500 $ --
Notes payable to stockholders bearing interest at 8.5%, convertible
to common stock at conversion price of $5.00 per share, interest
accruing monthly, maturing on February 1, 1998 (a)................. -- 1,600,000
Notes payable to stockholders bearing interest at 4.5%, both
principal and interest due on July 15, 1996 (b).................... -- 70,474
Notes payable to stockholders bearing interest at prime (6.75% at
September 30, 1995) plus 2%, principal and interest due in eight
equal quarterly installment beginning on July 1, 1997 and due in
full on March 1, 1999 (c).......................................... -- 371,130
236,500 2,041,604
Less: Current portion................................................ -- 70,474
$ 236,500 $ 1,971,130
</TABLE>
(a) Effective February 1, 1995, the Company executed revised and amended
convertible notes payable to stockholders of $1,600,000 which extended the
terms of notes payable which were due on February 1, 1995 and May 1, 1995,
respectively, to February 1, 1998, with interest at 8.5% to be paid annually
beginning on February 1, 1996. In February 1996, the Company secured
agreements for holders of the convertible notes in the aggregate principal
amount of $1,600,000 (less cash paid in the amount of $35 for notes not
converted to common stock due to fractional shares) to convert their
principal balances to shares of the Company's common stock at $5.00 per
share, to convert fifty percent of the accrued interest thereon ($67,958) to
shares of the Company's common stock at $5.50 per share and to receive the
remaining fifty percent of the accrued interest thereon in cash.
(b) These notes were payable to certain stockholders of the Company for amounts
advanced to the Company on behalf of these other stockholders in order for
them to purchase common stock. These notes and the related amounts due from
other stockholders were repaid during fiscal 1996.
F-12
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. NOTES PAYABLE TO STOCKHOLDERS -- Continued
(c) Effective May 31, 1996, notes payable to stockholders with a principal
amount of $371,130 and related accrued interest of $46,694 were exchanged
for 75,968 shares of the Company's common stock at $5.50 per share.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
<S> <C> <C>
Bonds payable (a).................................................... $ 72,750,759 $ --
Capital lease obligations (b)........................................ 239,567 --
72,990,326 --
Less: Current portion of long-term debt.............................. 67,709 --
$ 72,922,617 $ --
</TABLE>
(a) In the Private Placement (Note 1), the Company issued 142,000 units, each
consisting of a 14% senior discount note due 2003 with a principal amount at
maturity of $1,000 and one warrant to purchase 7.334 shares of common stock
of the Company at $.01 per share. However, if the Company has not completed
an initial public offering by September 30, 1997, each warrant that has not
been exercised will entitle the respective holder to purchase 9.429 shares
of the Company's common stock at $.01 per share. The proceeds of $94.7
million were allocated by the Company to the value of the warrants ($24.5
million -- Note 8) and to the discounted notes ($70.2 million).
No cash interest will be payable on the notes prior to February 1, 2000. The
notes will accrue cash interest at a rate of 14% per annum, commencing on
August 1, 1999, payable semi-annually on February 1 and August 1 of each
year commencing on February 1, 2000. The debt discount related to the
difference between the face value of the notes ($142 million) and the
proceeds of the Private Placement ($94.7 million) is being accreted over the
period to February 1, 2000. The debt discount related to the portion of the
Private Placement allocated to the value of the warrants ($24.5 million) is
being accreted over the full term of the notes to August 1, 2003. Interest
expense on the notes, including the accretion of debt discount, is being
recognized at a constant rate of interest over the life of the notes.
Discount accretion of $2,558,739 has been recognized as interest expense
during the year ended September 28, 1996.
The Company had agreed to use its best efforts to have a registration
statement with respect to the senior discount notes issued as part of the
Private Placement declared effective by the Securities and Exchange
Commission as promptly as practicable after the filing thereof. Since no
registration statement had been declared effective within 120 days of the
issue date of the Private Placement, approximately $1,000 of cash interest
is being accrued daily and will be payable on February 1, 1997 with respect
to the senior discount notes.
(b) The Company has leased certain vehicles and other assets under capital
leases. The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of the net
minimum lease payments as of September 28, 1996:
<TABLE>
<S> <C>
Fiscal Year:
1997....................................................................... $ 91,849
1998....................................................................... 87,674
1999....................................................................... 58,406
2000....................................................................... 54,231
2001....................................................................... 8,861
Total minimum lease payments................................................. 301,021
Less: Executory costs........................................................ 18,309
Net minimum lease payments................................................... 282,712
Less: Amount representing interest........................................... 43,145
Present value of net minimum lease payments.................................. $239,567
</TABLE>
8. COMMON STOCK PURCHASE WARRANTS
Each warrant issued in the Private Placement (Notes 1 and 7(a)), when
exercisable, will entitle the holder thereof to purchase 7.334 shares of common
stock at an exercise price of $.01 per share; provided, however, that if by
September 30, 1997, the Company has not completed an initial public offering,
each warrant that has not theretofore been exercised will thereafter entitle the
holder thereof to purchase 9.429 shares of common stock.
F-13
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
8. COMMON STOCK PURCHASE WARRANTS -- Continued
These warrants will be exercisable on or after the earliest to occur of (i)
August 1, 2000, (ii) a change of control, (iii) (a) 90 days after the closing of
an initial public offering or (b) upon the closing of the initial public
offering but only in respect of warrants required to be exercised to permit the
holders thereof to sell shares in the initial public offering, (iv) a
consolidation, merger or purchase of assets involving the Company or any of its
subsidiaries that results in the common stock of the Company becoming subject to
registration, (v) an extraordinary cash dividend or (vi) the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company. The number of shares of the common stock for which a warrant is
exercisable is subject to adjustment upon the occurrence of certain events.
Holders of warrants (or common stock issued in respect thereof) will be
entitled to include the common stock issued or issuable upon the exercise of the
warrants (the "Underlying Common Stock") in a registration statement whenever
the Company or any shareholder proposes to effect a public equity offering with
respect to capital stock of the Company (other than redeemable stock), except to
the extent the managing underwriter for such offering determines that such
registration and sale would materially adversely affect the price, timing or
distribution of the shares to be sold in such public equity offering. Following
the occurrence of an initial public offering, holders of warrants and Underlying
Common Stock representing not less than 25% of all the outstanding warrants and
Underlying Common Stock, taken together, will have the right, on one occasion,
to require the Company to register such securities pursuant to an effective
registration statement.
In the event that a public market does not exist for the common stock on
August 1, 2001 (the "Triggering Date"), the Company will be required, at its
option, to (i) make an offer to purchase, for cash at fair market value, all
outstanding warrants and underlying common stock issued or (ii) take all
necessary action to cause all of the Underlying Common Stock issued or issuable
to be publicly registered within 120 days of the Triggering Date.
Management of the Company believes, based on independent third party
valuations, that the value of the Company's common stock at the date of the
issuance of these warrants was $23.50 per share and, accordingly, has allocated
$24,463,760 of the proceeds of the Private Placement to the value of these
warrants based on 142,000 units consisting of warrants to purchase 7.334 shares
of common stock per unit with an exercise price of $.01 per share. This amount
is classified between liabilities and stockholders' equity (deficit) in the
accompanying consolidated balance sheet as of September 28, 1996. The equal,
offsetting amount has been included as additional debt discount subject to
accretion as described in Note 7(a).
9. ACQUISITION
On April 14, 1993, Interactive Networks Incorporated ("INI") entered into
an agreement with Clearing Systems, Inc. ("CSI"), a Delaware corporation,
whereby 816,902 shares of INI stock were exchanged for certain assets and
assumption of certain liabilities of CSI. The assets acquired by INI included
the following:
<TABLE>
<S> <C>
Cash......................................................................... $ 449
Deposit on cabinetry for interactive terminals and network equipment......... 14,500
Prepayment of lease on facilities............................................ 30,000
Communication equipmen....................................................... 8,060
Accounts receivable.......................................................... 95
Purchased technology, research and development............................... 611,471
664,575
Liabilities of CSI that were assumed by INI are as follows:
Demand note payable to members of the Investors Group...................... 610,000
Accounts payable........................................................... 40,000
Note payable -- communication equipment.................................... 4,575
</TABLE>
F-14
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
9. ACQUISITION -- Continued
<TABLE>
<S> <C>
654,575
Consideration for the 816,902 shares of common stock issued.................. $ 10,000
</TABLE>
The market value of the acquired technology, research and development of
$611,471 was expensed during the period ending September 30, 1993. The Company
has incurred additional research and development costs redesigning and refining
the technology and systems acquired from CSI, as indicated in Note 2.
10. DEFERRED COMPENSATION
In September 1996, the Company issued options to purchase 48,000 shares of
common stock at an exercise price of $7.50 per share under the 1996 Nonqualified
Stock Option Plan (Note 15), which was an exercise price below the fair market
value of the Company's common stock on the date of grant. Accordingly, the
Company has recorded a deferred compensation charge of $768,000, which will be
amortized ratably over the five year vesting period of the related options.
Through September 28, 1996, $6,400 of this amount has been amortized.
11. SALE AND OUTSOURCING OF MANUFACTURING FUNCTION
On September 9, 1996, the Company sold its manufacturing operations to
Coleman Resources Corporation ("Coleman Resources") for approximately $2.6
million and entered into a supply agreement whereby Coleman Resources is to
fulfill the Company's anticipated requirements for terminals for the next three
years with fixed pricing for the first 5,000 terminals. No material gain or loss
was realized in this transaction.
12. LITIGATION SETTLEMENT
During the year ended September 28, 1996, the Company settled a lawsuit
which was commenced in July 1996. This settlement requires the Company to pay an
aggregate of $400,000 by January 1997, $350,000 of which was paid on August 7,
1996. The remaining $50,000 is reflected as a note payable in the accompanying
consolidated balance sheet as of September 28, 1996. The cost of the settlement
has been charged to operations during the year ended September 28, 1996.
13. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the use of the "asset and
liability method" of accounting for income taxes. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences relating primarily to utilization of net operating loss
("NOL") carryforwards of approximately $18.2 million resulted in a deferred tax
asset of approximately $7.5 million. The deferred tax asset has been reduced by
an equal, offsetting valuation allowance of approximately $7.5 million due to
both the uncertainty of future income and limitations on the use of the NOL
carryforwards due to changes in control resulting from equity transactions.
Accordingly, no net deferred tax asset is recorded at September 28, 1996 or
September 30, 1995. The net operating loss carryforwards, as well as research
and development credits, which can be applied against future taxable income and
income taxes, expire in years through 2011.
14. 1994 STOCK COMPENSATION PLAN
In April 1994, the Company adopted the 1994 Stock Compensation Plan (the
"Plan"), which authorizes a committee named by the Board of Directors to grant
options to purchase up to 200,000 shares of the Company's common stock to
officers, founders, key employees and directors of the Company at exercise
prices not less than the fair market value of the stock at the date of grant.
During fiscal 1995, the number of shares eligible to be
F-15
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
14. 1994 STOCK COMPENSATION PLAN -- Continued
granted was increased to 430,000. Options granted may be either qualified
incentive stock options under the Internal Revenue Code of 1986, as amended, or
nonqualified stock options. The Plan will expire on April 19, 2004. An aggregate
of 125,900 shares remain available for future grant under this plan.
In April 1994, the Company granted qualified options to purchase 25,000
shares of the Company's common stock at an exercise price of $1.86 per share
(which, in the opinion of management, represented the fair market value of such
stock at the date of grant) to an officer of the Company. These options vest
over a five year period beginning with the end of this officer's second year of
employment with the Company (August 1995). At September 28, 1996, none of these
options were exercised and 12,500 were exercisable.
In August 1994, the Company granted nonqualified stock options to purchase
a total of 18,000 shares of common stock at $5.00 per share. Of these options,
16,000 were granted to nonemployee directors of the Company and 2,000 were
granted to employee directors of the Company. At September 28, 1996, none of
these options were exercised and all were exercisable.
During the year ended September 30, 1995, the Company granted qualified
options to purchase a total of 45,000 shares of common stock, of which options
to purchase 15,000 shares were canceled in February 1996 concurrent with the
issuance of 7,500 nonqualified stock options, at $5.00 per share. These options
were granted to certain officers of the Company. At September 28, 1996, none of
the remaining options were exercised and 6,000 were exercisable.
Additionally, during the year ended September 30, 1995, the Company granted
qualified options to purchase a total of 96,000 shares of common stock, of which
options to purchase 28,000 shares were canceled. The exercise price for these
options (net of the 28,000 options canceled) is $5.00 for 33,000 options and
$5.50 for 35,000 options. These options were granted to certain key employees of
the Company. At September 28, 1996, none of these options were exercised and
6,600 were exercisable.
In March 1995, the Company granted nonqualified stock options to purchase a
total of 60,600 shares of common stock at $5.00 per share to certain nonemployee
directors of the Company. At September 28, 1996, none of these options were
exercised and all were exercisable.
In April 1995, the Company granted nonqualified stock options to purchase a
total of 30,000 shares of common stock at $5.00 per share. These options were
granted to certain consultants of the Company. At September 28, 1996, none of
these options were exercised and all were exercisable.
During the year ended September 28, 1996, the Company granted qualified
options to purchase a total of 65,000 shares of common stock at $5.50 per share.
These options were granted to certain employees of the Company, as well as an
employee of Vanguard. At September 28, 1996, none of these shares were exercised
and 12,000 were exercisable.
Management of the Company believes, based on independent third party
valuations, that the options issued under the 1994 Stock Compensation Plan were
issued at exercise prices which represented the fair market value of the
Company's common stock at the dates of grant.
15. 1996 NONQUALIFIED STOCK OPTION PLAN
On June 14, 1996, the Company adopted the 1996 Nonqualified Stock Option
Plan, which provides for the issuance of shares of common stock to key
employees, consultants and directors pursuant to nonqualified stock options. All
options must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of common stock that may be issued pursuant to the
plan may not exceed 600,000 shares of common stock, subject to adjustment on the
occurrence of certain events affecting the Company's capitalization. As of
September 28, 1996, 496,000 options had been granted at an exercise price of
$5.50 per share and 48,000 options had been granted at an exercise price of
$7.50 per share. Management of the Company believes, based
F-16
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
15. 1996 NONQUALIFIED STOCK OPTION PLAN -- Continued
on independent third party valuations, that the options granted at $5.50 per
share were granted at fair market value and that the options granted at $7.50
per share were granted when the fair market value of common stock was $23.50 per
share, resulting in a deferred compensation charge (Note 10). These options vest
annually over five years from the date of grant with the exception of 129,400
options, which became immediately exercisable.
16. ISSUANCE OF WARRANTS WITH SHARES
In May 1995, the Company issued 400,000 shares of common stock to an
investor at $5 per share. In addition, with the issuance of these shares, the
Company also issued to the same investor a warrant (the "Vanguard Warrant") to
purchase up to an additional 400,000 shares of the Company's common stock at the
agreed-upon fair market value of such stock at the time of exercise. This
warrant agreement contains an anti-dilution clause which provides for
adjustments to the number of shares eligible to be purchased to maintain the
number of shares at approximately 10.3% of the Company's outstanding common
stock. The warrant expires on the earlier of (i) May 5, 2005 or (ii) the
consummation of an initial public offering by the Company. The terms of the
Vanguard Warrant were restructured immediately prior to the consummation of the
private placement transaction (Note 1) to provide that Vanguard has the right to
buy 900,113 shares at any time before May 5, 2005 at $23.50 per share, which was
in the opinion of management, the fair market value of the related common stock
at the date of restructuring. The restructured Vanguard Warrant also provides
that Vanguard may pay the exercise price either in cash or, if the fair market
value of the common stock at the time of exercise is greater than the exercise
price, by surrendering any unexercised portion of the Vanguard Warrant and
receiving the number of shares equal to (i) the excess of fair market value per
share at the time of exercise over the exercise price per share multiplied by
(ii) the number of shares surrendered.
17. COMMITMENTS AND CONTINGENCIES
Agreement with CSI
Pursuant to an agreement with CSI, the Company was required to pay a
consulting fee to CSI of $375,000 in the form of an 8.5% convertible note
payable. Of this amount, the Company has paid $138,500 and $236,500, which is
convertible to common stock at $5.50 per share, is due December 28, 1998. The
$375,000 consulting fee is included in selling, general and administrative
expenses for the year ended September 28, 1996.
Consulting and Management Services Agreements with Vanguard Cellular Systems,
Inc. ("Vanguard")
The Company entered into a consulting agreement with Vanguard pursuant to
which an employee of Vanguard began to serve as Chief Operating Officer of the
Company and Vanguard provided other consulting services requested by the
Company. Pursuant to the agreement, the Company was to reimburse Vanguard for
its costs of providing such services and had recognized expense of approximately
$52,000 during fiscal 1996 until the consulting agreement was terminated and
replaced by a management services agreement dated June 17, 1996. The management
services agreement, which has a term expiring on June 17, 1998, provides that
Vanguard will be entitled to receive 10,000 shares of common stock annually
during the term of the agreement in return for its other consulting services to
the Company. In June 1996, 10,000 shares were issued to Vanguard pursuant to
this agreement and were recorded as a prepaid expense at the fair market value
of $5.50 per share at the date of issuance.
Commitments for Technology
The Company has commitments for use of technology for which it has agreed
to pay aggregated minimum fees of $23,000 per month through August 1, 1996 and
subsequently increasing to $33,000 per month. Future commitments are expected to
be paid at least through November 2003 and are subject to increases based upon
the amount of revenue generated from this technology. Aggregated technology
commitments charged to operations for fiscal 1996, 1995 and 1994 and for the
period from February 23, 1993 (Date of Inception) to September
F-17
<PAGE>
INTER(Bullet)ACT SYSTEMS, INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
17. COMMITMENTS AND CONTINGENCIES -- Continued
28, 1996 were $296,000, $265,465, $200,000 and $861,465, respectively, and are
included in selling, general and administrative expenses.
Lease Commitments
The Company is also obligated under noncancelable operating leases expiring
through fiscal year 2000, covering premises and equipment with minimum rentals
of:
<TABLE>
<S> <C>
Fiscal Year:
1997....................................................................... $264,644
1998....................................................................... 262,124
1999....................................................................... 274,215
2000....................................................................... 69,401
</TABLE>
Rent expense of $221,143, $218,243, $93,817 and $573,492 was recognized for
fiscal 1996, 1995 and 1994 and for the period from February 25, 1993 (Date of
Inception) to September 28, 1996, respectively, and is included in selling,
general and administrative expenses.
18. FORFEITURE OF SHARES
In September 1994, a stockholder agreed to forfeit 10,000 shares of the
Company's common stock for failure to fulfill an obligation to invest additional
capital in the Company. The forfeiture did not reduce the amount of the
stockholder's financial investment in the Company at that time, but did reduce
the number of shares issued to this individual. These shares were subsequently
reissued to two other individuals at $5.00 per share. In December 1994, the same
stockholder agreed to forfeit an additional 18,000 shares of the Company's
common stock for failure to fulfill an obligation to invest additional capital
in the Company. Upon this forfeiture, the investor's equity in the Company was
reduced in the total amount of $140,000, representing the value of 28,000 shares
of common stock at $5.00 per share.
F-18
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY INTER(BULLET)ACT OR ANY OF THE
INITIAL PURCHASERS. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF INTER(BULLET)ACT SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
UNTIL , 19 , ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES
MAY BE REQUIRED TO DELIVER A PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Risk Factors.......................................... 9
The Exchange Offer.................................... 15
Use of Proceeds....................................... 20
Capitalization........................................ 21
Selected Consolidated Financial Data.................. 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 23
Business.............................................. 26
Management............................................ 42
Principal Shareholders................................ 47
Certain Transactions.................................. 49
Description of New Notes.............................. 52
Certain Federal Income Tax Considerations............. 74
Plan of Distribution.................................. 78
Legal Opinions........................................ 78
Independent Auditors.................................. 78
Index to Financial Statements......................... F-1
</TABLE>
INTER(BULLET)ACT SYSTEMS, INCORPORATED
OFFER TO EXCHANGE ITS 14% SENIOR DISCOUNT NOTES DUE 2003 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL 14%
SENIOR DISCOUNT NOTES DUE 2003
(INTERACT LOGO)
PROSPECTUS
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VIII of the Company's Bylaws provides:
"ARTICLE VIII
INDEMNIFICATION
1. EXTENT. In addition to the indemnification otherwise provided by law,
the corporation shall indemnify and hold harmless its directors and Indemnified
Officers (as hereinafter defined) against liability and expenses in any
proceeding, including reasonable attorneys' fees, arising out of their status as
directors or officers or their activities in any of such capacities or in any
capacity in which any of them is or was serving, at the corporation's request,
in another corporation, partnership, joint venture, trust or other enterprise,
and the corporation shall indemnify and hold harmless those directors and
officers who are deemed to be fiduciaries of the corporation's present and
future employee pension and welfare benefit plans as defined under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA fiduciaries"),
against liability and expenses in any proceeding including reasonable attorneys'
fees, arising out of their status or activities as ERISA fiduciaries; provided,
however, that the corporation shall not indemnify a director or Indemnified
Officer against liability or litigation expense that he may incur on account of
his activities that at the time taken were not in good faith, were known or
reasonably should have been known by him to be clearly in conflict with the best
interests of the corporation, or that he had reason to believe was unlawful, and
the corporation shall not indemnify an ERISA fiduciary against any liability or
litigation expense that he may incur on account of his activities that at the
time taken were known or reasonably should have been known by him to be clearly
in conflict with the best interests of the employee benefit plan to which the
activities relate. The corporation shall also indemnify the director,
Indemnified Officer or ERISA fiduciary for reasonable costs, expenses and
attorneys' fees in connection with the enforcement of rights to indemnification
granted herein, if it is determined in accordance with Section 2 of this Article
that the director, officer or ERISA fiduciary is entitled to indemnification
hereunder.
2. DETERMINATION. Any indemnification under Section 1 of this Article shall
be paid by the corporation in any specific case only after a determination that
the director, Indemnified Officer or ERISA fiduciary did not act in a manner, at
the time the activities were taken, that was known or reasonably should have
been known by him to be clearly in conflict with the best interests of the
corporation, or the employee benefit plan to which the activities relate, as the
case may be. Such determination shall be made (a) by the affirmative vote of a
majority (but not less than two) of directors who are or were not parties to
such action, suit or proceeding or against whom any such claim is asserted
("disinterested directors") even though less than a quorum, or (b) if a majority
(but not less than two) of disinterested directors so direct, by independent
legal counsel in a written opinion, or (c) by the vote of the shares
representing a majority of the outstanding votes entitled to be cast other than
those owned or controlled by directors or officers who were parties to such
action, suit or proceeding or against whom such claim is asserted, or by a
unanimous vote of all the votes entitled to be cast, or (d) by a court of
competent jurisdiction.
3. ADVANCED EXPENSES. Expenses incurred by a director, Indemnified Officer
or ERISA fiduciary in defending a civil or criminal claim, action, suit or
proceeding may, upon approval of a majority (but not less than two) of the
disinterested directors, even though less than a quorum, or, if there are less
than two disinterested directors, upon unanimous approval of the Board of
Directors, be paid by the corporation in advance of the final disposition of
such claim, action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, Indemnified Officer or ERISA fiduciary to repay such
amount unless it shall ultimately be determined that he is entitled to be
indemnified against such expenses by the corporation.
4. CORPORATION. For purposes of this Article, references to directors of
the "corporation" shall be deemed to include directors, officers and ERISA
fiduciaries of Inter(Bullet)Act Systems, Incorporated, its subsidiaries, and all
constituent corporations absorbed into Inter(Bullet)Act Systems, Incorporated or
any of its subsidiaries by a consolidation or merger.
II-1
<PAGE>
5. INDEMNIFIED OFFICER. For purposes of the Article, "Indemnified Officer"
shall mean all executive officers of the corporation who are also directors of
the corporation, the Treasurer of the corporation and any other officer who is
designated by the Board of Directors as an Indemnified Officer.
6. RELIANCE AND CONSIDERATION. Any director, Indemnified Officer, or ERISA
fiduciary who at any time after the adoption of this Bylaw serves or has served
in any of the aforesaid capacities for or on behalf of the corporation shall be
deemed to be doing or to have done so in reliance upon, and as consideration
for, the right of indemnification provided herein. Such right shall inure to the
benefit of the legal representatives of any such person and shall not be
exclusive of any other rights to which such person may be entitled apart from
the provision of this Bylaw. No amendment, modification or repeal of this
Article VIII shall adversely affect the right of any director, Indemnified
Officer or ERISA fiduciary to indemnification hereunder with respect to any
activities occurring prior to the time of such amendment, modification or
repeal.
7. INSURANCE. The corporation may purchase and maintain insurance on behalf
of its directors, officers, employees and agents and those persons who were
serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent of, or in some other capacity in, another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article or otherwise. Any full or partial payment made by
an insurance company under any insurance policy covering any director, officer,
employee or agent made to or on behalf of a person entitled to indemnification
under this Article shall relieve the corporation of its liability for
indemnification provided for in this Article or otherwise to the extent of such
payment, and no insurer shall have a right of subrogation against the
corporation with respect to such payment."
The North Carolina General Statutes contain provisions prescribing the
extent to which directors and officers shall or may be indemnified. These
statutory provisions are set forth below:
CH. 55 N.C. BUSINESS CORPORATION ACT
PART 5. INDEMNIFICATION.
(SECTION MARK) 55-8-50. POLICY STATEMENT AND DEFINITIONS.
(a) It is the public policy of this State to enable corporations organized
under this Chapter to attract and maintain responsible, qualified directors,
officers, employees and agents, and, to that end, to permit corporations
organized under this Chapter to allocate the risk of personal liability of
directors, officers, employees and agents through indemnification and insurance
as authorized in this Part.
(b) Definitions in this Part:
(1) "Corporation" includes any domestic or foreign predecessor entity
of a corporation in a merger or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or
was serving at the corporation's request as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other
enterprise. A director is considered to be serving an employee benefit plan
at the corporation's request if his duties to the corporation also impose
duties on, or otherwise involve services by, him to the plan or to
participants in or beneficiaries of the plan. "Director" includes, unless
the context requires otherwise, the estate or personal representative of a
director.
(3) "Expenses" means expenses of every kind incurred in defending a
proceeding, including counsel fees.
(4) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a
proceeding.
(5) "Official capacity" means: (i) when used with respect to a
director, the office of director in a corporation; and (ii) when used with
respect to an individual other than a director, as contemplated in G.S.
55-8-56, the office in a corporation held by the officer or the employment
or agency relationship undertaken by the
II-2
<PAGE>
employee or agent on behalf of the corporation. "Official capacity" does
not include service for an other foreign or domestic corporation or any
partnership, joint venture, trust, employee benefit plan, or other
enterprise.
(6) "Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
(SECTION MARK) 55-8-51. AUTHORITY TO INDEMNIFY.
(a) Except as provided in subsection (d), a corporation may indemnify an
individual made a party to a proceeding because he is or was a director against
liability incurred in the proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed (i) in the case of conduct in his official
capacity with the corporation, that his conduct was in its best interests;
and (ii) in all other cases, that his conduct was at least not opposed to
its best interests; and
(3) In the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of
subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of no contest or its equivalent is not, of itself,
determinative that the director did not meet the standard of conduct described
in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation;
or
(2) In connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity,
in which he was adjudged liable on the basis that personal benefit was
improperly received by him.
(e) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation that is concluded without a
final adjudication on the issue of liability is limited to reasonable expenses
incurred in connection with the proceeding.
(f) The authorization, approval or favorable recommendation by the board of
directors of a corporation of indemnification, as permitted by this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such indemnification shall be void or voidable on
such ground.
(SECTION MARK) 55-8-52. MANDATORY INDEMNIFICATION.
Unless limited by its articles of incorporation, a corporation shall
indemnify a director who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he was a party because he is or was a
director of the corporation against reasonable expenses incurred by him in
connection with the proceeding.
(SECTION MARK) 55-8-53. ADVANCE FOR EXPENSES.
Expenses incurred by a director in defending a proceeding may be paid by
the corporation in advance of the final disposition of such proceeding as
authorized by the board of directors in the specific case or as authorized or
required under any provision in the articles of incorporation or bylaws or by
any applicable resolution or contract upon receipt of an undertaking by or on
behalf of the director to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation against such
expenses.
II-3
<PAGE>
(SECTION MARK) 55-8-54. COURT-ORDERED INDEMNIFICATION.
Unless a corporation's articles of incorporation provide otherwise, a
director of the corporation who is a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction. On receipt of an application, the court after giving any
notice the court considers necessary may order indemnification if it determines:
(1) The director is entitled to mandatory indemnification under G.S.
55-8-52, in which case the court shall also order the corporation to pay the
director's reasonable expenses incurred to obtain court-ordered indemnification;
or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the standard of
conduct set forth in G.S. 55-8-51 or was adjudged liable as described in G.S.
55-8-51(d), but if he was adjudged so liable his indemnification is limited to
reasonable expenses incurred.
(SECTION MARK) 55-8-55. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION.
(a) A corporation may not indemnify a director under G.S. 55-8-51 unless
authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard of conduct set forth in G.S. 55-8-51.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority
vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely
of two or more directors not at the time parties to the proceeding;
(3) By special legal counsel (i) selected by the board of directors or
its committee in the manner prescribed in subdivision (1) or (2); or (ii)
if a quorum of the board of directors cannot be obtained under subdivision
(1) and a committee cannot be designated under subdivision (2), selected by
majority vote of the full board of directors (in which selection directors
who are parties may participate); or
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not
be voted on the determination.
(c) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection
(b)(3) to select counsel.
(SECTION MARK) 55-8-56. INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS.
Unless a corporation's articles of incorporation provide otherwise:
(1) An officer of the corporation is entitled to mandatory indemnification
under G.S. 55-8-52, and is entitled to apply for court-ordered indemnification
under G.S. 55-8-54, in each case to the same extent as a director.
(2) The corporation may indemnify and advance expenses under this Part to
an officer, employee, or agent of the corporation to the same extent as to a
director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy, that may be provided by its articles of incorporation, bylaws, general
or specific action of its board of directors, or contract.
(SECTION MARK) 55-8-57. ADDITIONAL INDEMNIFICATION AND INSURANCE.
(a) In addition to and separate and apart from the indemnification provided
for in G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56, a corporation may in
its articles of incorporation or bylaws or by contract or resolution indemnify
or agree to indemnify any one or more of its directors, officers, employees, or
agents against liability and expenses in any proceeding (including without
limitation a proceeding brought by or on behalf of the corporation itself)
arising out of their status as such or their activities in any of the foregoing
capacities; provided, however,
II-4
<PAGE>
that a corporation may not indemnify or agree to indemnify a person against
liability or expenses he may incur on account of his activities which were at
the time taken known or believed by him to be clearly in conflict with the best
interests of the corporation. A corporation may likewise and to the same extent
indemnify or agree to indemnify any person who, at the request of the
corporation, is or was serving as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise or as a trustee or administrator under
an employee benefit plan. Any provision in any articles of incorporation, bylaw,
contract, or resolution permitted under this section may include provisions for
recovery from the corporation of reasonable costs, expenses, and attorneys' fees
in connection with the enforcement of rights to indemnification granted therein
and may further include provisions establishing reasonable procedures for
determining and enforcing the rights granted therein.
(b) The authorization, adoption, approval, or favorable recommendation by
the board of directors of a public corporation of any provision in any articles
of incorporation, bylaw, contract or resolution, as permitted in this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such articles of incorporation or bylaw provision
or contract or resolution shall be void or voidable on such grounds. The
authorization, adoption, approval, or favorable recommendation by the board of
directors of a nonpublic corporation of any provision in any articles of
incorporation, bylaw, contract or resolution, as permitted in this section,
which occurred prior to July 1, 1990, shall not be deemed an act or corporate
transaction in which a director has a conflict of interest, and no such articles
of incorporation, bylaw provision, contract or resolution shall be void or
voidable on such grounds. Except as permitted in G.S. 55-8-31, no such bylaw,
contract, or resolution not adopted, authorized, approved or ratified by
shareholders shall be effective as to claims made or liabilities asserted
against any director prior to its adoption, authorization, or approval by the
board of directors.
(c) A corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have power to indemnify him against the
same liability under any provision of this Chapter.
(SECTION MARK) 55-8-58. APPLICATION OF PART.
(a) If articles of incorporation limit indemnification or advance for
expenses, indemnification and advance for expenses are valid only to the extent
consistent with the articles.
(b) This Part does not limit a corporation's power to pay or reimburse
expenses incurred by a director in connection with his appearance as a witness
in a proceeding at a time when he has not been made a named defendant or
respondent to the proceeding.
(c) This Part shall not affect rights or liabilities arising out of acts or
omissions occurring before July 1, 1990.
ITEM 21. EXHIBITS.
The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
*1 Purchase Agreement dated July 30, 1996, between the Company and the Initial Purchasers.
*3 (a) Articles of Incorporation of the Company, with amendments, through June 12, 1996.
*3 (b) Bylaws of the Company, as amended, through June 12, 1996.
*4 (a) Specimen Certificate of the Company's Common Stock.
*4 (b) Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee, relating to $142,000,000
in principal amount of 14% Senior Discount Notes due 2003.
5 Opinion of Schell Bray Aycock Abel & Livingston, P.L.L.C. as to legality of securities.
8 Tax Opinion of Schell Bray Aycock Abel & Livingston, P.L.L.C.
*10 (a) Management Services Agreement dated June 17, 1996, between the Company and Vanguard Cellular Systems, Inc.
*10 (b) Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular Systems, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
*10 (c) Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard Cellular Systems, Inc.
<C> <S>
*10 (d) Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company and Vanguard Cellular
Systems, Inc.
*10 (e) Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion Investments, Inc.
*10 (f) Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular Systems, Inc.
*10 (g) Company's 1996 Nonqualified Stock Option Plan.
*10 (h) Form of Nonqualified Stock Option Agreement.
*10 (i) Company's 1994 Stock Compensation Plan.
*10 (j) Form of Incentive Stock Option Agreement.
*10 (k) Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating Corp.
*10 (l) Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as Warrant Agent.
*10 (m) Shareholders' Agreement dated April 16, 1993, between the Company and its shareholders.
*10 (n) Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and its shareholders.
*10 (o) Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and the Initial Purchasers.
*10 (p) Kiosk Agreement dated September 3, 1996 between the Company and Coleman Research Corporation.
*10 (q) Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy as Licensors, Michael
R. Jones as Licensee and Network Licensing, Inc. as Assignee.
*10 (r) Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing, Inc.
*10 (s) Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Registrant.
*10 (t) Settlement Agreement and Mutual General Release dated as of September 6, 1994 among Gerald R. Singer, Arthur J.
Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc. and the Registrant.
*10 (u) Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29, 1995 between Joseph F.
Stratton and the Registrant.
*10 (v) Agreement Regarding Licensing Matters dated as of January 22, 1996 among Michael R. Jones, Networking Licensing,
Inc. and the Registrant.
*10 (w) Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the Registrant.
*10 (x) Assignment dated as of July 23, 1996 from Networking Licensing, Inc. to the Registrant.
12 Calculation of deficiency of earnings available to cover fixed charges.
*21 List of Subsidiaries of the Company.
23 (a) Consent of Arthur Andersen LLP.
23 (b) Consent of Schell Bray Aycock Abel & Livingston P.L.L.C. is contained in its opinion included as Exhibit 5.
*24 Power of Attorney is contained on the signature page of this registration statement.
*25 Statement of Eligibility of Trustee.
*27 Financial Data Schedule.
99 (a) Form of Letter of Transmittal.
99 (b) Form of Notice of Guaranteed Delivery.
*99 (c) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99 (d) Form of Letter to Clients.
</TABLE>
* Previously filed.
II-6
<PAGE>
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
For purposes of determining any liability under the Securities Act, the
registrant will treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 403A and contained
in a form of prospectus filed by the registrant under rule 424(b)(1), or (4) or
497(h) under the Securities Act ((section mark)(section mark)230.424(b)(1), (4)
or 230.497(h)) as part of this registration statement as of the time the
Commission declared it effective.
For purposes of determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norwalk,
State of Connecticut, on October 30, 1996.
INTER(BULLET)ACT SYSTEMS, INCORPORATED
By: /s/ STEPHEN R. LEEOLOU
STEPHEN R. LEEOLOU, CHAIRMAN
OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ STEPHEN R. LEEOLOU Chairman of the Board of Directors, Chief December 10, 1996
Executive Officer and Treasurer
STEPHEN R. LEEOLOU
President, Chief Operating Officer and
Director
ARETAS E. STEARNS
/s/ RICHARD A. VINCHESI Vice President and Chief Financial December 10, 1996
Officer (principal accounting and
RICHARD A. VINCHESI principal financial officer)
/s/ * Vice Chairman of the Board of Directors December 10, 1996
WILLIAM F. PENWELL
/s/ * Director December 10, 1996
PAUL A. NASH
/s/ * Director December 10, 1996
ROBERT M. DEMICHELE
/s/ * Director December 10, 1996
WILLIAM P. EMERSON, JR.
/s/ * Director December 10, 1996
HAYNES G. GRIFFIN
/s/ * Director December 10, 1996
RICHARD P. LUDINGTON
/s/ * Director December 10, 1996
L. RICHARDSON PREYER, JR.
/s/ * Director December 10, 1996
BRIAN A. RICH
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ * Director December 10, 1996
STUART S. RICHARDSON
/s/ * Director December 10, 1996
ROBERT A. SILVERBERG
</TABLE>
* Stephen R. Leeolou, by signing his name hereto, does sign this document on
behalf of the person indicated above pursuant to a Power of Attorney duly
executed by such person and filed with the Securities and Exchange Commission.
<TABLE>
<C> <S> <C>
By:/s/ Stephen R. Leeolou
STEPHEN R. LEEOLOU,
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
<C> <S> <C>
*1 Purchase Agreement dated July 30, 1996, between the Company and the Initial Purchasers.
*3 (a) Articles of Incorporation of the Company, with amendments, through June 12, 1996.
*3 (b) Bylaws of the Company, as amended, through June 12, 1996.
*4 (a) Specimen Certificate of the Company's Common Stock.
*4 (b) Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee, relating to
$142,000,000 in principal amount of 14% Senior Discount Notes due 2003.
5 Opinion of Schell Bray Aycock Abel & Livingston, P.L.L.C. as to legality of securities.
8 Tax Opinion of Schell Bray Aycock Abel & Livingston, P.L.L.C.
*10 (a) Management Services Agreement dated June 17, 1996, between the Company and Vanguard Cellular
Systems, Inc.
*10 (b) Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular Systems, Inc.
*10 (c) Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard Cellular Systems,
Inc.
*10 (d) Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company and
Vanguard Cellular Systems, Inc.
*10 (e) Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion
Investments, Inc.
*10 (f) Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular Systems, Inc.
*10 (g) Company's 1996 Nonqualified Stock Option Plan.
*10 (h) Form of Nonqualified Stock Option Agreement.
*10 (i) Company's 1994 Stock Compensation Plan.
*10 (j) Form of Incentive Stock Option Agreement.
*10 (k) Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating Corp.
*10 (l) Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as Warrant
Agent.
*10 (m) Shareholders' Agreement dated April 16, 1993, between the Company and its shareholders.
*10 (n) Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and its
shareholders.
*10 (o) Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and the Initial
Purchasers.
*10 (p) Kiosk Agreement dated September 3, 1996 between the Company and Coleman Research Corporation.
*10 (q) Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy as
Licensors, Michael R. Jones as Licensee and Network Licensing, Inc. as Assignee.
*10 (r) Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing, Inc.
*10 (s) Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Registrant.
*10 (t) Settlement Agreement and Mutual General Release dated as of September 6, 1994 among Gerald R.
Singer, Arthur J. Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc. and the Registrant.
*10 (u) Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29, 1995
between Joseph F. Stratton and the Registrant.
*10 (v) Agreement Regarding Licensing Matters dated as of January 22, 1996 among Michael R. Jones,
Networking Licensing, Inc. and the Registrant.
*10 (w) Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the Registrant.
*10 (x) Assignment dated as of July 23, 1996 from Networking Licensing, Inc. to the Registrant.
12 Calculation of deficiency of earnings available to cover fixed charges.
*21 List of Subsidiaries of the Company.
23 (a) Consent of Arthur Andersen LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
23 (b) Consent of Schell Bray Aycock Abel & Livingston P.L.L.C. is contained in its opinion included as
Exhibit 5.
<C> <S> <C>
*24 Power of Attorney is contained on the signature page of this registration statement.
*25 Statement of Eligibility of Trustee.
*27 Financial Data Schedule.
99 (a) Form of Letter of Transmittal.
99 (b) Form of Notice of Guaranteed Delivery.
*99 (c) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99 (d) Form of Letter to Clients.
</TABLE>
* Previously filed.
<PAGE>
December 10, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Inter(Bullet)Act Systems, Incorporated
Registration Statement on Form S-4
Registration No. 333-12091
Gentlemen:
We have represented Inter(Bullet)Act Systems, Incorporated, a North
Carolina corporation (the "Corporation"), in connection with the proposed
offering to exchange $142,000,000 aggregate principal amount of the
Corporation's Senior Discount Notes due 2003 (the "New Notes") for an equal
principal amount of its outstanding Senior Discount Notes due 2003 (the "Old
Notes").
We have examined the Corporation's Articles of Incorporation, and all
amendments thereto, its Bylaws and such of its corporate records as we deemed
necessary for purposes of rendering this opinion, the Registration Statement
(Form S-4) and all amendments thereto relating to the offering referred to above
and filed with the Securities and Exchange Commission (the "Commission"),
including the Prospectus therein (the "Prospectus"), and the Indenture between
the Company and Fleet National Bank, as trustee (the "Indenture") included as an
exhibit thereto. For purposes of this opinion, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
certified, photostatic or conformed copies, and the authenticity of the
originals of such documents.
Based on the foregoing, we are of the following opinions:
(1) The Indenture has been duly authorized, executed and delivered and
constitutes a valid and legally binding instrument of the Corporation;
(2) The New Notes, when and if duly executed, authenticated and
delivered in accordance with the Indenture and issued against receipt of
the Old Notes, will be duly issued, valid and binding obligations of the
Corporation entitled to the benefits of the Indenture.
The opinions set forth above are subject to the following qualifications
and limitations:
(a) The enforceability of any obligation of the Corporation is subject
to applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium and similar laws affecting creditors' rights and
remedies generally and subject to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
(b) We express no opinion (i) as to, and assume compliance with, any
applicable, federal or state securities law (ii) as to any provision of the
Indenture purporting to relieve the Trustee of the exercise of reasonable
diligence or (iii) with respect to the enforceability of any provision of
the Indenture pursuant to which any party is indemnified against a
liability arising under applicable securities laws.
(c) In rendering the opinions set forth herein, we have relied solely
on the opinion of Cravath, Swaine & Moore insofar as such opinions relate
to the laws of the State of New York.
We hereby consent to the use of this opinion as Exhibit 5 of the
Registration Statement relating to the offering referred to above, as filed
with the Commission under the Securities Act of 1933 (the "Act"), and to
any reference to this opinion and to our firm name under the heading "Legal
Opinions" in the Prospectus. We do not, however, thereby admit that we are
within the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
SCHELL BRAY AYCOCK ABEL & LIVINGSTON
P.L.L.C.
<PAGE>
<PAGE>
December 10, 1996
Inter(Bullet)Act Systems, Incorporated
14 Westport Avenue
Norwalk, Connecticut 06851
Gentlemen:
You have requested our opinion regarding certain Federal income tax
consequences of (i) the exchange, pursuant to the offer (the "Exchange Offer")
by Inter(Bullet)Act Systems, Incorporated, a North Carolina corporation (the
"Company"), of an aggregate of $142,000,000 principal amount at maturity of 14%
Senior Discount Notes due 2003 (the "New Notes") for an equal principal amount
at maturity of 14% Senior Discount Notes due 2003 (the "Old Notes") and (ii) the
ownership and disposition of the New Notes.
We have examined such documents as we have deemed appropriate for purposes
of this opinion, including the Registration Statement on Form S-4 (Registration
No. 333-12091), as amended (the "Registration Statement"), that the Company
filed with the Securities and Exchange Commission (the "SEC") on the date hereof
with respect to the registration of the New Notes under the Securities Act of
1933, as amended (the "Act"). We also have examined such other materials and
have obtained such additional information as we have deemed relevant and
necessary.
The terms of the Exchange Offer, of the Old Notes and of the New Notes,
which are set forth in the Registration Statement, are incorporated herein by
reference.
Based on and subject to the foregoing and subject to the qualifications,
limitations and exceptions contained in the Prospectus forming a part of the
Registration Statement (the "Prospectus"), the legal conclusions set forth under
the heading "Certain Federal Income Tax Considerations" in the Prospectus
represent our opinion as to the material United States Federal income tax
consequences to a holder of Old Notes of the exchange of Old Notes for New Notes
pursuant to the Exchange Offer and of the ownership and disposition of New
Notes. No opinion is expressed on any matters other than those specifically
referred to under the heading "Certain Federal Income Tax Considerations" in the
Prospectus.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under "Legal Matters" in the
Prospectus. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the SEC promulgated thereunder.
Very truly yours,
SCHELL BRAY AYCOCK ABEL & LIVINGSTON
P.L.L.C.
<PAGE>
<PAGE>
EXHIBIT 12
INTER(BULLET)ACT SYSTEMS, INCORPORATED
COMPUTATION OF DEFICIENCY OF EARNINGS
AVAILABLE TO COVER FIXED CHARGES
(AMOUNTS IN 000S)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM
FEBRUARY 25, 1993 YEAR ENDED YEAR ENDED FEBRUARY 25, 1993
(DATE OF INCEPTION) TO SEPTEMBER 30, SEPTEMBER 28, (DATE OF INCEPTION) TO
SEPTEMBER 30, 1993 1994 1995 1996 SEPTEMBER 28, 1996
<S> <C> <C> <C> <C> <C>
Loss from operations...................... $1,295 $2,267 $4,427 $ 9,750 $ 17,739
Interest expense.......................... -- 87 188 2,744 3,019
Deficiency of earnings available to cover
fixed charges........................... $1,295 $2,354 $4,615 $12,494 $ 20,758
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated November 18, 1996 included herein,
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Melville, New York
December 10, 1996
<PAGE>
<PAGE>
EXHIBIT 99(A)
<PAGE>
<PAGE>
EXHIBIT 99(A)
LETTER OF TRANSMITTAL
INTER(BULLET)ACT SYSTEMS, INCORPORATED
OFFER TO EXCHANGE ITS REGISTERED
14% SENIOR DISCOUNT NOTES DUE 2003
FOR ANY AND ALL OF ITS OUTSTANDING
14% SENIOR DISCOUNT NOTES DUE 2003
PURSUANT TO THE PROSPECTUS, DATED , 1996.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"), TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON , 1996.
<TABLE>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION NUMBER: BY HAND/OVERNIGHT DELIVERY:
Fleet National Bank (860) 986-7908 Fleet National Bank
PO Box 5080 (For Eligible Institutions Attn: Corporate Trust
Attn: Corporate Trust Operations Only) One Talcott Plaza, 5th Floor Window
CT OP T06B Confirm by Telephone: Hartford, Connecticut 06120
Hartford, Connecticut 06102-5080 Patricia Williams CTM00238
(860) 986-2910
For Information Call:
Patricia Williams
(860) 986-2910
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1996 (the "Prospectus"), of Inter(Bullet)Act
Systems, Incorporated, a North Carolina corporation (the "Company"), and this
Letter of Transmittal (this "Letter"), which together constitute the Company's
offer (the "Exchange Offer") to exchange an aggregate principal amount of up to
$142,000,000 of 14%, Senior Discount Notes Due 2003 (the "New Notes") of the
Company for an equal principal amount of the Company's outstanding 14% Senior
Discount Notes Due 2003 (the "Old Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The form and terms of the New Notes are generally the same
as the form and terms of the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended, and therefore will not
bear legends restricting the transfer thereof. The New Notes will accrete at a
rate of 14%, compounded semi-annually, to an aggregate principal amount of
$142,000,000 by August 1, 2003. Cash interest will not accrue on the New Notes
prior to August 1, 1999. Thereafter, interest on the New Notes will accrue at
the rate of 14% per annum and will be payable in cash semi-annually on February
1 and August 1 of each year commencing on February 1, 2000. If by
neither the Exchange Offer has been consummated nor a shelf registration
statement with respect to the Old Notes has been declared effective, interest
will accrue on each Old Note, from and including at a rate per annum
equal to 0.5% of the Accreted Value of the New Notes (determined daily),
representing an additional 1/2% per annum over the interest rate stated on the
face of the Old Notes. The Company reserves the right, at any time or from time
to time, to extend the Exchange Offer at its discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify the holders of the Old Notes of any
extension by means of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of Old Notes, if
available, is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "The Exchange Offer" section
of the Prospectus. Holders of Old Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
<PAGE>
<PAGE>
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Old Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES 1 2 3
AGGREGATE
PRINCIPAL PRINCIPAL
NAMES AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
TOTAL
* Need not be completed if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Old Notes represented
by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of
principal amount of $1,000 and any integral multiple thereof. See Instruction 1.
</TABLE>
CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Account Number Transaction Code Number
CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
Window Ticket Number (if any)
Date of Execution of Notice of Guaranteed Delivery
Name of Institution which guaranteed delivery
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number Transaction Code Number
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
Address:
<PAGE>
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission that the New Notes issued in exchange for the Old Notes pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement with any person
to participate in the distribution of such New Notes. If the undersigned is not
a broker-dealer, the undersigned represents that it is not engaged in, and does
not intend to engage in, a distribution of New Notes. If the undersigned is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, it represents that the Old Notes to be exchanged for the New Notes
were acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus in connection with
any resale of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
<PAGE>
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
TO BE COMPLETED ONLY IF CERTIFICATES FOR OLD NOTES NOT EXCHANGED AND/OR
NEW NOTES ARE TO BE ISSUED IN THE NAME OF AND SENT TO SOMEONE OTHER THAN THE
PERSON(S) WHOSE SIGNATURE(S) APPEAR(S) ON THIS LETTER ABOVE, OR IF OLD NOTES
DELIVERED BY BOOK-ENTRY TRANSFER WHICH ARE NOT ACCEPTED FOR EXCHANGE ARE TO BE
RETURNED BY CREDIT TO AN ACCOUNT MAINTAINED AT THE BOOK-ENTRY TRANSFER
FACILITY OTHER THAN THE ACCOUNT INDICATED ABOVE.
ISSUE NEW NOTES AND/OR OLD NOTES TO:
NAME(S):......................................................................
(PLEASE TYPE OR PRINT)
............................................................................
(PLEASE TYPE OR PRINT)
Address:......................................................................
............................................................................
(INCLUDING ZIP CODE)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
(Book-Entry Transfer Facility
Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
TO BE COMPLETED ONLY IF CERTIFICATES FOR OLD NOTES NOT EXCHANGED AND/OR
NEW NOTES ARE TO BE SENT TO SOMEONE OTHER THAN THE PERSON(S) WHOSE
SIGNATURE(S) APPEAR(S) ON THIS LETTER ABOVE OR TO SUCH PERSON(S) AT AN ADDRESS
OTHER THAN SHOWN IN THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ON THIS LETTER
ABOVE.
MAIL NEW NOTES AND/OR OLD NOTES TO:
NAME(S):......................................................................
(PLEASE TYPE OR PRINT)
............................................................................
(PLEASE TYPE OR PRINT)
Address:......................................................................
............................................................................
(INCLUDING ZIP CODE)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR
OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE
NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
<PAGE>
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
<TABLE>
<C> <S> <C> <C>
Dated: ............................................................................................ , 1996
x ............................................................... ........................... , 1996
x ............................................................... ........................... , 1996
(Signature(s) of Owner) (Date)
Area Code and Telephone Number:.......................................................................
</TABLE>
If a holder is tendering any Old Notes, this Letter must be signed by
the registered holder(s) as the name(s) appear(s) on the certificate(s) for
the Old Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitting herewith. If signature is by a
trustee, executor, administrator, guardian, officer or other person acting in
a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s):................................................
.......................................................
(PLEASE TYPE OR PRINT)
Capacity:...............................................
Address:................................................
.......................................................
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:................................
(AUTHORIZED SIGNATURE)
.......................................................
(TITLE)
.......................................................
(NAME AND FIRM)
Dated:............................................, 1996
<PAGE>
<PAGE>
EXHIBIT 99(B)
<PAGE>
EXHIBIT 99(B)
NOTICE OF GUARANTEED DELIVERY FOR
INTER(BULLET)ACT SYSTEMS, INCORPORATED
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Inter(Bullet)Act Systems, Incorporated (the "Company") made
pursuant to the Prospectus, dated , 1996 (the "Prospectus"), and
the enclosed Letter of Transmittal (the "Letter of Transmittal") if certificates
for Old Notes of the Company are not immediately available or if the procedure
for book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach the Company prior to 5:00 P.M., New York
City time, on the Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by facsimile transmission, mail or hand delivery to
Fleet National Bank (the "Exchange Agent") as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender Old Notes pursuant
to the Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
P.M., New York City time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
FLEET NATIONAL BANK, EXCHANGE AGENT
Attn: Corporate Trust
CT OP T06B
One Talcott Plaza
5th Floor Window
Hartford, Connecticut 06115
Telephone: (860) 986-2910
Facsimile: (860) 986-7908
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
<TABLE>
<S> <C>
Principal Amount of Old Notes Tendered:
$ If Old Notes will be delivered by book-entry transfer to The
Depository Trust Company, provide account number.
Certificate Nos. (if available):
Total Principal Amount Represented by Old Notes
Certificate(s):
$ Account Number
</TABLE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE REGISTERED
14% SENIOR DISCOUNT NOTES FOR ANY AND ALL OUTSTANDING 14% SENIOR DISCOUNT NOTES
OF
INTER(BULLET)ACT SYSTEMS, INCORPORATED
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by holders of Old Notes either if
certificates are to be forwarded herewith or if tenders are to be made pursuant
to the procedures for delivery by book-entry transfer set forth in "The Exchange
Offer -- Book-Entry Transfer" section of the Prospectus. Certificates for all
physically tendered Old Notes, or Book-Entry Confirmation, as the case may be,
as well as a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and any other documents required by this Letter, must be
received by the Exchange Agent at the address set forth herein on or prior to
the Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below. Old Notes tendered hereby must be in
denominations of principal amount of maturity of $1,000 and any integral
multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
or a Book-Entry Confirmation, as the case may be, and any other documents
required by this Letter will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may
be, and all other documents required by this Letter, are received by the
Exchange Agent within five NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes -- Principal Amount Tendered." A reissued certificate representing the
balance of nontendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE
DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
<PAGE>
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificates must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of
any certificates specified herein, such certificates must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name of the registered holder appears on the certificates and the signatures on
such certificates must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF
OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A
SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT
COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY
INSTRUCTIONS" ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter.
In the case of issuance in a different name, the employer identification or
social security number of the person named must also be indicated. A holder of
Old Notes tendering Old Notes by book-entry transfer may request that Old Notes
not exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder of Old Notes may designate hereon. If no such
instructions are given, such Old Notes not exchanged will be returned to the
name or address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in
<PAGE>
the name of the actual owner, such holder should consult the W-9 Guidelines for
information on which TIN to report. If such holder does not have a TIN, such
holder should consult the W-9 Guidelines for instructions on applying for a TIN,
check the box in Part 2 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or it tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT NOT BE NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
<PAGE>
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: INTER(BULLET)ACT SYSTEMS, INCORPORATED
<TABLE>
<S> <C> <C>
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE
SUBSTITUTE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING TIN
FORMW-9 BELOW. (SOCIAL SECURITY NUMBER OR
EMPLOYER IDENTIFICATION NUMBER)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PART 2 -- TIN APPLIED FOR
PAYOR'S REQUEST FOR
TAXPAYER CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
IDENTIFICATION NUMBER
("TIN") AND (1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting
CERTIFICATION for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I
am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding,
and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that
you are no longer subject to backup withholding.
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
SIGNATURE DATE
<PAGE>
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
PLEASE SIGN HERE
X
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:
Must be signed by the holder(s) of Old Notes as the name(s) of such
holder(s) appear(s) on the Old Notes certificate(s) or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If any signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
Capacity:
Address(es):
<PAGE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Old Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus, together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantee and any
other documents required by the Letter of Transmittal, will be received by the
Exchange Agent at the address set forth above, no later than five New York Stock
Exchange trading days after the date of execution hereof.
<TABLE>
<S> <C>
Name of Firm Authorized Signature
Address Title
Name:
Zip Code (Please Type or Print)
Area Code and Tel. No.: Dated:
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
