<PAGE> 1
As filed with the Securities and Exchange Commission on April 23,1997
Registration No. 333 - 21893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 7373 06-1361276
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer
incorporation or organization) Identification No.)
372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
BRUCE F. FAILING, JR.
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------
with copies to:
HOWARD KAILES, ESQ.
KRUGMAN, CHAPNICK & GRIMSHAW
PARK 80 WEST - PLAZA TWO
SADDLE BROOK, NJ 07663
(201) 845-3434
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
- ------------------------------------------------------------------------ ----------------------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside Front Cover Page
of Prospectus................................................ Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus......... Inside Front Cover Page; Available
Information; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information.................................................. Prospectus Summary; Risk Factors;
Selected Historical Consolidated
Financial and Certain Other Data
4. Terms of the Transaction........................................ Prospectus Summary; The Exchange Offer;
Description of the Notes; Certain
Federal Income Tax Consequences; Plan
of Distribution
5. Pro Forma Financial Information................................. Summary Historical Consolidated Financial
and Certain Other Data; Selected
Historical Consolidated Financial and
Certain Other Data; Interim Condensed
Consolidated Financial Statements
6. Material Contacts with the Company Being Acquired............... Not Applicable
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to Be Underwriters............................ Not Applicable
8. Interests of Named Experts and Counsel.......................... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... Not Applicable
10. Information with Respect to S-3 Registrants..................... Not Applicable
11. Incorporation of Certain Information by Reference............... Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3 Registrants.............. Prospectus Summary; Selected Historical
Consolidated Financial and Certain
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Consolidated Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
13. Incorporation of Certain Information by Reference............... Incorporation of Certain Documents by
Reference
14. Information with Respect to Registrants Other Than S-3 or S-2
Registrants.................................................. Not Applicable
15. Information with Respect to S-3 Companies....................... Not Applicable
16. Information with Respect to S-2 or S-3 Companies................ Not Applicable
17. Information with Respect to Companies Other Than S-3 or S-2
Companies.................................................... Not Applicable
18. Information if Proxies, Consents or Authorizations are to be
Solicited.................................................... Not Applicable
19. Information if Proxies, Consents or Authorizations are not to
be Solicited or in an Exchange Offer......................... Prospectus Summary; The Exchange Offer
</TABLE>
<PAGE> 4
SUBJECT TO COMPLETION, DATED APRIL 23, 1997
PROSPECTUS
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS 13 1/4% SENIOR DISCOUNT NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 13 1/4% SENIOR DISCOUNT NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
_____________1997, UNLESS EXTENDED.
Electronic Retailing Systems International, Inc., a Delaware corporation (the
"Company" or "ERS") 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 13 1/4% Senior Discount Notes due 2004 (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 at maturity of its
outstanding 13 1/4% Senior Discount Notes due 2004 (the "Old Notes," and
collectively with the New Notes, the "Notes"), of which $147,312,000 aggregate
principal amount at maturity is outstanding as of the date hereof.
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 at maturity of $1,000. See "The Exchange Offer."
The New Notes will mature on February 1, 2004. No cash interest will be payable
on the New Notes prior to August 1, 2000. The New Notes will accrue cash
interest at a rate of 13-1/4% per annum, commencing on February 1, 2000, and
cash interest will be payable thereafter on February 1 and August 1 of each
year, commencing August 1, 2000. The Notes will not be redeemable at the option
of the Company prior to February 1, 2001. From and after February 1, 2001, the
Notes may be redeemed at the option of the Company, in whole or in part, at the
redemption prices set forth herein. Upon a Change of Control (as defined), each
holder of the Notes (a "Holder") will have the right to require the Company to
purchase all or any part of such Holder's Old and New Notes at a purchase price
equal to 101% of the Accreted Value (as defined) thereof, plus accrued and
unpaid interest, if any, to the date of purchase. There can be no assurance that
the Company will be able to raise sufficient funds to meet this obligation
should it arise.
The New Notes will be senior, unsecured obligations of the Company ranking pari
passu in right of payment of principal and interest with all other existing and
future senior, unsecured obligations of the Company and will rank senior to all
future subordinated debt of the Company. As of March 31, 1997, the Company had
recorded $102.4 million of total outstanding indebtedness (including $97.4
million for the Old Notes), all of which will rank pari passu in right of
payment of principal and interest with the New Notes and none of which is
subordinated debt of the Company. However, the CDA Note (as defined) is secured
by substantially all of the assets of the Company and Electronic Retailing
Systems International, Inc., a Connecticut corporation and the Company's
principal subsidiary (the "Principal Subsidiary"). See "Description of the
Notes."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
OF OLD NOTES ON ______________________, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
<PAGE> 5
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 ________________, 1997.
<PAGE> 6
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.
<PAGE> 7
(continued from front cover)
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes. The New Notes will be issued under and entitled
to the benefits of the same Indenture (as defined), pursuant to which the Old
Notes were issued such that the New Notes and Old Notes will be treated as a
single class of debt securities under the Indenture. The form and terms of the
New Notes are generally the same as the form and terms of the Old Notes, except
that (i) the exchange will be registered under the Securities Act and,
therefore, the New Notes will not bear legends restricting the transfer thereof,
and (ii) holders of the New Notes will not be entitled to any of the
registration rights of holders of Old Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. See "Description of the Notes."
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission"), as set forth in no-action letters issued to Exxon Capital
Holdings Corporation, (available May 13, 1988), Morgan Stanley & Co.
Incorporated, (available June 5, 1991), Mary Kay Cosmetics, Inc., (available
June 5, 1991) and Warnaco, Inc., (available October 11, 1991), the Company
believes that a holder who exchanges Old Notes for New Notes pursuant to the
Exchange Offer may offer for resale, resell and otherwise transfer such New
Notes without compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "Securities Act");
provided that (i) such New Notes are acquired in the ordinary course of such
holder's business, (ii) such holder is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement with any
person to participate in the distribution of such New Notes, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). 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. A holder who
exchanges Old Notes for New Notes pursuant to the Exchange Offer with the
intention to participate in a distribution of the New Notes may not rely on the
staff's position enunciated in the Exxon Capital Letter, the Morgan Stanley
Letter or similar letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
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." 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 Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 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." EXCEPT AS DESCRIBED IN THIS
PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER, SALE OR OTHER TRANSFER
OF NEW NOTES.
Prior to this Exchange Offer, there has been no public market for the Old Notes
or New Notes. The Old Notes have traded on the Portal Market. If such a market
were to develop, the New Notes could trade at prices that may be higher or lower
than their principal amount at maturity. 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 -- Absence of Public Trading 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.
<PAGE> 8
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, believed to be accurate in all material respects, of certain
terms and provisions of certain agreements; however, in each such case reference
is made to the actual agreements filed as an exhibit to the Registration
Statement, and all such summaries are qualified in their entirety by this
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Registration Statement and the
exhibits thereto, and the reports and other information, filed by the Company
with the Commission in accordance with the Exchange Act 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 Section of the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549, at prescribed rates, and can also be obtained electronically through
the Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov). The Company's Common Stock is listed
on The Nasdaq Stock Market and copies of such reports and other information can
also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by reference
into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as amended by Amendment No. 1 thereto;.
(ii) the Company's Current Reports on Form 8-K dated, respectively, January
24, 1997 and February 7, 1997.
The Company hereby undertakes to provide without charge to each Holder to whom a
copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated into this Prospectus by reference, other than
exhibits to such documents. Requests for such copies should be directed to:
Electronic Retailing Systems International, Inc., 372 Danbury Road, Wilton,
Connecticut, 06897, telephone number (203) 761-7900.
<PAGE> 9
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
appearing elsewhere in, or incorporated into, this Prospectus. Certain
capitalized terms used but not defined in this summary are used herein as
defined elsewhere in this Prospectus. Unless otherwise indicated, all references
in this Prospectus to the Company refer to Electronic Retailing Systems
International, Inc., a Delaware corporation, and its subsidiaries and, with
respect to operations prior to the Combination described below, its
predecessors.
THE COMPANY
Electronic Retailing Systems International, Inc. develops and provides
electronic shelf label ("ESL") systems designed to allow supermarket chains and
other retailers to increase productivity, reduce labor costs and improve
management information systems. The Company is the leading provider in the
United States of ESL systems, based on management's estimates of installed ESL
systems. The ERS ShelfNet system (the "ERS ShelfNet System") has been designed
as a productivity enhancing center store automation system, which replaces paper
price tags on retail shelves with electronic liquid crystal display units and
provides a suite of applications to enhance a retailer's pricing, inventory,
shelf management, merchandising and promotional activities. The ERS ShelfNet
System is comprised of proprietary hardware and software that electronically
link a store's shelves to its point-of-sale ("POS") systems and central
computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. An ERS store-based local area network has up to 20,000
individual ESLs connected to a central server. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning alphanumeric
messages. The ERS ShelfNet System is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market. Management estimates, based on studies
conducted in collaboration with the Company's current customers, that cost
savings and benefits to a supermarket with 15,000 ESLs that changes 2,500 to
4,500 prices per week could, under the Company's proposed SayGo Plan (as
defined), provide an annual contribution per store ranging from approximately
$40,000 to approximately $240,000 through the anticipated level of usage of the
applications afforded by the ERS ShelfNet System. However, there can be no
assurance that any such cost savings or benefits will be realized by any
customer. See "Risk Factors -- Use of Assumptions to Estimate Net Cost Savings
and Benefits".
<PAGE> 10
2
As of December 31, 1996, the ERS ShelfNet System was installed in 64
U.S. retail stores, including stores owned by such leading supermarket chains as
The Vons Companies, Inc. ("Vons"), Stop & Shop Supermarket Company ("Stop &
Shop"), H.E. Butt Grocery Co. ("HEB"), Big Y Foods, Inc. ("Big Y"), Shaw's
Supermarkets, Inc. ("Shaw's"), Lucky Stores, Inc. ("Lucky"), The Great Atlantic
& Pacific Tea Company, Inc. and K Mart Corporation, and one supermarket owned by
the Overwaitea Food Group Division of Great Pacific Industries Ltd. (the
"Overwaitea Food Group") in Canada. The Company's customers include five of the
15 largest supermarket chains in the United States. The Company estimates that,
as of December 31, 1996, of the approximately 29,800 supermarkets in the United
States, approximately 120 stores were operating ESL systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it planned in the first quarter
of 1997 to introduce a new generation ERS ShelfNet System that provides spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, in
December 1996 ERS signed its first non-binding letter of intent (the "Letter of
Intent") providing for installation of the ERS ShelfNet System in approximately
60 supermarkets beginning in 1997 and is continuing its efforts to procure
additional letters of intent. The Letter of Intent is, and all such additional
letters of intent will be, subject to numerous conditions, including the
negotiation and execution of a definitive contract terms.
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. The Company now intends also to offer the ERS
ShelfNet System on a fee based arrangement called "Save-As-You-Go" (the "SayGo
Plan") whereby the Company will own the system and, with no upfront cash cost to
the retailer, furnish the system to retailers (generally for a period of up to
five years), who will pay monthly fees to the Company based primarily on their
actual usage of the system. The Company believes that the SayGo Plan will
accelerate market acceptance of the ERS ShelfNet System.
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
In December 1996, the Company announced its plan to introduce the new
generation ERS ShelfNet System, providing spread spectrum microwave transmission
of data directly to wireless ESLs. The enhanced ERS ShelfNet System is designed
to provide additional flexibility and convenience to customers by expanding
potential coverage by the Company's ESLs to the entire store and allowing the
retailer to change store placement of the ESLs more easily. The Company believes
that the cost of installing and maintaining its wireless ESLs will be lower than
that of its current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
In December 1996, ERS signed its first non-binding Letter of Intent
providing for installation of the ERS ShelfNet System under the SayGo Plan in
approximately 60 supermarkets beginning in 1997, and is continuing its efforts
to procure additional letters of intent. The Letter of Intent is, and all such
additional arrangements, will be, subject to numerous conditions, including
negotiation and execution of definitive contract terms. See "Business --
Marketing and Sales" for a description of the terms to be proposed initially by
the Company.
<PAGE> 11
3
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock and
the contemporaneous private placement of Common Stock to subscribers, including
members of the Company's Board of Directors (the "Board of Directors") and their
affiliates. In January 1997, the Company raised approximately $95 million in net
proceeds as a result of the Private Placement (as defined).
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends: (i) to focus its initial marketing efforts under the SayGo Plan on the
supermarket sector of the retail industry,; (ii) to continue to reduce the
manufacturing costs of the system to improve the Company's profitability; and
(iii) to continue to enhance, develop and support value-added applications of
the ERS ShelfNet System.
- SayGo Plan. The Company believes that its SayGo Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use the proceeds from
the Private Placement (as defined) to install the ERS ShelfNet
System in supermarkets under the SayGo Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and because of the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
December 31, 1996, of the approximately 29,900 supermarkets in
the United States, approximately 120 stores were operating ESL
systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the SayGo Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings and benefits) and to
encourage existing customers to adopt the new generation
system (and install additional systems), the Company intends
to develop additional productivity enhancing applications for,
and enhance existing applications of, the ERS ShelfNet System.
HISTORY
ERS was founded in 1990 by Norton Garfinkle, the Company's Chairman of
the Board, and Bruce F. Failing, Jr., the Company's Vice Chairman of the Board
and Chief Executive Officer, to develop and supply ESL systems to retailers. Mr.
Failing previously co-founded and served as President of Actmedia, Inc., a
principal provider of in-store marketing products and services, until Actmedia's
sale to Heritage Media Corporation in 1989 for total consideration of
approximately $184 million. Mr. Garfinkle was a significant shareholder, and
served as a director, of Actmedia until its sale. Since inception, the Company
has raised approximately $69 million, excluding the proceeds to the Company from
the Private Placement, in order to develop its system and business, of which
Messrs. Failing and Garfinkle contributed approximately $23 million. The
Company's headquarters is located at 372 Danbury Road, Wilton, Connecticut
06897, telephone (203) 761-7900.
<PAGE> 12
4
THE EXCHANGE OFFER
Registration Rights Agreement........... The Old Notes were sold by the
Company on January 24, 1997, to the
Initial Purchasers (as defined),
who placed (the "Private
Placement") the Old Notes with
institutional investors as part of
units (collectively, the "Units")
comprised of $1,000 principal
amount at maturity of Old Notes and
one warrant (collectively, the
"Warrants") to purchase 17.23
shares of the common stock, $.01
par value ("Common Stock"), of the
Company. In connection therewith,
the Company executed and delivered
for the benefit of the holders of
the Old Notes the Registration
Rights 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 at maturity of Old Notes. As
of the date hereof, $147,312,000
aggregate principal amount at
maturity 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
Delaware General Corporation Law or
the Indenture in connection with
the Exchange Offer.
Based on interpretations by the
staff of the Commission, as set
forth in no-action letters issued
to Exxon Capital Holdings
Corporation, (available May 13,
1988), Morgan Stanley & Co.
Incorporated, (available June 5,
1991), Mary Kay Cosmetics, Inc.,
(available June 5, 1991) and
Warnaco, Inc., (available October
11, 1991), the Company believes
that a holder who exchanges Old
Notes for New Notes pursuant to the
Exchange Offer may offer for
resale, resell and otherwise
transfer such New Notes without
compliance with the registration
and prospectus delivery
requirements of the Securities Act;
provided that (i) such New Notes
are acquired in the ordinary course
of such Holder's business, (ii)
such holder is not engaged in, and
does not intend to engage in, a
distribution of such New Notes and
has no arrangement with any person
to participate in the distribution
of such New Notes, and (iii) such
holder is not an affiliate of the
Company (as defined under Rule 405
of the Securities Act). 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. A holder
who exchanges Old Notes for New
Notes pursuant to the Exchange
Offer with the intention to
participate in a distribution of
the New Notes may not rely on the
staff's position enunciated in the
Exxon Capital Letter, the Morgan
Stanley Letter or similar letters
and must comply with the
registration and prospectus
delivery requirements of the
Securities Act in connection with
any resale transaction. 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."
Acceptance of Old Notes and Delivery of
New Notes.......................... Subject to certain conditions, the
Company will accept for exchange
any Old 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."
<PAGE> 13
5
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................ 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
(unless such tender is being
effected pursuant to the procedure
for book-entry transfer described
herein) 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.
Untendered Old Notes.................... Holders of Old Notes whose Old
Notes are not exchanged for New
Notes pursuant to the Exchange
Offer, will continue to be subject
to the existing restrictions upon
transfer contained in the legend
thereon. In general, the Old Notes
may not be offered for resale or
resold, 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
Notes -- Exchange Offer;
Registration Rights."
Exchange Agent.......................... United States Trust Company of New
York, the Trustee under the
Indenture, is serving as exchange
agent (the "Exchange Agent") in
connection with the Exchange Offer.
Accounting Treatment.................... No gain or loss for accounting
purposes will be recognized by the
Company upon the consummation of
the Exchange Offer. See "The
Exchange Offer -- Accounting
Treatment."
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 NOTES
The Exchange Offer relates to the exchange of up to $147,312,000
aggregate principal amount at maturity of Old Notes for up to an equal aggregate
principal amount at maturity 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
<PAGE> 14
6
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 OF OLD NOTES WITH NEW NOTES
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. 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 Rights Agreement")
dated as of January 20, 1997,
between the Company and the Initial
Purchasers (as defined). 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 for resale or resell
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."
TERMS OF THE NEW NOTES:
Maturity Date........................... February 1, 2004.
Yield and Interest...................... 13-1/4% per annum (computed on a
semi-annual bond equivalent basis).
Except as described herein, no cash
interest will accrue on the Notes
prior to February 1, 2000. The
Notes will begin to accrue cash
interest on February 1, 2000, and
cash interest will be payable
thereafter on February 1 and August
1 of each year, commencing August
1, 2000.
Sinking Fund............................ None.
Original Issue Discount................. The Old Notes were issued with
original issue discount requiring
holders of the New Notes to include
such OID in gross income for U.S.
federal income tax purposes in
advance of the receipt of the cash
payments to which such income is
attributable. See "Certain Federal
Income Tax Consequences".
Optional Redemption..................... The Notes may not be redeemed at
the option of the Company prior to
February 1, 2001. The Notes may be
redeemed by the Company at any time
and from time to time on or after
February 1, 2001, at the redemption
prices set forth herein.
Ranking................................. The New Notes will be senior,
unsecured obligations of the
Company ranking pari passu in right
of payment of principal and
interest with all other existing
and future senior unsecured
obligations of the Company and will
rank senior to all future
subordinated debt of the Company.
As of March 31, 1997, the Company
had recorded $102.4 million of
total outstanding indebtedness
(including $97.4 million for the
Old Notes), all of which will rank
pari passu in right of payment of
principal and interest with the New
Notes and none of which is
subordinated debt of the Company.
However, the CDA Note is secured by
substantially all of the assets of
the Company and the Principal
Subsidiary.
Restrictive Covenants................... The Indenture (as defined) under
which the New Notes will be issued
contains certain covenants which,
among other things, limits (a) the
incurrence of additional
indebtedness by the Company and its
Restricted Subsidiaries and the
<PAGE> 15
7
issuance of preferred stock by the
Company's Restricted Subsidiaries,
(b) the payment of dividends on
capital stock of the Company and
the purchase, redemption or
retirement of capital stock or
subordinated indebtedness, (c)
certain investments, (d) certain
transactions with affiliates, (e)
the incurrence of liens and sale
and leaseback transactions, (f)
sales of assets, including capital
stock of subsidiaries, (g) certain
consolidations and mergers and (h)
the Company's lines of business.
The Indenture also prohibits
certain restrictions on
distributions from subsidiaries.
All of these limitations and
prohibitions, however, are subject
to a number of important
qualifications. See "Description of
the Notes -- Certain Covenants."
Change of Control....................... Upon a Change of Control, each
Holder shall have the right to
require the Company to purchase all
or any part of such Holder's Notes
at a purchase price in cash equal
to 101% of the Accreted Value
thereof, plus accrued and unpaid
interest, if any, to the date of
purchase.
RISK FACTORS
Prospective participants in the Exchange Offer should consider
carefully the information set forth under "Risk Factors" and all other
information set forth in this Prospectus before making any investment in the
Securities.
<PAGE> 16
8
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect summary historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following summary historical consolidated statement of operations
data, insofar as it relates to each of the years 1992-1996, has been derived
from audited annual consolidated financial statements, including the
consolidated statement of operations for the three years ended December 31, 1995
1996 and the notes thereto included elsewhere in this Prospectus. For a
discussion of factors affecting the comparability of this data, see "Selected
Historical Consolidated Financial and Certain Other Data".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1992 1993(1) 1994 1995 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenues ................................. $ 941 $ 1,122 $ 2,376 $ 2,973 $ 5,002
Loss from operations ..................... (9,420) (16,518) (11,324) (10,717) (9,332)
Net loss(2) .............................. (9,533) (15,997) (11,278) (10,868) (9,412)
Net loss per common share(3) ............. -- (1.40) (0.97) (0.95) (0.60)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING(4) ................. -- 11,461 11,682 11,743 16,169
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital $ 8,764 $103,764
======== ========
Total assets 112,260 112,260
======== ========
Long-term debt 4,989 99,889
======== ========
Warrants to purchase common stock -- 5,100
Stockholders' equity 5,723 5,723
======== ========
</TABLE>
<PAGE> 17
9
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1992 1993(1) 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
OTHER DATA:
EBITDA(6) ...................................... $ (8,371) $(15,290) $(10,839) $(10,114) $ (8,370)
Cash flows from operating activities............ (8,133) (11,855) (10,026) (11,160) (7,549)
Cash flows from investing activities............ (324) (8,641) 6,737 100 (989)
Cash flows from financing activities............ 12,866 18,606 1,901 13,139 13,526
Depreciation and amortization .................. 240 367 374 463 660
Capital expenditures ........................... 324 574 303 452 397
Deficiency of earnings to fixed
charges(7) .................................. (10,364) (16,420) (11,278) (10,868) (9,412)
Pro forma deficiency of earnings to
fixed charges(8) ............................ -- -- -- -- (23,974)
Stores with ERS ShelfNet System
installed at end of period .................. 7 13 21 42 65
</TABLE>
- ----------
(1) Reflects the consummation of the combination of the Company, the
Principal Subsidiary, which was incorporated in Connecticut in 1990,
and ERS Associates Limited Partnership (the "Partnership"), which was
organized in Connecticut in 1992 in order to continue the business and
hold the principal assets of the Principal Subsidiary, immediately
prior to the closing of the Company's initial public offering (the
"Initial Public Offering") of Common Stock on May 7, 1993. This
combination is herein referred to as the "Combination". References to
historical financial information of the Company prior to the date of
the Combination refer to the historical financial information of the
Principal Subsidiary.
(2) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(3) Net loss per common share data for periods prior to December 31, 1993
has not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common share equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not
reflect common share equivalents that are anti-dilutive.
(5) As adjusted to give effect to the Private Placement and the application
of the net proceeds therefrom.
<PAGE> 18
10
(6) EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization. EBITDA is presented because the Company
believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by
an investor as an alternative to net income or income from operations,
as an indicator of the operating performance of the Company or other
consolidated operations or cash flow data prepared in accordance with
generally accepted accounting principles, or as an alternative to cash
flows as a measure of liquidity. For the years ended December 31, 1993
and 1994, EBITDA included non-cash charges for stock option
compensation expense of $7.5 million and $1.1 million, respectively;
for the years ended December 31, 1995 and 1996, such amounts were not
material.
(7) For purposes of determining the deficiency of earnings to fixed
charges, "earnings" consist of earnings before fixed charges and "fixed
charges" consist of interest on all debt and that portion of rental
expense that the Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to
give effect to the Private Placement and the application of the net
proceeds therefrom.
<PAGE> 19
11
RISK FACTORS
Prospective participants in the Exchange Offer should carefully
consider the risk factors set forth below, as well as the other information
appearing 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.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following risk factors.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained 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 for resale or resold, 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 intend to register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to Exxon Capital Holdings Corporation, (available May
13, 1988), Morgan Stanley & Co. Incorporated, (available June 5, 1991), Mary Kay
Cosmetics, Inc., (available June 5, 1991) and Warnaco, Inc., (available October
11, 1991), the Company believes that a holder who exchanges Old Notes for New
Notes pursuant to the Exchange Offer may offer for resale, resell and otherwise
transfer such New Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided that (i) such New Notes
are acquired in the ordinary course of such Holder's business, (ii) such holder
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement with any person to participate in the distribution
of such New Notes, and (iii) such holder is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act). 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. A holder who exchanges Old Notes for New Notes pursuant to the
Exchange Offer with the intention to participate in a distribution of the New
Notes may not rely on the staff's position enunciated in the Exxon Capital
Letter, the Morgan Stanley Letter or similar letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. 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." 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 Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 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." The New Notes may not be offered or sold unless they
have been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Company is required, under the Registration Rights Agreement,
to register the New Notes in any jurisdiction requested by the holders, subject
to certain limitations. 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.
<PAGE> 20
12
RELIANCE ON SINGLE PRODUCT IN EMERGING MARKET
For the foreseeable future, the Company's revenues, if any, will be
derived entirely from the ERS ShelfNet System. The market for ESL systems, such
as the ERS ShelfNet System, is in the development stage, and market acceptance
of, and demand for, these systems are subject to a high level of uncertainty.
The Company's success will be dependent upon, among other things, the extent to
which retailers choose to install ESL systems. The demand for such systems may
be affected by numerous factors, many of which are beyond the Company's control,
including the actual savings and benefits experienced by the individual
supermarket stores using the ESL system. See " -- Use of Assumptions to Estimate
Net Cost Savings and Benefits." There can be no assurance that supermarket
chains will choose to install ESL systems in a significant number of their
stores. If the ERS ShelfNet System fails to generate adequate operating cash
flows, whether as a result of lack of market acceptance, the Company's inability
to place or service the system, the failure of the system to perform as
expected, the obsolescence of the system or otherwise, the Company will be
unable to pay the principal of or interest on the Notes. See " -- Introduction
of Enhanced System".
INTRODUCTION OF NEW GENERATION SYSTEM
In December 1996, ERS announced that, in the first quarter of 1997, it
planned to introduce the new generation ERS ShelfNet System providing spread
spectrum microwave transmission of data directly to wireless ESLs. Although the
Company has commenced solicitation of orders for the new generation system while
it completes field testing of the system, there can be no assurance that the new
generation ERS ShelfNet System will function successfully over time in actual
retail usage or will result in the lower costs of manufacturing, installing and
maintaining the system that the Company anticipates. If the new generation ERS
ShelfNet System or its applications fail to perform as expected, the Company's
business and results of operations would be materially adversely affected.
The introduction of the new generation ERS ShelfNet System could affect
the Company's ability to sell on-hand inventories of the current system and
could affect the recoverability of the book value of such inventory and certain
related assets. During the fourth quarter of 1996, the Company recorded a
special provision for excess inventory in the amount of $750,000, in connection
with the introduction of its new generation ERS ShelfNet System.
USE OF ASSUMPTIONS TO ESTIMATE NET COST SAVINGS AND BENEFITS
As noted above, demand for the ERS ShelfNet System will be affected by,
among other things, the actual savings and benefits experienced by the
individual stores using the ERS ShelfNet System. Estimates of the potential for
such savings and benefits used in this Prospectus are based on a number of
assumptions made by the Company, including, for example, the assumed average
cost of labor, other assumed average supermarket operating data and the assumed
usage of the system's applications by retailers. Because the market for ESL
systems is in the development stage, these estimates are based on information
and studies which may not be representative of the overall retail market for ESL
systems and may overstate the cost savings and benefits that retailers are able
to achieve in actual practice. Moreover, these estimates are not based on actual
results obtained by any particular retailer using the ERS ShelfNet System and
are inherently subject to business and economic uncertainties. There can be no
assurance, therefore, that the estimated cost savings and benefits will actually
be achieved by any particular retailer or by any particular group of retailers,
and prospective purchasers of the Securities are cautioned not to place undue
reliance upon these estimates. The actual cost savings and benefits may vary
significantly from the Company's estimates used in this Prospectus. To the
extent that retailers are not able to achieve the anticipated cost savings and
benefits, the appeal of the ERS ShelfNet System will be adversely affected.
<PAGE> 21
13
HISTORICAL AND ANTICIPATED LOSSES AND NEGATIVE CASH FLOW; ACCUMULATED DEFICIT
The Company has never been profitable and has incurred significant net
operating losses and negative cash flow from operations to date in connection
with developing, designing and market testing its ESL systems. As of December
31, 1996, the Company had a cumulative net loss of approximately $65.8 million
(which includes non-cash charges in the amount of $8.6 million for stock option
compensation expense), resulting in an accumulated deficit of $45.1 million. See
"Selected Historical Consolidated Financial and Certain Other Data". Losses and
negative cash flow from operations will continue, and the accumulated deficit
will increase, while the Company concentrates on such activities and until it
has established a sufficient revenue-generating customer base, if ever. Under
its new SayGo Plan, the Company will recognize revenue to the extent monthly
usage or other fees are billed to customers and, although the cost of hardware
components of its systems will be depreciated over the shorter of their
estimated useful lives or five years, the Company will have substantial cash
requirements for manufacturing and carrying costs attendant to introduction of
the SayGo Plan which will not initially be covered by revenues. There can be no
assurance that an adequate revenue base will be established or that sales of the
Company's products and services will generate positive cash flow from
operations. If the Company is not able to generate profits and positive cash
flow in the next few years, the Company will most likely be unable to pay the
principal of or interest on the Notes, and the Warrants may become worthless.
LETTER OF INTENT; ABILITY TO OBTAIN FIRM COMMITMENTS
The Company intends to continue using the proceeds of the Private
Placement to provide the capital necessary to permit the Company to offer the
ERS ShelfNet System pursuant to the SayGo Plan, whereby the Company will own the
ERS ShelfNet System and provide it to retailers on a fee basis. Although the
Company has entered into the Letter of Intent which contemplates the
installation of the ERS ShelfNet System in approximately 60 stores, and is
continuing its efforts to procure additional letters of intent, the Letter of
Intent is not, and all such additional arrangements will not be, binding
obligations and, in any case, will be subject to numerous conditions, including
the negotiation and execution of definitive contract terms. There can be no
assurance that the arrangements contemplated by the Letter of Intent or such
additional arrangements will be consummated. In addition, under the SayGo Plan a
customer may elect to terminate its usage of the ERS ShelfNet System in certain
circumstances. If the Company is not able to consummate the arrangements.
contemplated by the Letter of Intent or such additional arrangements to provide
the ERS ShelfNet System or if the use of the ERS ShelfNet System is terminated
by its customers, the Company's business and results of operations will be
materially adversely affected.
SUBSTANTIAL LEVERAGE; DEBT SERVICE REQUIREMENTS
As a result of the Private Placement, the Company is highly leveraged
with indebtedness that is substantial in relation to its stockholders' equity.
On a pro forma basis as of December 31, 1996, the Company had an estimated total
outstanding indebtedness of approximately $100 million, including $94.9 million
with respect to the Notes, and the Company would have had total stockholders'
equity of $5.7 million. On a pro forma basis, after giving effect to the Private
Placement as if the Private Placement had occurred on January 1, 1996, for the
year ended December 31, 1996, the Company's earnings would have been
insufficient to cover fixed charges by $24.0 million.
<PAGE> 22
14
The Company's high degree of leverage could have important consequences
to holders of the Notes, including that (i) a substantial portion of the
Company's cash flow from operations, if any, after February 1, 2000, will be
required to be dedicated to the Company's interest expense obligations and may
not be available to the Company for its operations, working capital, capital
expenditures or other purposes, (ii) the Company's ability to obtain financing
in the future may be limited, (iii) the Company's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures as
compared to less highly-leveraged competitors could be limited (including by
reason of the covenants contained in the Indenture), and (iv) the Company may be
more vulnerable to downturns in general economic conditions or in its business
or be unable to undertake capital expenditures that are important for its growth
strategy, any of which could have a material adverse effect on the Company and
its ability to make payments of principal of, and interest on, the Notes.
Since inception, the Company has not generated positive cash flow from
operations. As a result, the Company has been required to pay its fixed charges
(including interest on existing indebtedness) and operating expenses with the
proceeds from sales of its equity securities, loans from stockholders and other
credit arrangements. With the issuance of the Notes, as of February 1, 2000, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations. Commencing August 1, 2000, cash interest on the Notes will
be payable semi-annually at the rate of 13-1/4% per annum (approximately $19.5
million per year). The full accreted principal amount at maturity of the Notes
of $147,312,000 will become due on February 1, 2004.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes (including its obligation to purchase the
Notes at 101% of the Accreted Value plus accrued and unpaid interest, if any, at
the time of a Change of Control (as defined in the Indenture)) 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, prices it can
charge its customers, 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 largely on the extent to which the
Company can implement successfully its business strategy of achieving
large-scale commercialization of the ERS ShelfNet System. 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. There can be no
assurance that the Company will be able to generate sufficient cash flow or
otherwise obtain funds in the future to cover interest and principal payments
associated with the Notes and any other debt of the Company and its
subsidiaries. See "Business -- Business Strategy".
In the event the Company is unable to meet its obligations with respect
to its existing indebtedness, it may be required to reduce or delay capital
expenditures, refinance or restructure all or a portion of its indebtedness,
sell material assets or operations or seek to raise additional debt or equity
capital. There can be no assurance that the Company will be able to effect any
such refinancing or restructuring or sell assets or obtain any such additional
capital on satisfactory terms or at all, or 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of the Notes -- Limitation on Sales of Assets and
Subsidiary Stock".
RANKING OF NOTES; HOLDING COMPANY STRUCTURE
The Notes are not secured and, therefore, will be effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness. As of December
31, 1996, and without giving pro forma effect to the Private Placement, the
Company had $5.0 million of secured indebtedness outstanding, consisting solely
of the CDA Note. Subject to certain conditions specified therein, the Indenture
permits the Company and its subsidiaries to incur additional indebtedness,
including capital lease obligations and secured indebtedness, which obligations
and secured indebtedness will rank senior to the Notes to the extent of the
assets subject thereto. See "Description of the Notes".
In addition, the Company is a holding company and conducts
substantially all of its operations through subsidiaries. As such, the Company
has no substantial source of operating cash flow other than from dividends and
<PAGE> 23
15
distributions from its subsidiaries. Therefore, the Company's ability to make
required principal and interest payments with respect to the Company's
indebtedness (including the Notes) and other obligations depends on the earnings
of its subsidiaries and on its ability to receive funds from its subsidiaries
through dividends or other payments. Although the Indenture prohibits the
Company from causing the imposition of or permitting to exist any restrictions
on the ability of its subsidiaries to make such distributions, there can be no
assurance that other factors, including legal or regulatory restrictions, will
not limit the ability of such subsidiaries to make such distributions in the
future. Although each of the Company's subsidiaries, at such future time as it
incurs certain indebtedness, may be required to guarantee the Company's
obligations under the Notes, any such guarantee is subject to certain
limitations and such subsidiary's liability under its guarantee could be reduced
to zero. See "-- Fraudulent Conveyance" and "Description of the Notes --
Certain Covenants -- Future Guarantors" and "-- Certain Definitions". To the
extent that any subsidiary that does not guarantee the Company's obligations
under the Notes is subject to or incurs indebtedness and becomes insolvent or is
liquidated, secured and unsecured creditors of such subsidiary would be entitled
to payment from the proceeds of such subsidiary's assets before the Company and
its creditors would derive any value from such subsidiary's assets. Furthermore,
because any such guarantees by the Company's subsidiaries will be unsecured, the
secured creditors of any such subsidiary would be entitled to payment from such
proceeds before the Company and its creditors would derive any value from such
subsidiary's assets. As of December 31, 1996, after giving pro forma effect to
the Private Placement, the Company's subsidiaries (including the Principal
Subsidiary, as co-borrower under the CDA Note) had in the aggregate $5.0 million
of long-term indebtedness outstanding (exclusive of (i) the Notes and (ii)
indebtedness to the Company in the amount of $38 million), all of which was
secured. The Company's subsidiaries may incur additional indebtedness in the
future, subject to certain restrictions imposed by the Indenture. See
"Description of the Notes -- Certain Covenants".
COMPETITION AND TECHNOLOGICAL CHANGE
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel Systems Inc. ("Telepanel") of Markham, Ontario, Canada, Pricer, Inc.
of Norwalk, Connecticut, a subsidiary of Pricer AB ("Pricer") of Uppsala, Sweden
and, recently, NCR Corporation ("NCR"). However, the emerging market for ESL
systems is characterized by rapid technological advances and evolving industry
standards and is subject to a high degree of potential competition. As a result,
the Company has been and will continue to be required to make substantial
expenditures for engineering and development. Telepanel has publicly reported
the existence of an arrangement with IBM whereby IBM may market the Telepanel
system. Additionally, other companies that are larger than the Company and have
greater financial and other resources than the Company may attempt to develop or
market competing ESL systems. No assurance can be given that other companies,
such as other vendors of POS systems, including Fujitsu-ICL, will not enter the
market in which the Company competes or that the Company will have the resources
required to respond to technological changes or to compete successfully in the
future. The Company's ESL system is also subject to competition from vendors
selling traditional paper labeling methods, as well as providers of hand-held
portable data terminals. See "Business -- Competition".
PROTECTION OF INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on
the competitive advantage it enjoys as a result of its intellectual property,
and thus on its ability to continue to protect its intellectual property. The
Company relies principally upon patent and copyright protection and its trade
secret program to protect its proprietary technology. There can be no assurance
that any additional patents will be issued as a result of any applications made
by the Company therefor or that claims allowed under such patents or any
existing patents will not be challenged or invalidated or will be of adequate
scope to protect the Company's technology. The Company also relies on
non-disclosure agreements with its employees, customers and consultants and
other parties. There can be no assurance that such measures will be adequate to
protect the Company's intellectual property. Although the Company believes that
its products and technology do not infringe on the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
in the future or that such claims will not be successful. In any case, the
Company could incur substantial costs in defending itself in patent infringement
suits
<PAGE> 24
16
brought by others and in prosecuting suits against patent infringers. See
"Business -- Intellectual Property" and "Business -- Legal Proceedings".
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
The Company does not manufacture any of the hardware components of the
ERS ShelfNet System and is solely dependent upon third parties to manufacture
and assemble components comprising the ERS ShelfNet System on a purchase order
basis. The Company does not have written long-term arrangements with such
contract manufacturers. In addition, the Company's ESLs currently incorporate a
microprocessor which is supplied solely by Sanyo Semiconductor Corporation
("Sanyo"). While the Company, on the basis of its familiarity with the design of
such microprocessor and the capabilities of other sources, believes that other
suppliers could produce equivalent microprocessors within approximately four
months of notification by the Company, any inability to obtain microprocessors
from its current supplier in sufficient quantities could result in a temporary
interruption of the Company's production of ESLs and any such replacement
supplier could charge more for such production or produce a lower-quality unit,
thus diminishing the Company's revenues and income from operations. Although the
Company believes that several parties are available to manufacture the
components of its system, the termination of the Company's relationship with one
or more of its contract manufacturers, legal or regulatory changes in any
country in which such manufacturer resides or an extreme loss of property (e.g.,
as a result of a fire, hurricane, etc.) to any such manufacturer may result in a
temporary interruption in the manufacture and assembly of the Company's system
and, thus, in the delay or loss of placements of the ERS ShelfNet System, with a
corresponding loss of revenues. See "Business -- Manufacturing".
DEPENDENCE ON SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, 79% of the Company's revenues
was attributable to purchases by three supermarket chains, and, in 1994 and
1995, 81% and 83%, respectively, of the Company's revenues were attributable to
purchases by two and three supermarket chains, respectively (aggregating five
chains for the entire three year period). The failure of such customers to
continue to utilize systems from the Company could have a material adverse
effect on the business of the Company. Additionally, customers who account for
significant portions of the Company's revenues may have the ability to negotiate
prices for the Company's products and services that are more favorable to such
customers and that result in lower profit margins for the Company. See "Business
- -- Customers".
ABILITY TO MANAGE GROWTH
If the ERS ShelfNet System is installed in the stores contemplated by
the Letter of Intent and the Company is able to obtain significant orders from
other large retailing chains, the Company will experience rapid growth, which in
turn will place significant pressure on the Company's managerial, operational
and financial resources. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base, and any inability of the Company to attract and
retain the executive and managerial personnel required by its expanding business
could have a material adverse effect on the Company's business operating results
and financial condition. The Company will also 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. 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.
Furthermore, there can be no assurance that the Company will be successful in
procuring expanded third party sources for the manufacture and assembly of the
components of the ERS ShelfNet System, in expanding the capabilities of its
personnel and subcontractors engaged in the
<PAGE> 25
17
installation and servicing of its system or in lowering the costs of
manufacturing, installing or maintaining its system. In addition, any
anticipated expansion of the Company's marketing efforts outside of the United
States will expose the Company to the economic, political and regulatory
environments within the countries in which the Company's new and potential
customers are located, which may be more restrictive or burdensome than those in
the United States and with which the Company may be unfamiliar.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on its ability to recruit, retain and motivate
high quality personnel, including technical employees, competition for whom is
intense. Any inability of new management to adjust quickly to, and perform as
expected in, their respective roles within the Company, or any inability of the
Company to attract and retain personnel with the requisite skills, could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company does not currently have fixed term employment
agreements with its key personnel. See "Management".
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Indenture contains numerous financial and operating covenants,
including, but not limited to, restrictions on the Company's ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in certain
mergers and acquisitions, make investments and enter into new lines of business.
For example, such covenants require the Company to maintain certain financial
ratios in order to incur additional indebtedness which, as of December 31, 1996
(after giving pro forma effect to the Private Placement), would not have
permitted the Company to incur additional indebtedness (exclusive of the
indebtedness permitted by the exceptions to such covenants described under
"Description of the Notes - Certain Covenants - Limitation on Indebtedness").
Such covenants could materially limit or exclude potentially profitable
activities in which the Company might otherwise engage. The ability of the
Company to comply with the covenants and other terms of the Indenture, to make
cash payments with respect to the Notes and to satisfy its other debt
obligations will depend on the future performance of the Company. In addition,
in the event of a Change of Control, the Company will be required, subject to
certain conditions, to offer to purchase all outstanding Notes at a price equal
to 101% of the Accreted Value of the Notes at such time plus accrued interest,
if any. There can be no assurance that the Company would be able to raise
sufficient funds to meet this obligation. In the event the Company fails to
comply with the various covenants contained in the Indenture, it would be in
default thereunder and the maturity of substantially all of its long-term debt
(including the Notes) could be accelerated. See "Description of the Notes --
Defaults".
CONTROL BY EXISTING STOCKHOLDERS
Norton Garfinkle, Chairman of the Board and a director of the Company,
together with two affiliated limited partnerships, and Bruce F. Failing, Jr.,
Vice Chairman of the Board and Chief Executive Officer and a director of the
Company, together with a related trust established for the benefit of his
children, beneficially own approximately 53% of the outstanding Common Stock
(without giving effect to any outstanding stock options, convertible securities
and warrants). Messrs. Garfinkle and Failing have entered into an agreement
relating to the voting and disposition of such shares. Accordingly, Messrs.
Garfinkle and Failing, acting together, effectively control the Company and are
currently able to elect all of the Company's directors and to take any other
action requiring majority stockholder approval.
TRANSACTIONS WITH AFFILIATES
A significant source of funds for the Company historically has been
certain credit arrangements with members of the Board of Directors and their
affiliates and the sale of additional shares of its capital stock to such
parties. No such credit arrangements are in effect as of the date of this
Prospectus. In connection with such transactions, the Company has entered into
registration rights agreements with such directors and their affiliates. As a
result of holding the Company's convertible note and warrants, the Connecticut
Development Authority (the "CDA") is also the beneficial owner of in excess of
5% of the outstanding Common Stock. The Company subleases
<PAGE> 26
18
certain premises to a company owned by Messrs. Garfinkle and Failing and is
indebted to the CDA in accordance with its existing arrangements.
FRAUDULENT CONVEYANCE
Under certain circumstances, subsidiaries of the Company will be
required to guarantee the Company's obligations with respect to the Notes. The
Company believes that any such guarantee will be for proper purposes and in good
faith. See "Description of the Notes -- Certain Covenants -- Future Guarantors".
If a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time such subsidiary incurred
its obligations under its guarantee, either such subsidiary incurred such
obligations with the intent to hinder, delay or defraud its present or future
creditors, or that it was insolvent or was rendered insolvent by reason of such
incurrence, was engaged or was about to engage in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small capital
to carry on its business or intended to incur, or believed or reasonably should
have believed that it would incur, debts beyond its ability to pay such debts as
they matured, and the indebtedness was incurred for less than reasonably
equivalent value, such court could avoid such subsidiary's obligations under its
guarantee, subordinate such guarantee to any or all other indebtedness of such
subsidiary or take other action detrimental to the holders of the Notes. In that
event, there can be no assurance that any repayment on such guarantee could ever
be recovered by the holders of the Notes. This risk is accordingly particularly
relevant in the case of a potential guarantee of the Notes by the Principal
Subsidiary. Principally as a result of intercompany indebtedness to the Company
of approximately $38 million at December 31, 1996, the Principal Subsidiary
might not currently be solvent (the measure of solvency for these purposes is
discussed below).
The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction in which it is being applied.
Generally, however, an entity would be considered insolvent for these purposes
if, at the time it incurred indebtedness such as a guaranty obligation, either
the sum of its debts was then greater than all of its property at a fair
valuation, or the then fair salable value of its assets was less than the amount
that was then required to pay its probable liabilities on its existing debts
(including contingent liabilities such as guarantee obligations) as they became
absolute and matured or if, at any time, it proved unable to satisfy its
liabilities immediately due and payable with its current cash flow and available
assets. Principally as a result of intercompany debts owed by the Principal
Subsidiary to the Company, the Principal Subsidiary might not currently be
solvent on this basis.
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their stated
principal amount at maturity. Consequently, although cash interest on the Notes
will generally not be payable prior to August 1, 2000, original issue discount
("OID") will be includable in the gross income of a holder of the New Notes, for
U.S. federal income tax purposes, in advance of the receipt of such cash
payments on the Notes. See "Certain Federal Income Tax Consequences" for a more
detailed discussion of the U.S. federal income tax consequences of the purchase,
ownership and disposition of the New Notes.
If a case is commenced by or against the Company under federal
bankruptcy law after the issuance of the Notes, the claim of a holder of a Note
with respect to the principal amount at maturity thereof may be limited to an
amount equal to the sum of (i) the imputed initial offering price of such Note
and (ii) that portion of the OID that is not deemed to constitute "unmatured
interest" for purposes of federal bankruptcy law. Any OID that was not amortized
as of any such bankruptcy filing would constitute "unmatured interest".
POTENTIAL LOSS OF NOLS
As of December 31, 1996, the Company had net operating loss
carryforwards ("NOLs") of approximately $44 million for U.S. federal income tax
purposes. These NOLs, if not utilized to offset taxable income in future
periods, will expire between 2008 and 2011. Section 382 of the Internal Revenue
Code of 1986, as
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19
amended (the "Code"), and regulations promulgated thereunder, impose limitations
on the ability of corporations to use NOLs, if the corporation experiences a
more than 50% change in ownership during any three-year period. The Company does
not believe that it has experienced an ownership change between the Initial
Public Offering and the date of this Prospectus, although it is possible that
such an ownership change may occur or be deemed to have occurred as a result of
events beyond the control of the Company (such as transfers of Common Stock by
certain stockholders or the exercise or treatment of warrants, conversion rights
or stock options issued by the Company). In addition, it is possible that the
Private Placement itself will have caused or contributed to an ownership change,
as a result of treatment of either the Notes or the Warrants as stock for
purposes of Section 382 of the Code. There can also be no assurance that the
Company will not take additional actions, such as the issuance of additional
stock, that would cause an ownership change to occur. In addition, the NOLs are
subject to examination by the Internal Revenue Service (the "IRS"), and are thus
subject to adjustment or disallowance resulting from any such IRS examination.
Accordingly, prospective purchasers of the New Notes should not assume the
unrestricted availability of the Company's currently existing or future NOLs, if
any, in making their investment decisions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Income Taxes".
ABSENCE OF PUBLIC TRADING MARKET FOR NOTES
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 Stock 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 for the New Notes does develop, the price of such 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 New Notes for an extended period of
time, if at all.
Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
See " -- Investment Company Act Considerations" for a description of
certain risks associated with the Company being determined to be an "investment
company".
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940 Act"),
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily, in the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and are
not primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading securities. As a result of the receipt and investment of the
proceeds of the Private Placement a majority of the Company's assets will be
invested in investment securities (as defined in the 1940 Act), and the Company
may be deemed to be an investment company.
In order to clarify the Company's status under the 1940 Act, the
Company applied on January 15, 1997 (the "Application") to the Commission for an
order under Section 3(b)(2) of the 1940 Act declaring that the Company is
primarily engaged in a business other than that of investing, reinvesting,
owning, holding or trading in securities and in the alternative for an order
under Section 6(c) of the 1940 Act exempting the Company from all provisions of
the 1940 Act. The staff of the Commission has informed the Company that it is
the policy of the Commission not to take enforcement action for failure to
register as an investment company if a company's bona fide application for an
exemptive order is pending. The Company does not intend to register as an
investment company in
<PAGE> 28
20
the expectation that an exemptive order will be granted. However, there is no
assurance that any such order will be granted.
Any order that may be granted may be conditioned on, among other
things, (i) the Company limiting the nature of the securities in which the
proceeds of the Private Placement are invested, which would be likely to result
in the Company obtaining lower yields on the funds invested than might be
available in the securities markets generally, (ii) compliance with Sections 9,
17(a), 17(d), 17(e), 17(f) and Sections 36-53 of the 1940 Act and the rules and
regulations thereunder as if the Company were a registered investment company,
and (iii) disclosure in the Company's reports required to be filed under the
Exchange Act that any such order has been granted and that the Company is
subject to certain provisions of the 1940 Act and the rules and regulations
thereunder as if it were a registered investment company. In addition, the
duration of any such order may be limited to a period of two years from the date
of the filing of the Application and therefore may require the Company to reduce
its holdings of securities and investment securities by January 15, 1999, so
that the Company would no longer be considered an investment company under
Section 3(a) of the 1940 Act. Because the rate at which the proceeds of the
Private Placement will be expended depends in part on circumstances not within
the Company's control, there is no assurance that this timetable will be met.
If the Company were required to register as an investment company under
the 1940 Act, it would become subject to substantial regulation with respect to
its capital structure, management, operations, transactions with affiliated
persons (as defined in the 1940 Act) and other matters in addition to any such
regulations that may apply as a result of the conditions discussed above that
may be imposed by any exemptive order issued by the Commission. Application of
all provisions of the 1940 Act to the Company would have a material adverse
effect on the Company. In the event that an exemptive order is not granted by
the Commission or expires prior to the time the Company would no longer be
considered an investment company under Section 3(a) of the 1940 Act, the Company
would take such action as may be prudent to seek to avoid becoming subject to
further regulation under the 1940 Act. There is no assurance, however, that
under such circumstances such regulation could be avoided.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
On January 24, 1997, the Company issued $147,312,000 aggregate
principal amount at maturity of Old Notes to Credit Suisse First Boston
Corporation and UBS Securities LLC (the "Initial Purchasers"). The issuance was
not registered under the Securities Act in reliance upon the exemption under
Rule 144A and Section 4(2) of the Securities Act. In connection with the
issuance and sale of the Old Notes, the Company entered into a Registration
Rights Agreement with the Initial Purchasers dated as of January 20, 1997 (the
"Registration Rights Agreement"). The Registration Rights 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 January 24, 1997, the date the
Old Notes were issued (the "Issue Date"), (ii) use its best efforts to cause the
Registration Statement to become effective within 150 days after the Issue Date
and (iii) consummate the Exchange Offer within 180 days of the Issue Date. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Exchange Offer is
being made pursuant to the Registration Rights Agreement to satisfy the
Company's obligations thereunder.
Based on interpretations by the staff of the Commission, as set forth
in no-action letters issued to Exxon Capital Holdings Corporation, (available
May 13, 1988), Morgan Stanley & Co. Incorporated, (available June 5, 1991), Mary
Kay Cosmetics, Inc., (available June 5, 1991) and Warnaco, Inc., (available
October 11, 1991), the Company believes that a holder who exchanges Old Notes
for New Notes pursuant to the Exchange Offer may offer for resale, resell and
otherwise transfer such New Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided that (i) such
New Notes are acquired in the
<PAGE> 29
21
ordinary course of such Holder's business, (ii) such holder is not engaged in,
and does not intend to engage in, a distribution of such New Notes and has no
arrangement with any person to participate in the distribution of such New
Notes, and (iii) such holder is not an affiliate of the Company (as defined
under Rule 405 of the Securities Act). 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.
A holder who exchanges Old Notes for New Notes pursuant to the Exchange Offer
with the intention to participate in a distribution of the New Notes may not
rely on the staff's position enunciated in the Exxon Capital Letter, the Morgan
Stanley Letter or similar letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. 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." 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 (other than a resale of an unsold allotment from the
original sale of the Notes) received 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. The Company has agreed that, for a
period of 180 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."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept any and 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 a principal amount at maturity of
New Notes in exchange for an equal principal amount at maturity of outstanding
Old Notes validly tendered pursuant to the Exchange Offer and not withdrawn
prior to the Expiration Date. Old Notes may only be tendered in integral
multiples of $1,000 at maturity. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer.
The terms of the New Notes and the Old Notes are substantially
identical in all material respects, except that (i) the exchange will be
registered under the Securities Act and, therefore, the New Notes will not bear
legends restricting the transfer of such New Notes, and (ii) holders of the New
Notes will not be entitled to any of the registration rights of holders of Old
Notes under the Registration Rights Agreement, which rights will terminate upon
the consummation of the Exchange Offer. See "Description of New Notes." The New
Notes will evidence the same indebtedness as the Old Notes. The New Notes will
be issued under and entitled to the benefits of the Indenture pursuant to which
the Old Notes were issued such that the New Notes and Old Notes will be treated
as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $147,312,000 aggregate principal
amount at maturity of the Old Notes are outstanding. This Prospectus, together
with the Letter of Transmittal, is being sent to all registered holders of the
Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Notes properly tendered and not withdrawn and will issue New Notes in exchange
<PAGE> 30
22
therefor promptly after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if, the Company has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from the
Company.
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 such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents; provided, however, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Old Notes are
not accepted for any reason set froth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount at
maturity than the holder desires to exchange, such unaccepted or nonexchanged
Old Notes or substitute Old Notes evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time,
on _________, 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 and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under " --Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer. 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 Old Notes
of such amendment.
Without limiting the manner in which the Company may choose to make a
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.
INTEREST ON THE NEW NOTES
Cash interest will not accrue on the New Notes prior to February 1,
2000. Thereafter, the New Notes will bear interest at the rate of 13-1/4% per
annum, payable semi-annually, in cash, on February 1 and August 1 of each year,
commencing August 1, 2000.
<PAGE> 31
23
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will
not be required to exchange any New Notes for any Old Notes, and may terminate
or amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer which
seeks to restrain or prohibit the Exchange Offer or, in the Company's judgment,
would materially impair the ability of the Company to proceed with the Exchange
Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule, order or regulation is interpreted,
by any government or governmental authority which, in the Company's judgment,
would materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) the Exchange Offer or the consummation thereof would otherwise
violate or be prohibited by applicable law.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders who tendered such Old
Notes to withdraw their tendered Old Notes, or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right, and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time. Any determination by the Company
concerning the events described above shall be final and binding on all parties.
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
Only a holder of Old Notes may tender such Old Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must (i) complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein.
The tender of Old Notes by a holder as set forth below will constitute
an agreement between such holder and the Company in accordance with the terms
and subject to the conditions set forth in this Prospectus and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN
<PAGE> 32
24
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) 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 the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangement to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal
(described below), as the case may be, must be guaranteed by an Eligible
Institution (as defined) unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Payment 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 made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (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 a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes,
with the signature thereon guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and 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), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
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.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
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 by the Exchange
Agent to the tendering holders, 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 to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth below under " --Conditions," to terminate
the Exchange Offer and, 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.
<PAGE> 33
25
By tendering, each holder will represent to the Company that, among
other things, (i) the New Notes to be acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of such holder, (ii) such
holder has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Notes and
(iii) it is not an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company, or that if it is an "affiliate," it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
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 the Old Notes,
The Depository Trust Company ("DTC"), for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any financial institution
that is a participant in DTC's systems may make book-entry delivery of Old Notes
by causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's procedures for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer into
the Exchange Agent's account at DTC, an appropriate Letter of Transmittal with
any required signature guarantee and all other required documents must in each
case be transmitted to and received and confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed notice of
guaranteed delivery substantially in the form provided by the Company (the
"Notice of Guaranteed Delivery") (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the certificate
number(s) of such Old Notes (if possible) and the principal amount at maturity
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five business trading days after the Expiration Date,
(i) the Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Notes and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, or (ii) that book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC will be effected and confirmation of such
book-entry transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the Letter
of Transmittal, or confirmation of book-entry transfer of the Old Notes into the
Exchange Agent's account at DTC, are received by the Exchange Agent within five
business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
<PAGE> 34
26
To withdraw a tender of Old Notes in the Exchange Offer, a telegram,
telex, facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having tendered the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount at maturity of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accomplished by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn Old Notes or otherwise comply with DTC's procedures. 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 purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for payment will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under " --
Procedures for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered
but not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer contained in the legend thereon. In general,
the Old Notes may not be offered for resale or resold, 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 will have no further obligations to such holders, other than the Initial
Purchasers, to provide for the registration under the Securities Act of the Old
Notes held by them after the Expiration Date. 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.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 770 Broadway - 13th Floor
Cooper Station Corporate Trust Operations
New York, NY 10276-0844 Department
(registered or certified mail recommended) New York, NY 10003
By Hand: By Facsimile:
United States Trust Company of New York (212) 420-6152
111 Broadway (For Eligible Institutions Only)
Lower level Confirm by telephone:
New York, NY 10006 (800) 548-6565
Attn: Corporate Trust Services
</TABLE>
<PAGE> 35
27
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include registration fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, among others.
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 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 person) 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.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained 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 for resale or resold, 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 intend to register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to Exxon Capital Holdings Corporation, (available May
13, 1988), Morgan Stanley & Co. Incorporated, (available June 5, 1991), Mary Kay
Cosmetics, Inc., (available June 5, 1991) and Warnaco, Inc., (available October
11, 1991), the Company believes that a holder who exchanges Old Notes for New
Notes pursuant to the Exchange Offer may offer for resale, resell and otherwise
transfer such New Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided that (i) such New Notes
are acquired in the ordinary course of such Holder's business, (ii) such holder
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement with any person to participate in the distribution
of such New Notes, and (iii) such holder is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act). 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. A holder who exchanges Old Notes for New Notes pursuant to the
Exchange Offer with the intention to participate in a distribution of the New
Notes may not rely on the Staff's position enunciated in the Exxon Capital
Letter, the Morgan Stanley Letter or similar letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
<PAGE> 36
28
connection with any resale transaction. 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." The
New Notes may not be offered or sold unless they have been registered or
qualified for sale under applicable state securities laws or an exemption from
registration or qualification is available and is complied with. The Company is
required, under the Registration Rights Agreement, to register the New Notes in
any jurisdiction requested by the holders, subject to certain limitations. 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.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that
were not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. Accordingly, such Old Notes may not be offered, sold, pledged or
otherwise transferred except (i) to a person whom the seller reasonably believes
is a "qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act purchasing for its own account or for the account of a qualified
institutional buyer in a transaction meeting the requirements of Rule 144A, (ii)
in an offshore transaction complying with Rule 904 of Regulation S under the
Securities Act, (iii) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 thereunder (if available), (iv) pursuant to
an effective registration statement under the Securities Act or (v) to the
Company and, in each case, in accordance with all other applicable securities
laws.
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 by the Company upon the consummation of
the Exchange Offer. The expenses of the Exchange Offer will be amortized over
the remaining term of the New Notes.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the
New Notes pursuant to the Exchange Offer.
<PAGE> 37
29
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of the Company as of December 31, 1996, and as adjusted to give
effect to the Private Placement and the application of the net proceeds
therefrom. The table should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
AS
ACTUAL ADJUSTED
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 8,198 $ 103,198
-------- ---------
Long-term debt
CDA Note $ 4,989 $ 4,989
13-1/4% Senior Discount Notes Due 2004 -- 94,900
-------- ---------
Total long-term debt 4,989 99,889
-------- ---------
Common stock purchase warrants(1) -- 5,100
-------- ---------
Stockholders' equity:
Preferred stock, undesignated (par value $1.00 -- --
per share; 2,000,000 shares authorized; none
outstanding)
Common stock (par value $0.01 per share; 210 210
25,000,000 shares authorized; 21,047,106
issued and outstanding)(2)(3)
Additional paid-in capital 50,655 50,655
Accumulated deficit (45,142) (45,142)
-------- ---------
Total stockholders' equity 5,723 5,723
-------- ---------
Total capitalization $ 10,712 $ 110,712
======== =========
</TABLE>
- ----------
(1) Reflects the $5.1 million ascribed to the Warrants issued in connection
with the Private Placement. No assurance can be given that the value
allocated to the Warrants is indicative of the price at which the
Warrants may actually trade.
(2) In January 1997, the stockholders of the Company authorized an
amendment to the Company's certificate of incorporation increasing the
number of authorized shares of Common Stock from 25,000,000 shares to
35,000,000 shares.
(3) On April 1, 1997, the Company had 21,078,206 shares of Common Stock
outstanding, which did not include (i) 2,538,258 shares of Common Stock
initially reserved for issuance upon exercise of the Warrants, (ii)
943,388 shares of Common Stock which may be issued upon exercise of
outstanding stock options granted to directors, officers and employees
of the Company, (iii) 699,724 shares
<PAGE> 38
30
of Common Stock subject to purchase upon exercise of a warrant ("the
CDA Warrant") to purchase shares of Common Stock through August 1999
held by the CDA, (iv) 802,568 shares of Common Stock issuable upon
conversion of the CDA Note (as defined); and (v) 50,000 shares of
Common Stock subject to purchase through June 1998 upon the exercise of
additional warrants issued by the Company.
<PAGE> 39
31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect selected historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following selected historical consolidated statement of operations
and balance sheet data, insofar as it relates to each of the years 1992-1996,
has been derived from audited annual consolidated financial statements,
including the consolidated balance sheet at December 31, 1995 and 1996 and the
related consolidated statement of operations for the three years ended December
31, 1996 and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1993(1) 1994 1995 1996
-------- -------- -------- -------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenues .................................... $ 941 $ 1,122 $ 2,376 $ 2,973 $ 5,002
Cost of goods sold .......................... 2,373 1,718 3,822 4,113 6,204
-------- -------- -------- -------- -------
Gross profit (loss) ......................... (1,432) (596) (1,446) (1,140) (1,202)
-------- -------- -------- -------- -------
Operating expenses:
Selling, general and administrative ....... 4,628 5,966 6,039 6,952 6,807
Research and development .................. 2,503 2,325 2,571 2,491 1,117
Stock option compensation(2) .............. -- 7,454 1,119 27 44
Patent license fee ........................ 700 -- -- -- --
Depreciation and amortization ........... 157 177 149 107 162
-------- -------- -------- -------- -------
Total operating expenses ................ 7,988 15,922 9,878 9,577 8,130
-------- -------- -------- -------- -------
Loss from operations .................... (9,420) (16,518) (11,324) (10,717) (9,332)
-------- -------- -------- -------- -------
Other income (expenses):
Interest income ........................... 44 438 288 134 302
Interest expense .......................... (922) (340) (65) (291) (382)
Gain (loss) on short-term investments ..... -- -- (177) 6 --
Other ..................................... (66) -- -- -- --
-------- -------- -------- -------- -------
Total other income (expenses) ......... (944) 98 46 (151) (80)
-------- -------- -------- -------- -------
Loss before minority interest in
consolidated affiliate .................. (10,364) (16,420) (11,278) (10,868) (9,412)
Minority interest in loss of consolidated
affiliate ............................... 831 423 -- -- --
-------- -------- -------- -------- -------
</TABLE>
<PAGE> 40
32
<TABLE>
<S> <C> <C> <C> <C> <C>
Net loss(3) ........................... $ (9,533) $(15,997) $(11,278) $(10,868) $(9,412)
======== ======== ======== ======== =======
Earnings per share:
Weighted average number of common
shares outstanding(4) ................... 11,461 11,682 11,743 16,169
======== ======== ======== =======
Net loss per common share(5) ................ $ (1.40) $ (0.97) $ (0.95) $ (0.60)
======== ======== ======== =======
</TABLE>
<PAGE> 41
33
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1992 1993(1) 1994 1995 1996
-------- ------- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital .......................... $ 2,800 $11,642 $3,452 $5,283 $ 8,764
Total assets ................................. 5,445 13,241 5,195 8,316 12,260
Long-term debt ............................... 14,199 -- 1,981 3,335 4,989
Minority interest in consolidated affiliate .. 8,531 -- -- -- --
Stockholders' equity (deficiency) ............ (19,374) 12,405 2,268 3,215 5,723
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993(1) 1994 1995 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6) ............................. $ (8,371) $(15,290) $(10,839) $(10,114) $ (8,370)
Cash flows from operating activities .. (8,133) (11,855) (10,026) (11,160) (7,549)
Cash flows from investing activities .. (324) (8,641) 6,737 100 (989)
Cash flows from financing activities .. 12,866 18,606 1,901 13,139 13,526
Depreciation and amortization ......... 240 367 374 463 660
Capital expenditures .................. 324 574 303 452 397
Deficiency of earnings to fixed
charges(7) ............................ (10,364) (16,420) (11,278) (10,868) (9,412)
Pro forma deficiency of earnings to
fixed charges(8) ...................... -- -- -- -- (23,974)
Stores with ERS ShelfNet System
installed at end of period ............ 7 13 21 42 65
</TABLE>
- ----------
(1) Reflects the consummation of the Combination immediately prior to the
closing of the Initial Public Offering.
(2) The non-cash compensation expense recognized for 1993 included
compensation earned for services prior to the Combination and
compensation earned for the period subsequent to the Combination
through December 31, 1993. Compensation expense recognized in 1994,
1995 and 1996 related to services provided by employees during those
periods.
(3) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common stock equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not
reflect common share equivalents that are anti-dilutive.
<PAGE> 42
34
(5) Net loss per common share data for periods prior to December 31, 1993
has not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(6) EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization. EBITDA is presented because the Company
believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by
an investor as an alternative to net income or income from operations,
as an indicator of the operating performance of the Company or other
consolidated operation or cash flow data prepared in accordance with
generally accepted accounting principles, or as an alternative to cash
flows as a measure of liquidity. For the years ended December 31, 1993
and 1994, EBIDTA included non-cash charges for stock option
compensation expense of $7.5 million and $1.1 million, respectively;
for the years ended December 31, 1995 and 1996 such amounts were not
material.
(7) For purposes of determining the deficiency of earnings to fixed
charges, "earnings" consist of earnings before fixed charges and "fixed
charges" consist of interest on all debt and that portion of rental
expense that the Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to
give effect to the Private Placement and the application of the net
proceeds therefrom.
<PAGE> 43
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The market for ESL systems is in the development stage, and the Company
estimates that, as of December 31, 1996, approximately 120 stores in the United
States were operating such systems, out of a potential market in excess of
100,000 supermarkets and other stores. Large supermarket chains have tested the
productivity benefits as well as the technical functionality of ESL systems in
pilot stores, as a result of which the Company believes they are in a position
to consider rolling out the systems. The Company's objective is to be the
worldwide leader in the emerging ESL system market as product adoption and
penetration increases.
Because the market for ESL systems is in the development stage, market
acceptance of and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at and extent to
which retailers choose to install ESL systems throughout their stores. The
initial acceptance and rate of installation by retailers may be affected by
numerous factors beyond the Company's control, including the customer's
assessment of the benefits of and the need for ESL systems and the customer's
available capital resources.
Since its inception in April 1990, the Company has been engaged
primarily in the development, design, market testing and, more recently, sale of
the ERS ShelfNet System. The Company subcontracts to third parties the
manufacture and assembly of the components comprising the ERS ShelfNet System.
In addition, the Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued development of the ERS
ShelfNet System. Since inception and through December 31, 1996, the Company has
generated cumulative revenues of $12.6 million, and has incurred a cumulative
net loss of approximately $65.8 million, which includes non-cash charges in the
amount of $8.6 million for stock option compensation expense.
The Company historically has marketed the ERS ShelfNet System for sale
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for capital-constrained retailers. The Company now intends also to
market its ERS ShelfNet System on a fee based arrangement whereby the Company
will own the system and, with no upfront cash cost to the retailer, furnish the
system to retailers (generally for a period of up to five years), who will pay
monthly fees to the Company based largely on their actual usage of the system.
The Company believes the SayGo Plan will increase market acceptance of the ERS
ShelfNet System. However, there can be no assurance that the pricing strategy
will be accepted by customers or will be successful in helping the Company to
attain profitability.
Under the SayGo Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers. Also, under the SayGo Plan the
Company will retain ownership of the systems, which will be reflected as
long-term assets on the Company's consolidated balance sheet and which will be
depreciated on a straight-line basis over the shorter of their economic lives or
five years. Such assets will be subject to periodic impairment testing as
prescribed by Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's revenues were $5,002,000 in 1996,
<PAGE> 44
36
compared to $2,973,000 in 1995. The increase of $2,029,000 in 1996 is primarily
attributable to greater product sales in 1996, including software license fees
in the amount of $243,000 (6% of product sales for 1996) recorded in the second
quarter of 1996. The increase in revenue also reflects a $586,000 increase in
maintenance revenue associated with a larger installed customer base. All
revenues are attributable to sales to customers in the supermarket industry. In
1996, a single customer was responsible for 46% of revenues and 79% of revenues
was attributable to three customers. Approximately 30% of revenues in 1995 was
attributable to a single customer, with three customers accounting for 83% of
total revenues. The Company anticipates that past patterns in growth of revenues
may not be indicative of future results of operations as the Company introduces
its SayGo Plan, under which the Company will recognize revenues as monthly usage
and other fees are billed to customers. See "Business -- Marketing".
In connection with introduction of the SayGo Plan, the Company will
depreciate the cost of hardware components of its system over the shorter of
their estimated useful lives or five years.
Cost of Goods Sold. Cost of goods sold consists of the cost of hardware
components of the ERS ShelfNet System, system installation costs, depreciation
of tools and dies owned by the Company and utilized in the manufacturing of
hardware components, amortization of capitalized software costs, warranty and
maintenance costs, freight and inventory obsolescence.
Cost of goods sold was $6,204,000 in 1996 compared to $4,113,000 in
1995, reflecting increased product sales in 1996. The Company realized lower
hardware component costs on installations during 1996 as compared to 1995,
reflecting an increase in the use of high volume low cost suppliers. Cost of
goods sold in 1996 includes warranty and maintenance expenses of $966,000,
compared to $561,000 for such expenses in 1995. The increase in warranty and
maintenance costs reflects the growing installation base for the ERS ShelfNet
System. The Company anticipates that system enhancements implemented in 1996 and
1995 will further decrease future warranty and maintenance expenses per
installation and, in the future, that the cost of goods sold will decrease as a
percentage of revenues as a result of higher manufacturing volumes of its
components and as the installation process is improved.
Cost of goods sold in 1996 also includes a special provision for excess
inventory of $750,000 recorded in the fourth quarter of 1996, in connection with
the introduction of the new generation electronic shelf labeling system.
Selling , General and Administrative. Selling, general and
administrative costs consist of costs associated with selling and administrative
staff, overhead, market research and development, and customer service
personnel. Selling, general and administrative costs decreased $145,000, to
$6,807,000 in 1996, compared to $6,952,000 in 1995, reflecting reduced
discretionary spending in 1996.
Research and Development. Research and development expenses were
$1,117,000 in 1996 compared to $2,491,000 in 1995, reflecting the winding down
or completion in 1996 of several hardware and software development projects
commenced in prior years. During the years ended December 31, 1996 and 1995, the
Company also capitalized product development costs of $592,000 and $475,000,
respectively, that will be amortized over the shorter of the estimated useful
life of the related software product or process or three years.
<PAGE> 45
37
Interest Income. Interest income increased to $302,000 in 1996 compared
to $134,000 in 1995, due to increased cash and cash equivalents available for
investment.
Interest Expense. Interest expense increased to $382,000 in 1996
compared to $291,000 in 1995. Interest expense represents interest on amounts
borrowed from the CDA and, through July 24, 1995, a revolving credit facility
with the principal stockholders of the Company and members of the Board of
Directors and their affiliates. Commencing with the consummation of the Private
Placement in January 1997, the Company will record interest on an amount equal
to the net proceeds to the Company from the Notes at the annual rate of 13.25%.
Additional interest will be recorded as a result of the amortization of the
discount recorded on the Notes (for value attributed to common stock purchase
warrants) and the amortization of costs of issuance.
Income Taxes. The Company has incurred net losses since inception which
have generated net operating loss carryforwards for federal income tax purposes
of approximately $44 million, which are available to offset future taxable
income and expire through the year 2011 for federal income tax purposes. In
consideration of the Company's accumulated losses and the uncertainty of its
ability to utilize any future tax benefits resulting from these losses, the
impact of this potential tax benefit has been eliminated in the Company's
consolidated financial statements as of December 31, 1996 and 1995 (see Note 11
of the Notes to Consolidated Financial Statements included elsewhere herein).
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. The Company's revenues were $2,973,000 in 1995, compared to
$2,376,000 in 1994. The increase of $597,000 in 1995 was attributable to an
increase of $436,000 in product sales. The total increase in revenue also
reflected a $161,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues were attributable to sales to customers in
the supermarket industry. Approximately 30% of revenues in 1995 was attributable
to a single customer, with three customers accounting for 83% of total revenues.
In 1994, a single customer was responsible for 67% of revenues and 81% of
revenues was attributable to two customers.
Cost of Goods Sold. Cost of goods sold was $4,113,000 in 1995, compared
to $3,822,000 in 1994, reflecting increased product sales in 1995. The Company
realized lower hardware component costs on installations during 1995 as compared
to 1994, reflecting an increase in the use of high volume, low cost suppliers.
In addition, included in cost of goods sold in 1994 is $300,000 of product
performance-related costs expected to be non-
<PAGE> 46
38
recurring. Such product performance-related costs included a $125,000 provision
for the upgrade of certain prior customer installations with an enhanced version
of a component of the ERS ShelfNet System and the costs of a special quality and
performance audit of customer installations. Cost of goods sold in 1995 included
warranty and maintenance expenses of $561,000. The comparable costs in 1994 were
$206,000, excluding such special product performance-related costs. The increase
in warranty and maintenance costs reflected the growing installation base for
the ERS ShelfNet System.
Selling, General and Administrative. Selling, general and
administrative costs increased $913,000, to $6,952,000 in 1995 compared to
$6,039,000 in 1994. The increase in selling, general and administrative costs
was primarily attributable to efforts to expand the Company's organization in
anticipation of sales growth.
Research and Development. Research and development expenses were
$2,491,000 in 1995, compared to $2,571,000 in 1994. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were
$1,523,000 in 1995, compared to $989,000 in 1994, due to an increased use of
third parties to augment the Company's internal activities in the area of
long-term product development. Expenses incurred in the development of the
Company's software system were $968,000 in 1995, compared to $1,582,000 in 1994.
During the year ended December 31, 1995, the Company also capitalized $475,000
of product development costs that will be amortized over the shorter of the
economic life of the related software product or process or three years.
Stock Option Compensation. The Company recorded non-cash compensation
expense of $27,000 in 1995 and $1,119,000 in 1994. Non-cash compensation expense
results from the Company's issuance of stock options to employees at exercise
prices below the fair market value at the date of grant and is recognized as
expense over the employees' respective service periods.
Interest Income. Interest income decreased to $134,000 in 1995,
compared to $288,000 in 1994, due to the decrease in the level of short-term
investments. Short-term investments were sold during 1995 and 1994 to fund the
Company's operating cash requirements.
Interest Expense. Interest expense increased $226,000 to $291,000 in
1995, compared to interest expense of $65,000 in 1994. Interest expense
represented interest on amounts borrowed from the CDA and, through July 24,
1995, a revolving credit facility between the Company and members of the Board
of Directors and their affiliates.
Gain (Loss) on Short-Term Investments. The Company recognized $6,000 in
gains in 1995 and $177,000 in losses in 1994 on the market value of short-term
investments. There were no unrealized gains or losses on short-term investments
at December 31, 1995. At December 31, 1994, short-term investments of $1,027,000
were recorded net of a valuation allowance of $77,000 for unrealized losses. The
remaining $100,000 of such losses had been realized in 1994.
Income Taxes. In consideration of the Company's accumulated losses and
the uncertainty of its ability to utilize any future tax benefits resulting from
these losses, the impact of this potential tax benefit has been eliminated in
the Company's Consolidated Financial Statements as of December 31, 1995 and
1994. See Note 11 of the notes to consolidated financial statements included
herein and "Risk Factors -- Potential Loss of NOLs".
<PAGE> 47
39
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had net working capital of
$8,764,000, reflecting cash and cash equivalents of $8,198,000, compared to net
working capital of $5,283,000, reflecting cash and cash equivalents of
$3,210,000 at December 31, 1995. The increase in net working capital and in cash
and cash equivalents resulted primarily from the offshore public offering and
contemporaneous private placement (the "1996 Transactions") of Common Stock in
July 1996, which generated approximately $12 million, and additional borrowings
of approximately $1.65 million during the first quarter of 1996 under the
Company's facility with the CDA. On January 24, 1997, the Company raised
approximately $95 million in net proceeds as a result of the Private Placement.
Net cash used in operations was $7,549,000 in 1996, compared to net
cash of $11,160,000 used for operating activities in 1995 resulting primarily
from the net losses of $9,412,000 and $10,868,000, respectively, for such
periods. Such net losses reflect non cash provisions for doubtful accounts
receivable of $168,000 in 1996 and $82,000 in 1995, and for inventory
obsolescence of $843,000 in 1996 and $94,000 in 1995. The improvement in net
cash used in operations also reflected decreases in trade accounts receivable
(net of allowance for doubtful accounts) of $294,000 and inventory (net of
reserves) of $1,052,000, compared to increases of $853,000 and $497,000,
respectively, for such items during the prior year. During 1996, current
liabilities decreased $217,000, reflecting a reduction in outstanding trade
payables, compared to an increase of $820,000 in the prior year.
Cash used in investing activities totaled $989,000 in 1996 compared to
$100,000 of cash provided by investing activities in 1995. Investing activities
included capital expenditures of $397,000 and $452,000 in 1996 and 1995,
respectively. The Company also incurred $592,000 and $475,000 in 1996 and 1995,
respectively, in product development costs. In 1995, cash provided by investing
activities also included $1,027,000 from the sale of short-term investments.
In addition to selling the ERS ShelfNet System to customers at a price
generally in excess of $100,000 per store, under the Company's proposed SayGo
Plan the Company will offer the system on a fee-based arrangement whereby the
Company retains ownership of the system. See "Business -- Marketing and Sales --
SayGo Agreements" below for a description of fixed and variable charges proposed
by the Company under the SayGo Plan. As a result, the Company will have
substantial cash requirements for manufacturing and carrying costs attendant to
introduction of the SayGo Plan, which will not initially be covered by revenues
calculated on the basis of usage fees paid by customers. Accordingly, the
Company will require substantial funds in order to support the introduction of
the SayGo Plan.
To date, the Company has not generated positive cash flow from
operations, and has historically funded its operations primarily through loans
from its stockholders, the sale of interests in an affiliated partnership, the
Initial Public Offering consummated in 1993, its arrangements with the CDA, the
sale of Series A Cumulative, Convertible Preferred Stock, $1.00 par value
("Series A Preferred Stock"), to members of the Board of Directors and their
affiliates, the 1996 Transactions and the Private Placement.
<PAGE> 48
40
Cash provided by financing activities provided $13,526,000 in 1996
compared to $13,139,000 in 1995. In July 1996, the Company completed: (i) the
offshore public offering of an aggregate of 4,963,500 shares of its Common
Stock, in accordance with Regulation S under the Securities Act, and (ii) the
contemporaneous private placement of an aggregate of 911,657 shares of Common
Stock to subscribers, including certain members of the Board of Directors and
their affiliates. In connection with completion of such transactions, holders of
all 125,556 outstanding shares of the Series A Preferred Stock converted their
shares, in accordance with their terms, into an aggregate of 3,138,900 shares of
Common Stock, in exchange for payments aggregating $235,000. The aggregate
proceeds to the Company in such transactions were approximately $12 million
(exclusive of non-cash expenses represented by the issuance of 213,957 shares of
Common Stock as commissions).
In addition, the Company borrowed the remaining $1,650,000 under its
facility with the CDA (all such indebtedness under such facility, the "CDA
Indebtedness") during the first quarter of 1996. The aggregate of $5,000,000 of
CDA Indebtedness is repayable in August 1999 and is convertible to shares of
Common Stock, through August 12, 1997 at an adjusted conversion price calculated
at $3.00 plus the average market price of the Common Stock during the eighteen
months prior to conversion and thereafter at $3.00 plus the average market price
of the Common Stock during the twelve months prior to conversion. In connection
therewith, the CDA acquired five-year warrants to purchase 699,724 shares (as
adjusted through December 31, 1996) of Common Stock, exercisable at an adjusted
price through August 12, 1997 calculated as $2.58 plus the average market price
of the Common Stock during the eighteen months prior to exercise, and thereafter
as $2.58 plus the average market price of the Common Stock during the twelve
months prior to exercise. Under its arrangements with the CDA, the Company will
be obligated to comply with certain covenants (some of which remain in effect
until August 2004), whether or not the CDA Indebtedness has been repaid in full,
or be subject to certain penalties including immediate repayment of the CDA
Indebtedness in full. In the event of specified changes in control of the
Company coupled with prepayment of its note, the Company has rights to
repurchase such warrants and shares at the fair market value thereof (calculated
pursuant to such arrangements), and thereby, subject to the foregoing,
extinguish such covenants. In all events (and notwithstanding any such
repurchase), if the Company relocates outside of Connecticut before August 2004,
all advances made by the CDA are subject to acceleration, together with a
penalty of $250,000.
In January 1997, the Company completed the private sale of 147,312
Units, consisting of $147,312,000 principal amount at maturity of the Old Notes
and Warrants, which were sold to investors at a price aggregating $100 million
($95 million net proceeds to the Company). The Old Notes mature on February 1,
2004, with accrual of cash interest at the rate of 13-1/4% per annum commencing
February 1, 2000, such interest payable thereafter on February 1 and August 1 of
each year commencing August 1, 2000. The Old Notes may be called, at the
Company's option, in whole or in part, at any time after February 1, 2001, and,
upon specified change in control events, each holder has the right to require
the Company to purchase its Old Notes, at specified prices.
<PAGE> 49
41
As more fully described under "Description of the Notes", the Indenture
places limitations on operations of and sales of assets by the Company or its
subsidiaries, requires maintenance of certain financial ratios in order for the
Company to incur additional indebtedness (subject to specified exceptions),
requires the delivery by the Company's subsidiaries of guaranties if specified
debt is subsequently incurred by such subsidiaries, and limits the Company's
ability to pay cash dividends or make other distributions to the holders of its
capital stock or to redeem such stock. The Warrants are, subsequent to January
24, 1998, exercisable through February 1, 2004 with respect to an aggregate of
2,538,258 shares of Common Stock, at a per share price of $5.23.
The Company will utilize the net proceeds from the Private Placement in
connection with the anticipated expansion of its operations, including for
manufacturing and carrying costs attendant to the SayGo Plan, and for general
corporate purposes, including the funding of the Company's ongoing engineering
and development efforts. The Company believes that the proceeds of the Private
Placement, together with its other cash and cash equivalents, will be sufficient
to meet the Company's currently anticipated operating and capital expenditure
requirements for the foreseeable future.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and related
arrangements, and the Company may consider additional transactions, consistent
with the provisions of the Indenture, that will further enhance its liquidity.
The Company has not reached any determination with respect to the size or nature
of any such transaction or whether any such transaction will be undertaken, and
there can be no assurance that any such transaction will be effected.
<PAGE> 50
43
BUSINESS
GENERAL
The Company develops and provides ESL systems designed to allow
supermarket chains and other retailers to increase productivity, reduce labor
costs and improve management information systems. The Company is the leading
provider in the United States of ESL systems, based on management's estimates of
installed ESL systems. The ERS ShelfNet System has been designed as a
productivity enhancing center store automation system which replaces paper price
tags on retail shelves with electronic liquid crystal display units and provides
a suite of applications to enhance a retailer's pricing, inventory, shelf
management, merchandising and promotional activities. The ERS ShelfNet System is
comprised of proprietary hardware and software that electronically link a
store's shelves to its POS systems and central computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. An ERS store-based local area network has up to 20,000
individual ESLs connected to a control server. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning alphanumeric
messages. The ERS ShelfNet System is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market.
As of December 31, 1996, the ERS ShelfNet System was installed in 64
U.S. retail stores, including stores owned by such leading supermarket chains as
Vons, Stop & Shop, HEB, Big Y, Shaw's, Lucky, The Great Atlantic & Pacific Tea
Company, Inc. and K Mart Corporation, and one supermarket owned by the
Overwaitea Food Group in Canada. The Company's customers include five of the 15
largest supermarket chains in the United States. The Company estimates that, as
of December 31, 1996, of the approximately 29,800 supermarkets in the United
States, approximately 120 stores were operating ESL systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it planned in the first quarter
of 1997 to introduce a new generation ERS ShelfNet System that provides spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, in
December 1996 ERS signed its first Letter of Intent
<PAGE> 51
44
providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997, and is continuing its efforts to procure
additional letters of intent. The Letter of Intent is, and all such additional
arrangements will be, subject to numerous conditions, including the negotiation
and execution of definitive contract terms.
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. The Company now intends also to offer the ERS
ShelfNet System on a fee based arrangement whereby the Company will own the
system and, with no upfront cash cost to the retailer, furnish the system to
retailers (generally for a period of up to five years), who will pay monthly
fees to the Company based primarily on their actual usage of the system. The
Company believes that the SayGo Plan will accelerate market acceptance of the
ERS ShelfNet System.
Management estimates that, under the SayGo Plan, the annual cost
savings and benefits realized by its anticipated supermarket customers using the
ERS ShelfNet System could substantially exceed the anticipated annual cost to
the customer for the new generation system proposed by ERS. For example,
management estimates, based on studies conducted in collaboration with the
Company's current customers, that cost savings and benefits to a supermarket
with 15,000 ESLs that changes 2,500 to 4,500 prices per week could, under the
Company's proposed SayGo Plan, provide an annual net contribution per store
ranging from approximately $40,000 to approximately $240,000 through the
anticipated level of usage of the applications afforded by the ERS ShelfNet
System. However, there can be no assurance that any such benefits will be
realized by any customer. See "Risk Factors -- Use of Assumptions to Estimate
Net Cost Savings and Benefits".
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
In December 1996, the Company announced its plan to introduce the new
generation ERS ShelfNet System, providing spread spectrum microwave transmission
of data directly to wireless ESLs. The enhanced ERS ShelfNet System is designed
to provide additional flexibility and convenience to customers by expanding
potential coverage by the Company's ESLs to the entire store and allowing the
retailer to change store placement of the ESLs more easily. The Company believes
that the cost of installing and maintaining its wireless ESLs will be lower than
that of its current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
In December 1996, ERS signed its first non-binding Letter of Intent
providing for installation of the ERS ShelfNet System under the SayGo Plan in
approximately 60 supermarkets beginning in 1997, and is continuing its efforts
to procure additional letters of intent. The Letter of Intent is, and all such
additional arrangements will be, subject to numerous conditions, including
negotiation and execution of definitive contract terms. See " -- Marketing and
Sales" below for a description of the terms to be proposed initially by the
Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock in
accordance with Regulation S under the Securities Act and the contemporaneous
private placement of Common Stock to subscribers, including members of the Board
of Directors
<PAGE> 52
45
and their affiliates. In January 1997, the Company raised approximately $95
million in net proceeds as a result of the Private Placement.
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends: (i) to focus its initial marketing efforts under the SayGo Plan on the
supermarket sector of the retail industry; (ii) to continue to reduce the
manufacturing costs of the system to increase the Company's profitability; and
(iii) to continue to enhance, develop and support value-added applications of
the ERS ShelfNet System.
- SayGo Plan. The Company believes that its SayGo Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use the proceeds from
the Private Placement to install the ERS ShelfNet System in
supermarkets under the SayGo Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and because of the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
December 31, 1996, of the approximately 29,900 supermarkets in
the United States, approximately 120 stores were operating ESL
systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the SayGo Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings) and to encourage existing
customers to adopt the new generation system and install
additional systems, the Company intends to develop additional
productivity enhancing applications for, and enhance existing
applications of, the ERS ShelfNet System.
RETAIL INDUSTRY OVERVIEW
The Company's target market consists of retailers that stock a large
number of stockkeeping units ("SKUs"), operate in highly competitive
environments, have relatively low margins and change prices frequently. Such
retailers include supermarkets, discount mass merchandisers, chain drug stores
and convenience stores. The Company believes that such retailers generally seek
automated solutions to reduce labor costs and improve efficiencies in
operations. The approximate number of supermarkets, discount mass merchandisers,
chain drug stores and convenience stores in the United States is set forth in
the table below. The table does not include the European market, where the
aggregate number of comparable stores is greater than in the United States.
<TABLE>
<CAPTION>
TYPE OF STORE NUMBER OF STORES
------------- ----------------
<S> <C>
Supermarkets..................... 29,870
Discount mass merchandisers...... 9,455
Chain drug stores................ 20,366
Convenience stores............... 56,000
-------
Total 115,691
=======
</TABLE>
<PAGE> 53
46
Source: Progressive Grocer Annual Report, April 1997; MMR Annual Report,
April 29, 1996.
The Company believes that many of its target retailers are capital
constrained and have compared potential investments in the ERS ShelfNet System
to alternative capital expenditures. Such alternative uses of capital include
purchasing additional stores, remodeling and refurbishing existing stores,
making acquisitions and investing in technology, including ESL systems. The
Company's SayGo Plan is designed to eliminate a retailer's upfront cash cost to
install the ERS ShelfNet System, instead assessing charges largely for services
the retailer actually uses. Thus, the ERS ShelfNet System will constitute an
operating expense (that the Company estimates to be more than offset by cost
savings and benefits) rather than a capital expenditure for retailers, allowing
retailers to conserve capital for other projects while also choosing to install
the ERS ShelfNet System.
SUPERMARKET SECTOR
The supermarket sector is mature, intensely competitive and tends to
have margins that are among the lowest in the retailing industry. The Company
estimates that an average supermarket stocks approximately 19,500 SKUs, most of
which are available at competitive stores, and runs frequent promotions with
respect to many of these items. As a result, a supermarket's success depends in
large part on the efficiency of its operations, which in turn affects its
ability to offer competitive prices and maintain acceptable operating margins.
Supermarkets are under constant pressure to reduce costs, manage inventory more
effectively and offer competitive prices.
Historically, supermarkets have been among the first retailers to adopt
technologies designed to reduce labor and other costs, improve operations and
enhance customer service. For example, POS scanners were first introduced in the
supermarket sector and have achieved the greatest level of market penetration
there. While fewer than 15 supermarkets in the United States had POS scanners in
1974, by 1995 approximately 95% of all chain supermarket stores and
approximately 80% of independent supermarket stores had installed POS scanners.
POS systems have enabled retailers to reduce labor costs, improve pricing
integrity and increase efficiency while also providing additional applications
such as electronic funds transfer and computerized inventory management. The
Company believes that supermarkets and other retailers will more quickly adopt
other technological innovations as a result of their experience with POS
scanners. As a result, and because of the Company's established relationships
with supermarket chains and its installed base of ERS ShelfNet Systems in
supermarkets, the Company intends to continue to focus its marketing efforts in
the supermarket sector.
CHALLENGES FACING RETAILERS THAT AFFECT THE COMPANY
The Company has designed the ERS ShelfNet System to address retailer
productivity, labor costs, merchandising and competitive market share issues, as
summarized below:
MANUAL PRICE CHANGES
Although POS systems have enabled supermarkets to achieve efficiencies
at the "front end" of the store, the center of the typical store has not been
automated and remains labor intensive. The Company estimates that an average
supermarket carries approximately 19,500 SKUs and changes approximately 2,500
prices per week at the shelf with newly printed paper labels. These price
changes require numerous manual steps resulting in (i) significant labor costs
and (ii) delays in implementing price changes following special promotions or
increases in wholesale costs, both of which adversely affect supermarket
profitability.
PRICING INTEGRITY
In addition to being labor intensive and time-consuming, manual
implementation of price changes also is more susceptible to pricing inaccuracy.
Stores with inaccurate prices risk customer dissatisfaction as well as fines and
penalties levied by governmental agencies. According to Supermarket News,
February 5, 1996, over 90% of supermarket executives surveyed rate the issue of
pricing verification as extremely or highly important. As a result, supermarket
operators incur significant expense in auditing pricing integrity and correcting
pricing inaccuracies.
<PAGE> 54
47
MERCHANDISING MANAGEMENT
Supermarkets actively promote products at the shelf with a variety of
merchandising materials such as "hangers" or "bibs", which are affixed to the
shelf or a product's price label and alert consumers to pricing or promotional
activities. Supermarkets install and remove bibs manually, with employees
generally walking the aisle and checking promotional items against a printed
list arranged according to the shelfset schematics (called "planograms"). The
Company believes using such a printed list is an unnecessarily time-consuming,
inaccurate and costly process.
REPLENISHMENT/INVENTORY MANAGEMENT
Supermarkets lose sales (and their corresponding margins) when products
are inadvertently missing from designated planogrammed shelves, often due to
lost or damaged paper labels. In addition, damaged and handwritten paper labels
result in increased order entry errors, which increases both out-of-stocks
(resulting in lost sales) and labor costs associated with the product ordering
process.
SHELFSET MANAGEMENT
Typically, supermarkets carefully develop planograms for the management
of products and product categories in the stores, on the belief that products
perform best in the aggregate when arranged on shelves in the quantities and
with the facings prescribed by the planogram. When paper labels are lost,
damaged or moved, deviations from the planogram occur, resulting in a higher
incidence of out-of-stock items, loss of sales of potentially high margin items,
continued stocking of discontinued or unauthorized products, and increased time
and labor associated with new cut-ins to a shelfset that differ from the
planogram.
ERS SHELFNET APPLICATIONS
The ERS ShelfNet System has been designed (i) to replace paper price
tags on retail shelves with electronic liquid crystal display units, and (ii) to
provide a suite of applications to address the challenges to retailers of manual
price changes, pricing integrity, merchandising management, replenishment/
inventory management and shelfset management. The ERS ShelfNet System's
applications are designed to include Instant Response Pricing to eliminate
manual price changes, Integrated Electronic Pricing to ensure pricing integrity,
Quick Point-of Purchase (QuickP.O.P.(R)) Merchandising to reduce the cost of
changing merchandising materials, AccuStock(TM) to facilitate inventory
replenishment and ShelfSet Audit to provide for efficient shelfset management.
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
Manual Price Changes.................. Instant Response Pricing. The ERS ShelfNet System allows retailers to
implement price changes almost instantaneously from the store's central
computer or directly from corporate or regional headquarters, which the
Company believes facilitates significant labor savings from manual
implementation of price changes. In addition, electronic price changes
are significantly faster to implement, which the Company believes leads
to increased margins as prices may be increased promptly following
special promotions or increases in wholesale prices.
Pricing Integrity..................... Integrated Electronic Pricing. The ERS ShelfNet System electronically
links a store's POS systems and its ESLs, virtually eliminating
discrepancies between prices displayed on the store shelves and prices
charged at checkout. This assurance of pricing integrity permits
retailers to reduce or eliminate manual pricing audits and fines paid to
governmental entities for pricing inaccuracies. In addition, such
pricing accuracy can result in fewer price checks and errors at
checkout, can result in faster checkout times, improved cashier
productivity and increased customer satisfaction.
</TABLE>
<PAGE> 55
48
<TABLE>
<CAPTION>
<S> <C>
Merchandising Management.............. QuickP.O.P. The ERS ShelfNet System's QuickP.O.P. application is
designed to increase the speed and accuracy of placing product displays
and promotional material by displaying a signal on the ESLs of products
that require the addition or removal of merchandising bibs or hangers.
This is intended to eliminate the time-consuming and potentially
inaccurate manual process of checking promotional items against a
printed list arranged according to the planogram.
Replenishment/Inventory Management.... AccuStock. The ERS ShelfNet System's AccuStock application is designed
to allow authorized store personnel to change ESLs from a price display
to an out-of-stock message. This procedure replaces the current system
of noting out-of-stocks manually, with the use of a label scanner, which
requires follow-up by the store employee. AccuStock facilitates simple
notation of out-of-stocks during normal stocking procedures, with the
system automatically generating an out-of-stock report that can be
resolved quickly by store management. In addition, the display of an
out-of-stock message, rather than removal of a paper label, holds the
shelf placement for the missing product, increasing planogram integrity.
Shelfset Management................... ShelfSet Audit. The ERS ShelfNet System is designed to maintain
shelfsets more easily, because the ESLs stay locked in place and cannot
be moved back and forth as can paper tags. In addition, the ESL is
designed to display product facing information and section, shelf, and
bay locations for simple, more accurate and less paper-intensive
planogram implementations or changes. These features are intended to
reduce labor associated with shelfset management and stocking and
increase planogram compliance and monitoring.
</TABLE>
Management estimates that, under the SayGo Plan, the cost savings and benefits
to its anticipated supermarket customers using the ERS ShelfNet System
(including the full suite of its applications at the anticipated level of usage)
could provide an annual net cost contribution per store ranging from
approximately $40,000 to approximately $240,000. See " -- Recent Developments --
New Marketing and Pricing Program" above.
THE ERS SHELFNET SYSTEM
The Company's ESL system replaces paper price tags on retail shelves
with liquid crystal display labels and transmits pricing and other information
to and from the shelf edge. The Company's new generation system permits the
transmission of data directly to wireless ESLs.
Each ERS ShelfNet System generally consists of 10,000 to 20,000 ESLs
and the necessary communication and support infrastructure to link the ESLs with
the store's central computer and POS systems. The Company's new generation
system consists of the following components:
ELECTRONIC SHELF LABEL
Each ESL is a mini data transceiver contained in a plastic case, which
displays price and other information by means of a wide-angle view liquid
crystal display window. The ESL is also able to display pricing and other
promotional information for the consumer and inventory and reorder information
for store employees, and is equipped with two buttons designed to allow store
staff to interact with the store computers from the ESL on the shelf. The
Company offers four different sizes and types of ESLs for use in different
applications, such as SKUs for coolers and freezers. The Company's currently
installed ESLs are powered through the rails to which they are
<PAGE> 56
49
connected, whereas the wireless ESLs are powered by long-life batteries.
SPREAD SPECTRUM WIRELESS NETWORK
Communication to the ESLs is managed by a high frequency, real-time
communication system that uses spread spectrum technology. Active cell antennae
in the store ceiling send and receive signals to and from wireless ESLs in their
respective coverage areas. The cells form a radio frequency infrastructure in
which multiple, non-overlapping cells may be active simultaneously, while
overlapping cells synchronize their transmissions, permitting spectrum re-use.
The redundancy of transmission provided by ERS' spread spectrum network helps to
eliminate interference problems and to ensure that complete information is
clearly communicated.
COMMUNICATION HUB
The local area network's communication hub, located in the store's back
office area, has two functions: (i) the hub distributes signals to the ESLs
through computerized information processors which relay information to active
cell antennae in the store ceiling and from the antennae to the individual
product ESLs located on the shelf and (ii) the hub receives information from the
information processors which has been relayed by the antennae in the ceiling
after receipt from the ESLs located on the shelf.
SYSTEM CONTROLLER
The system controller is a personal computer or the existing in-store
processor, also located in the store's back office area, which is linked
directly to the store's electronic POS system. The system software resides in
the system controller, and allows the same pricing data that is incorporated
into the POS system to be used with the ERS ShelfNet System simultaneously. The
system controller communicates the pricing or other data directly to and from
the communication hub. The system controller is designed to receive information
from the store's corporate or regional headquarters (such as product price or
promotional information) and to communicate data to such headquarters (such as
product order information).
SOFTWARE SYSTEM
The Company's ESL system is designed to be compatible with electronic
POS scanning systems and is compatible with systems provided by the three major,
worldwide suppliers of POS systems, IBM, NCR, and Fujitsu-ICL. The Company's
system may also be interfaced with major store operating systems, such as OS/2,
Windows NT and Unix. Because the "intelligence" of the ERS ShelfNet System is
located in the system controller and not the individual ESLs, the Company is
able to incorporate new functions into its system by upgrading software without
replacing any hardware.
The Company's system can be linked to an in-store laser printer capable
of printing paper overlays for ESLs, paper labels for non-electronic shelves and
other promotional items. The Company furnishes its customers with specific
procedures and guidelines for each application which show store managers how to
utilize the ERS system and software tools, and a data collection and analysis
format to document productivity increases and to monitor ongoing improvements in
store operations.
MARKETING AND SALES
GENERAL
The Company historically has marketed its ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store, a significant capital
expenditure for retailers. The Company now intends also to market the ERS
ShelfNet System under its SayGo Plan, whereby the Company will own the system
and, with no upfront cash cost to the retailer, furnish the system to retailers
who will pay monthly fees to the Company based largely on their actual usage of
the system.
<PAGE> 57
50
The Company will continue to focus its marketing efforts on major
national and regional supermarket chains. The Company believes that each
supermarket chain will typically choose a single supplier of ESL systems to
maximize chainwide efficiency. Therefore, the Company's marketing strategy is to
make installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such installations by
installing systems through the rest of the chain's stores. In response to
retailing trends, the Company has also increased its marketing efforts to mass
merchandisers.
Based upon its experience to date, the Company expects that the
adoption process for the ERS ShelfNet System will occur in four successive
phases, as follows:
- Detailed review of store procedures and systems and
documentation of expected cost savings and benefits;
- Agreement for multi-store adoption of the ERS ShelfNet System
subject to design, installation and implementation of a single
store evaluation system and concurrent design of integration
plans, operating procedures and training programs for broader
use by the retailer;
- Installation of the first group of stores within a chain,
defined by a geographic or merchandising region, to establish
final chain-wide operating procedures; and
- Chain-wide commercial rollout.
SAYGO AGREEMENTS
In December 1996, the Company signed its first non-binding Letter of
Intent providing for installation of the ERS ShelfNet System under the SayGo
Plan, and is continuing its efforts to procure additional letters of intent. The
Letter of Intent is, and all such additional arrangements will be, subject to
numerous conditions, including negotiation and execution of definitive contract
terms.
Under the terms proposed by the Company, the Company will own the ERS
ShelfNet System and furnish the system to qualified customers, identified by the
Company as those retailers who meet minimum requirements with respect to price
change potential per store and number of ESLs ordered. The Company's contract
with such customers will provide for: (i) a fixed rate charge per ESL per month
and (ii) a base rate charge per ESL price change, less volume discounts. Charges
will be billed to the customer on a monthly basis. In addition to such amounts,
the Company will collect transaction fees for usage of each value added
application.
The Company's proposals will allow the customer to terminate the
program and return the Company's system at any time after the first twelve
months. The customer's fees will cease upon termination, except for agreed upon
amounts in certain circumstances.
Under the SayGo Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers, and will depreciate the cost of
hardware components of its systems over the shorter of their estimated useful
lives or five years. In connection with the introduction of the SayGo Plan, the
Company will have substantial cash requirements for manufacturing and carrying
costs which will not initially be covered by revenues.
ORGANIZATION
The Company currently markets its products directly to major retail
chains through a marketing and sales force. The Company's marketing and sales
personnel have significant retail experience, including experience in the POS
system and local area network industries. The
<PAGE> 58
51
Company's marketing staff works with existing and potential customers to define
their needs for ESL systems and to coordinate their implementation of the ERS
ShelfNet System. The Company exhibits its system at major trade shows worldwide
and produces and distributes promotional materials to increase market awareness
of the Company's system. In addition, the Company will continue to investigate
the feasibility of marketing its system through indirect channels such as value
added resellers and distributors.
COLLABORATIVE DEVELOPMENT
The Company has collaborated with supermarket retailers and suppliers
of in-store wireless networks, printing services, merchandise planning systems
and other retail systems providers in order to develop a better understanding of
customer needs and to offer comprehensive customer solutions. The Company will
continue to pursue such efforts and will seek strategic partners to assist the
Company in the broad market adoption and roll-out of the Company's new
generation system.
CUSTOMERS
As of December 31, 1996, the ERS ShelfNet System was installed in 64
U.S. retail stores, including those owned by such leading supermarket chains as
Vons, Stop & Shop, HEB, Big Y, Shaw's, Lucky, The Great Atlantic & Pacific Tea
Company, Inc., and K Mart Corporation, and one supermarket owned by the
Overwaitea Food Group in Canada. The Company's customers include five of the 15
largest supermarket chains in the United States.
In June 1996, the Company obtained a sub-contract from NCR under NCR's
prime contract to upgrade POS systems at U.S. military commissaries, subject to
receipt of purchase orders by the Company from NCR. Pursuant to such
arrangements, NCR has delivered an order for a software license covering the
installation of the ERS ShelfNet System.
During the year ended December 31, 1994, HEB and Vons accounted for 14%
and 67%, respectively, of the Company's consolidated revenues; during the year
ended December 31, 1995, HEB, Vons and Shaw's accounted for 30%, 27% and 26%,
respectively, of the Company's consolidated revenues; and during the year ended
December 31, 1996, Stop & Shop, Big Y and Shaw's accounted for 46%, 20% and 13%,
respectively of the Company's consolidated revenues.
INSTALLATION AND CUSTOMER SERVICE
The ERS ShelfNet System is designed to be installed in a store without
disrupting normal store operations. In connection with the introduction of its
new generation system, the Company intends to use a team comprised of one
Company employee and two sub-contracted installers to install communications
infrastructure and software and, if rail strips are also ordered by the
customer, up to an additional five sub-contracted installers to install such
hardware. The ESLs generally will be programmed by the customer or at the
Company's facilities and shipped to the site where they will be installed by the
customer.
The Company's customer service group is staffed with employees
experienced in POS and other retail systems. The Company's SayGo Plan will
commit the Company to a standard maintenance contract, at no additional charge,
with extended maintenance services available at additional charges to the
customer.
MANUFACTURING
The Company utilizes third parties to manufacture and assemble the
components comprising the ERS ShelfNet System. The Company's ESLs currently
incorporate a microprocessor which is supplied solely by Sanyo. However, the
Company believes that other suppliers could produce equivalent microprocessors
within approximately four months. The Company's policy is to maintain an
inventory of microprocessors sufficient to meet substantially all of its
requirements during any such period. The Company intends to evaluate, from time
to time,
<PAGE> 59
52
establishing relationships with other manufacturers of microprocessors to
provide a second source of supply for its ESLs.
The Company intends to maintain its practice of utilizing manufacturing
subcontractors, and has a supply arrangement with Surface Mount Technology Ltd.,
of Hong Kong, for the assembly of ESLs. The Company also continues to utilize
Modulus, Inc. as a domestic source for the assembly of its ESLs. The Company has
not experienced interruptions or delays in the manufacture or assembly of its
systems, and believes that alternative sources of system components are readily
available.
ENGINEERING AND DEVELOPMENT
The Company's principal engineering and development efforts have been
conducted through software and hardware development groups located at its
facilities in Connecticut and Massachusetts. These groups focus on improvements
to current technology and also on new applications of existing technology. The
Company's engineering staff also generates the functional specifications and
development schedules for each of the Company's customers. The Company has also
from time to time engaged third parties to design hardware components based upon
requirements or specifications developed by the Company, and entered into
arrangements with hardware and software developers to augment the Company's
internal activities in the area of long-term product development. The Company's
arrangements with such developers are typically subject to termination by the
Company without penalty, and continuation of such arrangements will in each case
depend upon the satisfactory achievement by such developers of specified
milestones or other satisfactory performance by them.
During the years ended December 31, 1994, 1995 and 1996, the Company
incurred expenses for research and development activities of, respectively,
$2,571,000, $2,491,000 and $1,117,000. During the years ended December 31, 1995
and December 31, 1996, the Company capitalized an aggregate of $475,000 and
$592,000, respectively, in costs of internal labor and outside services
associated with product development.
INTELLECTUAL PROPERTY
The Company has aggressively pursued an intellectual property rights
strategy to protect its product developments. The Company's policy is to file
patent applications to protect its technology, inventions and improvements that
are important to the development of its business, and to seek copyright
protection with respect to its software. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The Company holds twelve United States patents and has eight additional
United States patent applications pending, and eleven foreign patent
applications pending. The Company also has other applications under preparation
and intends to continue to file patent applications on its novel products and
systems. Certain of these patents and patent applications are directed to
salient features of the Company's ESL system, in particular relating to the ESL
and associated hardware, and the communications network linking the components
of the system.
The Company's wholly-owned subsidiary, Amacrine International, Inc.
("Amacrine"), is entitled to use, and to grant sublicenses with respect to,
certain Telepanel patents directed to an alphanumeric display module and radio
frequency communications system, which Amacrine designed and developed for
Telepanel under a technical services agreement which existed between such
companies. The Company has become aware of certain statements made by Telepanel,
which the Company believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents.
<PAGE> 60
53
The Company attempts to protect certain computer software and service
applications through the use of copyright and trade secret law. The Company
relies on non-disclosure agreements with its employees, customers, consultants,
and strategic partners.
In 1993 in connection with the settlement of certain litigation, the
Company was granted a limited non-exclusive license in the United States,
Canada, the United Kingdom, Australia, Japan and Germany covering certain United
States and foreign patents, of which Telepanel is the exclusive licensee, in
consideration of a $700,000 payment made by the Company to Telepanel. During
1994, the United States patent underlying Telepanel's patent rights applicable
to such license expired.
See "Risk Factors -- Protection of Intellectual Property" for a
description of certain risks involving the Company's intellectual property.
COMPETITION
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel, Pricer and, recently, NCR. Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the Telepanel
system. See " -- Intellectual Property" above for a description of the
settlement in 1993 of certain patent litigation between the Company and
Telepanel. The Company believes NCR also has developed and is testing an ESL
system in the United States. Outside of the United States, in addition to
Pricer, the Company expects to compete with a number of companies with ESL
systems under development.
As more fully described under "Risk Factors -- Competition and
Technological Change" above, the emerging ESL system market is characterized by
rapid technological advances and evolving industry standards, and the Company
may be subject to a high degree of potential competition with additional
companies which may attempt to develop or market competing ESL systems. In the
future, the Company may face competition from vendors of POS systems, or scanner
manufacturers which offer products related to POS systems, who may elect to
enter the market for ESL systems. The ERS ShelfNet System is also subject to
competition from vendors selling traditional paper labeling methods, as well as
providers of hand-held portable data terminals.
The principal competitive factors in the Company's business are product
functionality, price/performance and reliability. The Company believes that it
competes favorably on each of these factors.
EMPLOYEES
As of December 31, 1996, the Company had 62 full-time employees,
consisting of 26 engaged in engineering and development and manufacturing
support, 12 in marketing and sales activities, 18 in customer services and six
in general administrative and executive functions. At such date, the Company had
an additional 27 part-time employees, engaged primarily in customer service
functions. The Company does not have a collective bargaining agreement with any
of its employees and considers its relationship with its employees to be
excellent.
FACILITIES
The Company's executive offices are located at 372 Danbury Road,
Wilton, Connecticut, where the Company leases approximately 14,700 square feet
of space (exclusive of space subleased to an affiliate). The Company's lease
expires in July 1997 and requires payment of annual rent (net of sublease
payments) in the amount of approximately $241,000 (in addition to increases in
operating expenses and real estate taxes). Of the Company's space in Wilton,
approximately 1,900 square feet is devoted to office and administrative uses,
approximately 6,600 square feet to engineering and development activities, and
approximately 6,200 square feet to marketing, sales and customer service
functions.
<PAGE> 61
54
The Company leases an additional space of approximately 10,000 square
feet for engineering and development activities in Westford, Massachusetts, and
at other smaller locations where required to support its operations. The
foregoing facilities are regarded by management as adequate in all material
respects for the current requirements of the Company's business.
As described under Note 6 of the Notes to the Company's Consolidated
Financial Statements included elsewhere in this Prospectus, the CDA Note is
secured by the assets of the Company and the Principal Subsidiary.
LEGAL PROCEEDINGS
In 1992, in proceedings commenced by the Company in the High Court of
Justice, Chancery Division, England against defendants John Baxter and
Epsi'lanne (UK) Limited, the defendants served counterclaims seeking, among
other things, to enjoin the Company from selling its system in the United
Kingdom. The Company does not believe that these counterclaims have any merit.
GOVERNMENT REGULATION
Accuracy in pricing on the part of supermarkets has been an objective
of state and local regulation. At least 18 states currently have laws or
regulations requiring some form of "unit pricing" (which require prices and
price per measure to be displayed at the shelf), and at least nine states (and
other local jurisdictions) have laws requiring "item pricing" (which require the
marking of prices on individual consumer packages for some or all products in
the retail store). The existence of item pricing laws applicable to any of the
Company's intended customers increases such customers' costs of providing price
information to consumers and may decrease or eliminate some of the potential
benefits of implementation of the ERS ShelfNet System. In some of the states
that have item pricing laws, such pricing is not required if the price is
clearly presented on the shelf and consumers are offered the means by which to
mark individual items. In the State of Connecticut, the item pricing law allows
the State's Department of Consumer Protection to exempt from item pricing
requirements stores employing an approved ESL system.
The United States Federal Communications Commission has established
standards for radio frequency emissions from computer products, and certain
components utilized in the Company's ESL system must comply with such criteria.
All components currently incorporated into the ERS ShelfNet System comply with
such standards, and the Company does not anticipate any material delays in
securing any required certification for components under development by the
Company. Certain foreign countries also regulate radio frequency emissions.
<PAGE> 62
55
MANAGEMENT
The executive officers and directors of the Company, and their
respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Norton Garfinkle(1)(2)(3)(4)... 66 Chairman of the Board and Director
Bruce F. Failing, Jr.(1)(3).... 48 Vice Chairman of the Board and Chief
Executive Officer and Director
George B. Weathersby(1)........ 52 Chairman of the Executive Committee
of the Board, President and Director
William W. Erdman.............. 55 Executive Vice President
Michael R. Valiton............. 35 Senior Vice President, Technology
and Operations
William B. Ames................ 53 Vice President, Manufacturing
William B. Fischer............. 46 Vice President, Finance
James M. Nolan, Jr............. 42 Vice President, New Product
Development
Paul M. Patrick................ 44 Vice President
Paul A. Biddelman(1)(2)(4)..... 51 Director
David Diamond.................. 38 Director
Donald E. Zilkha(1)(2)(4)...... 46 Director
</TABLE>
- ---------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Director Stock Option Committee.
(4) Member of Audit Committee.
Each director holds office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each executive
officer serves at the discretion of the Board of Directors.
Mr. Garfinkle, a founder of the Company and its Chairman of the Board,
has been a director of the Company since its inception in April 1990. Since
1970, Mr. Garfinkle has also been the Chairman of Cambridge Management
Corporation, which manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as Chairman of its
affiliates, including Oxford Management Corporation, which specialize in the
research and development of new technologies. From 1985 to 1988, Mr. Garfinkle
was Chairman of Oral Research Laboratories, Inc., a manufacturer of dental
hygiene products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to 1988. In December
1995, pursuant to an agreement with New York State authorities, Mr. Garfinkle
admitted to a misdemeanor relating to his 1989 New York State tax return and
paid all taxes required by the agreement.
Mr. Failing, a founder of the Company and its Vice Chairman of the
Board and Chief Executive Officer, has been a director of the Company since its
inception and served as President through February 1997. In 1973, Mr. Failing
co-founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive Officer of Actmedia,
Inc. until its sale in 1989.
Mr. Weathersby, the Chairman of the Executive Committee of the Board of
Directors, has been President of the Company since February 1997 and a director
of the Company since April 1996. Mr. Weathersby has been Vice Chairman of
Cambridge Management Corporation and its affiliates including Oxford Management
<PAGE> 63
56
Corporation, since 1993. From 1991 to 1993, Mr. Weathersby was a general partner
of Founder's Court, an investment management firm. Mr. Weathersby is a director
of Holnam, Inc. and USA Group, Inc.
Mr. Erdman has been Executive Vice President of the Company since March
1997. From 1992 until prior to joining the Company, Mr. Erdman was President and
Chief Executive Officer of InterDigital Communications Corporation (formerly
International Mobile Machine Corporation).
Mr. Valiton has been Senior Vice President, Technology and Operations
of the Company since March 1996, having joined the Company in July 1994 and
become Vice President, Delivery in January 1995. From prior to 1991 until
joining the Company, Mr. Valiton held various positions with Ungermann-Bass,
Inc., the last of which was as Director of Customer Administration.
Mr. Ames has been Vice President, Manufacturing of the Company since
April 1995. From prior to 1992 until joining the Company, Mr. Ames was employed
in various positions by the Hewlett-Packard Company, the last of which were as
Strategic Planning Manager and Manufacturing Development Engineering Manager.
Mr. Fischer has been Vice President, Finance of the Company since April
1995, having served as Controller of the Company from May 1994 until April 1995.
From September 1990 until joining the Company, Mr. Fischer was Director of
Financial Accounting Policies at GTE Corporation. From 1978 until 1990, Mr.
Fischer was employed by Price Waterhouse LLP, having last held the position of
Senior Manager.
Mr. Nolan has been Vice President, New Product Development of the
Company since November 1993. From 1981 until 1993, Mr. Nolan held various
positions with Sequoia Systems, Inc., a developer of fault tolerant computer
systems, the last of which was as Vice President of Engineering.
Mr. Patrick has been a Vice President of the Company since 1992. From
1989 to 1992, Mr. Patrick was Vice President, Canadian Operations, of Stores
Automated Systems, Inc., a manufacturer of retail point-of-sale products and
services.
Mr. Biddelman has been a director of the Company since 1993. Since
1992, Mr. Biddelman has been the Treasurer of Hanseatic Corporation, a private
investment company, and from 1991 to 1992 was a Managing Director of Clements
Taee Biddelman Incorporated, a financial advisor. Mr. Biddelman is a director of
Insituform Technologies, Inc., Celadon Group, Inc., Premier Parks, Inc.,
Petroleum Heat & Power Co., Inc., Star Gas Corporation (general partner of Star
Gas Partners, L.P.), and Oppenheimer Group, Inc.
Mr. Diamond has been a director of the Company since April 1996. Since
January 1997, Mr. Diamond has been Executive Vice President of Marketing and New
Applications of Catalina Marketing Corp. and Mr. Diamond has been a consultant
to suppliers of products and services to the supermarket industry since 1994.
From 1992 to 1994, Mr. Diamond was President of Lamaze Publishing Company, Inc.,
a publisher of material on neonatal care. From prior to 1991 until 1992, Mr.
Diamond was Senior Vice President of Strategic Planning and New Development of
Actmedia, Inc.
Mr. Zilkha has been a director of the Company since 1993. Since prior
to 1991, Mr. Zilkha has been President of Zilkha & Company, a private investment
advisor.
No family relationship exists between any of the directors or executive
officers of the Company.
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an Indenture,
dated as of January 24, 1997 (the "Indenture") between the Company and United
States Trust Company of New York, as trustee (the "Trustee"),
<PAGE> 64
57
a copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The statements under this caption relating to
the Notes and the Indenture are summaries and do not purport to be complete, and
are subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended. Where reference is made to particular provisions of the Indenture or to
defined terms not otherwise defined herein, such provisions or defined terms are
incorporated herein by reference as part of the statement made and such
statements are qualified in their entirety by such reference.
TERMS OF THE NOTES
The Notes are unsecured senior obligations of the Company, limited to
$147,312,000 aggregate principal amount at maturity, and will mature on February
1, 2004. Except as described below under " -- Exchange Offer; Registration
Rights", no cash interest will accrue on the Notes prior to February 1, 2000,
although for U.S. 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 from the issue date of the Notes through February 1, 2004.
Cash interest will accrue on the Notes at the rate per annum shown on the cover
page hereof from February 1, 2000, or from the most recent date to which
interest has been paid or provided for, payable semi-annually to Holders of
record at the close of business on the January 15 or July 15 immediately
preceding the interest payment date on February 1 and August 1 of each year,
commencing August 1, 2000. The Company will pay interest on overdue principal at
1% per annum in excess of such rate, and it will pay interest on overdue
installments of cash interest at such higher rate to the extent lawful.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Notes are not redeemable at the option of the Company prior to
February 1, 2001. Thereafter, the Notes will be redeemable, at the Company's
option, in whole or in part, at any time and from time to time, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed in
percentages of principal amount at maturity), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on February 1 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001.............. 106.625%
2002.............. 103.313
2003 and thereafter 100.000
</TABLE>
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in principal amount at maturity or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount at maturity thereof to be redeemed. A new Note in principal
amount at maturity equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
RANKING
The Notes are senior unsecured obligations of the Company, rank pari
passu in right of payment with all existing and future senior unsecured
indebtedness of the Company and are senior in right of payment to all future
<PAGE> 65
58
subordinated indebtedness of the Company. However, the CDA Note is secured by
the assets of the Company and the Principal Subsidiary. As of March 31, 1997,
the Company's senior indebtedness outstanding was approximately $102.4 million
(including $97.4 million for the Old Notes), consisting of the Notes and the
CDA Note.
Substantially all of the operations of the Company are conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
the CDA, trade creditors, secured creditors and creditors holding indebtedness
and guarantees issued by such subsidiaries, and claims of preferred stockholders
(if any) of such subsidiaries generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of the
Company, including holders of the Notes. However, in connection with the
incurrence of future indebtedness by certain of the Company's Subsidiaries, the
Notes may be guaranteed by such Subsidiaries (the "Subsidiary Guarantors"). See
" -- Certain Covenants -- Future Guarantors". The Notes, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of Subsidiaries of the Company other than any future
Subsidiary Guarantors. At December 31, 1996, the total liabilities of the
Company's subsidiaries (exclusive of indebtedness owed to the Company in the
amount of $38 million) were approximately $6.5 million, including the CDA Note,
trade payables and accrued expenses. See "Risk Factors -- Ranking of Notes;
Holding Company Structure". Although the Indenture limits the incurrence of
Indebtedness and issuance of Preferred Stock of certain of the Company's
Subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such Subsidiaries of liabilities that are not considered
Indebtedness or Preferred Stock under the Indenture. See " -- Certain Covenants
- -- Limitation on Indebtedness and Preferred Stock of Subsidiaries".
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company has filed this Registration Statement and will commence the
Exchange Offer pursuant to the Registration Rights Agreement. In the event that
the Initial Purchasers so request with respect to Notes not eligible to be
exchanged for New Notes in the Exchange Offer, or if any holder of Notes is not
eligible to participate in the Exchange Offer or does not receive freely
tradable New Notes in the Exchange Offer, the Company agreed to, at its cost,
(a) as promptly as practicable, file a shelf registration statement (the "Shelf
Registration Statement") covering resales of the Notes, (b) use its reasonable
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act and (c) keep the Shelf Registration Statement effective
until the earlier of (i) the time when the Notes covered by the Shelf
Registration Statement can be sold pursuant to Rule 144 without any limitations
under clauses (c), (e), (f) and (h) of Rule 144 and (ii) three years from the
Issue Date. The Company agreed to, in the event a Shelf Registration Statement
is filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A holder selling Notes
pursuant to the Shelf Registration Statement generally would be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If (i) on or prior to 180 days after the original issuance of the
Notes, neither the Exchange Offer is consummated nor the Shelf Registration
Statement is declared effective; or (ii) after either the Registration Statement
or the Shelf Registration Statement is declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to certain
exceptions) in connection with resales of Old Notes or New Notes in accordance
with and during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (i) and (ii), a "Registration Default"),
additional cash interest will accrue on the Old Notes and the New Notes as
applicable, in each case at the rate of 0.50% per annum from and including the
date on which any such Registration Default shall occur until the earlier of (i)
the date on which such Registration Default has been cured or (ii) the date on
which all the Notes otherwise become freely transferable by holders other than
affiliates of the Company without further registration under the Securities Act,
calculated on the Accreted Value of the Old Notes or New 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 from time to time with respect
to the Old Notes and the New Notes.
<PAGE> 66
59
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
BOOK-ENTRY, DELIVERY AND FORM
Each of the Old Notes was issued in the form of one or more fully
registered Notes in global form ("Old Global Notes"), except that each of the
Notes offered and sold to institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or 7 under the Securities Act) was 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 Old Global Notes will be represented by one or more Notes
in global form (the "New Global Notes," and together with the Old Global Notes,
the "Global Notes"), which will be deposited with, or on behalf of, the
Depositary and registered in the name of the Depositary or its nominee.
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 beneficial interests of persons other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Notes.
So long as the Depositary, or its nominee, is the registered holder of
any Global Notes, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and holder of such Notes represented by such
Global Notes for all purposes under the Indenture and the New Notes. Except as
set forth 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 or
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. The Company understands that under
existing industry practice, in the event an owner of a beneficial interest in a
Global Note desires to take any action that the Depositary, as the holder of
such Global Note, is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
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
<PAGE> 67
60
ownership interests or for other aspects of the relationship between the
Depositary and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Notes owning through such
participants.
As long as the New Notes are represented by a Global Note, DTC's
nominee will be the holder of the New Notes and therefore will be the only
entity that can exercise a right to repayment or repurchase of the New Notes.
See "Description of the Notes -- Change of Control" and " -- Certain Covenants
- --Limitation on Sales of Assets and Subsidiary Stock". Notice by participants or
by owners of beneficial interests in a Global Note held through such
participants of the exercise of the option to elect repayment of beneficial
interests in Notes represented by a Global Note must be transmitted to DTC in
accordance with its procedures on a form required by DTC and provided to
participants. In order to ensure that DTC's nominee will timely exercise a right
to repayment with respect to a particular New Note, the beneficial owner of such
Note must instruct the broker or other participant to exercise a right to
repayment. Different firms have cut-off times for accepting instructions from
their customers and, accordingly, each beneficial owner should consult the
broker or other participant through which it holds an interest in a New Note in
order to ascertain the cut-off time by which such an instruction must be given
in order for timely notice to be delivered to DTC. The Company will not be
liable for any delay in delivery of notices of the exercise of the option to
elect repayment.
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.
Although the Depositary has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Notes among participants of
the Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the Trustee may conclusively rely on, and shall be protected in
relying on, instructions from the Depositary for all purposes.
Upon transfer of Certificated Notes to a QIB, such Certificated Notes
will be transferred to the corresponding Global Notes. Global Notes shall be
exchangeable for corresponding Certificated Notes registered in the name of
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) 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 the
Depositary shall request.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. The Depositary was created
to hold securities of institutions that have accounts with the Depositary
("participants") and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of participants, thereby eliminating the need for
physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers (which may include the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. 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, whether directly or
indirectly.
<PAGE> 68
61
Initial settlement in the New Notes will be in same-day funds.
Investors holding their New Notes through the Depositary will follow settlement
practices applicable to United States corporate debt obligations. The Indenture
requires that payments in respect of Notes (including principal, premium and
interest) be made by wire transfer of same-day funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company purchase
such Holder's Notes at a purchase price in cash equal to 101% of the Accreted
Value thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act except that for purposes of this clause (i) such
person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company; provided, however, that the Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause
(i), a person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as defined in this clause (i)), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the Voting Stock of such parent corporation and do not have the right
or ability by voting power, contract or otherwise to elect or designate
for election a majority of the board of directors of such parent
corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new or replacement directors whose election by such
Board of Directors 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 then in office; or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person
or transferee that represent, immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of
the surviving Person or transferee.
Within 30 days following any Change of Control, the Company shall mail
a notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash
<PAGE> 69
62
flow and capitalization after giving effect to such Change of Control); (3) the
purchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the purchase of Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
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. 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", " -- Limitation on Preferred Stock of Restricted
Subsidiaries", " -- Limitation on Liens" and " -- Limitation on Sale/Leaseback
Transactions". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount at maturity of the 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 Notes protection in the event of a highly leveraged transaction.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be purchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to purchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such purchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required purchases. The
provisions under the Indenture relative to the Company's obligation to make an
offer to purchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the holders of a majority in principal
amount at maturity of the Notes.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall
not permit any Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness unless, on the date of such Incurrence and after giving effect
thereto, the Consolidated Leverage Ratio is less than 7.0 to 1.0 if such
Indebtedness is Incurred prior to February 1, 2000, or 5.0 to 1.0 if such
Indebtedness is Incurred thereafter. As of December 31, 1996 (after giving pro
forma effect to the Private Placement), such covenant would not have permitted
the Company to incur additional Indebtedness (exclusive of the Indebtedness
permitted by paragraph (b) below).
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to any credit agreement or
Incurred by any Foreign Subsidiary; provided, however, that (i) after
giving effect to any such Incurrence the aggregate principal amount of
all such Indebtedness then outstanding does not exceed the sum of (w)
65% of the book value of
<PAGE> 70
63
the inventory of the Company and its Restricted Subsidiaries and (x)
85% of the book value of the accounts receivables of the Company and
its Restricted Subsidiaries, (ii) in the case of any Indebtedness
Incurred by a Foreign Subsidiary, after giving effect to such
Incurrence the aggregate amount of all such Indebtedness then
outstanding does not exceed the sum of (y) 65% of the book value of the
inventory of such Foreign Subsidiary and (z) 85% of the book value of
the accounts receivables of such Foreign Subsidiary, and (iii)
notwithstanding the limitations in amount contained in (i) and (ii)
above, the Company and its Restricted Subsidiaries may Incur
Indebtedness pursuant to this clause (1) in an aggregate amount not to
exceed $10.0 million at any time outstanding;
(2) Indebtedness owed to and held by the Company or a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the issuer thereof;
(3) the Notes and the New Notes and Guarantees thereof;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(b)), including the CDA Note;
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a), or pursuant to clause (3) or (4) of
this paragraph (b) or this clause (5);
(6) Indebtedness (including Capital Lease Obligations) of the
Company or any Restricted Subsidiary financing the purchase, lease or
improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any
Person owning such assets), in each case incurred no more than 180 days
after such purchase, lease or improvement of such property and any
Refinancing Indebtedness in respect of such Indebtedness; provided,
however, that (i) the amount of such Indebtedness (net of original
issue discount) does not exceed, at the time initially Incurred, 90% of
the fair market value of such acquired property or equipment and (ii)
at the time of the Incurrence of such Indebtedness and after giving
effect thereto, the aggregate amount of all Indebtedness Incurred
pursuant to this clause (6) and then outstanding shall not exceed $10.0
million;
(7) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and the Restricted Subsidiaries pursuant to the Indenture;
(8) Indebtedness consisting of performance, surety or appeal
bonds obtained by the Company or a Restricted Subsidiary in the
ordinary course of business;
(9) Indebtedness consisting of self-insurance obligations; and
(10) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (9) above or paragraph
(a)), does not exceed $5.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such
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Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be
divided and classified in more than one of the types of Indebtedness described
above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
shall not permit any Restricted Subsidiary (other than a Joint Venture) to
Incur, directly or indirectly, any Preferred Stock except:
(a) Preferred Stock issued to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the issuance of such Preferred Stock by the issuer
thereof;
(b) Preferred Stock of a Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company (other
than Preferred Stock Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company); provided, however, that on the date
of such acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of additional Indebtedness pursuant to clause (a)
of the covenant described under " -- Limitation on Indebtedness";
(c) Preferred Stock outstanding on the Issue Date (other than Preferred
Stock described in clause (a) or (b) of this paragraph); and
(d) Preferred Stock Incurred to Refinance Preferred Stock referred to
in clause (b) or (c) of this paragraph or this clause (d); provided, however,
that to the extent such Preferred Stock directly or indirectly Refinances
Preferred Stock of a Subsidiary described in clause (b), such Preferred Stock
shall be Incurred only by such Subsidiary.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to, make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under " -- Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during which
the Old Notes are originally issued to the end of the most recent
fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to
a Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to the Issue Date, of
any Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount
of any cash, or the fair value of any other property, distributed by
the Company upon such conversion or exchange) and the net cash proceeds
received by the Company from the issuance of Disqualified Stock (other
than Indebtedness) of the Company to the extent such Disqualified Stock
has been converted or exchanged (other than by a Subsidiary of the
Company) subsequent to the Issue Date for Capital Stock (other than
Disqualified Stock) of the Company (less the
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amount of any cash, or the fair value of any other property,
distributed by the Company upon such conversion or exchange);
(D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however,
that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary; and
(E) $2.0 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however,
that (A) such Restricted Payment shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale shall be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Indebtedness of the Company which is permitted to be Incurred
pursuant to the covenant described under " -- Limitation on
Indebtedness"; provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted
Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
such dividend shall be included in the calculation of the amount of
Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, consultants, former
consultants, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former
employees, consultants, former consultants, directors or former
directors), pursuant to the terms of the agreements (including
employment or consulting agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell shares
of such common stock or as otherwise approved by the Board of
Directors; provided, however, that the aggregate amount of such
repurchases and other acquisitions shall not exceed $1.0 million in any
calendar year; provided further, however, that such repurchases and
other acquisitions shall be excluded in the calculation of the amount
of Restricted Payments;
(v) payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; provided,
however, that such payments or distributions from and after the Issue
Date shall
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not in the aggregate exceed $2.0 million; provided further, however,
that such payments and distributions shall be included in the
calculation of the amount of Restricted Payments; or
(vi) Investments in Joint Ventures; provided, however, that
the aggregate amount of all such Investments pursuant to this clause
(vi) shall not exceed $10.0 million; provided further, however, that
such Investments pursuant to this clause (vi) shall be excluded in the
calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) to make any loans or advances to the Company or (c) transfer
any of its Property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction arising under or by reason
of applicable law;
(iii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(iv) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (iii) of this covenant or this
clause (iv) or contained in any amendment to an agreement referred to
in clause (i) or (iii) of this covenant or this clause (iv); provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable in any material respect to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(v) any such encumbrance or restriction consisting of
customary non-assignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
(vi) in the case of clause (c) above, (A) any restriction
arising in connection with any Permitted Lien to the extent such
restriction restricts the transfer of the Property or the assets
subject to such Permitted Lien, including the transfer of such Property
or assets upon the foreclosure thereof, (B) restrictions existing by
virtue of any transfer of, agreement to transfer or option or right
with respect to any Property or assets of the Company or any Restricted
Subsidiary or (C) restrictions arising or agreed to in the ordinary
course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of the
Property or assets subject thereto in any manner material to the
Company or any Restricted Subsidiary taken as a whole; and
(vii) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Disposition unless (i) the Company or such
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Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition and at
least 80% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any
Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or
Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary
(in each case other than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, to the extent of the balance
of such Net Available Cash after application in accordance with clause (A), to
the extent the Company elects, to acquire Additional Assets within one year from
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to make an offer
to the holders of the Notes (and to holders of other Senior Indebtedness
designated by the Company) to purchase Notes (and such other Senior
Indebtedness) pursuant to and subject the conditions contained in the Indenture;
and (D) fourth, to the extent of the balance of such Net Available Cash in
excess of $200,000 in any fiscal year after application in accordance with
clauses (A), (B) and (C), to (x) the acquisition by the Company or any Wholly
Owned Subsidiary of Additional Assets or (y) the prepayment, repayment or
purchase of Indebtedness (other than any Disqualified Stock) of the Company
(other than Indebtedness owed to an Affiliate of the Company) or Indebtedness of
any Subsidiary (other than Indebtedness owed to the Company or an Affiliate of
the Company), in each case within one year from the later of the receipt of such
Net Available Cash and the date the offer described in clause (b) below is
consummated; provided, however, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above,
the Company or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this paragraph,
the Company and the Restricted Subsidiaries shall not be required to apply any
Net Available Cash in accordance with this paragraph except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this paragraph exceeds $5.0 million. Pending
application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash
or cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
the Notes (and other Senior Indebtedness) pursuant to clause (a)(ii)(C) above,
the Company will be required to purchase Notes tendered pursuant to an offer by
the Company for the Notes (and other Senior Indebtedness) at a purchase price of
100% of their Accreted Value plus accrued but unpaid interest, if any (or, in
respect of such other Senior Indebtedness, 100% of their accreted value or
principal amount (without premium), as the case may be, plus accrued but unpaid
interest, if any or such lesser price, if any, as may be provided for by the
terms of such Senior Indebtedness) in accordance with the procedures (including
prorating in the event of over subscription) set forth in the Indenture. If the
aggregate purchase price of Notes (and any other Senior Indebtedness) tendered
pursuant to such offer is less than the Net Available Cash allotted to the
purchase thereof, the Company will be required to apply the remaining Net
Available Cash in accordance with clause (a)(ii)(D) above. The Company shall not
be required to make such an offer to purchase Notes (and other Senior
Indebtedness) pursuant to this covenant if the Net Available Cash available
therefor is less than $5.0 million (which lesser amount shall be carried forward
for purposes of determining whether such an offer is required with respect to
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the purchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this
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covenant, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) with respect to any
such Affiliate Transaction that involves an amount in excess of $1.0 million,
are set forth in writing and have been approved by a majority of the members of
the Board of Directors having no personal stake in such Affiliate Transaction
and (3) with respect to any Affiliate Transaction that involves an amount in
excess of $10.0 million, have been determined by (A) a nationally recognized
investment banking firm to be fair from a financial standpoint to the Company or
such Restricted Subsidiary or (B) an appraisal firm nationally recognized in
making such determinations to be on terms that are not less favorable to the
Company or such Restricted Subsidiary than the terms that could be obtained in
an arms-length transaction from a Person that is not an Affiliate of the
Company.
(b) The provisions of the foregoing paragraph (a) shall not prohibit
(i) any Restricted Payment permitted to be paid pursuant to the covenant
described under " -- Limitation on Restricted Payments", (ii) any issuance of
securities or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company and its
Restricted Subsidiaries pursuant to plans approved by the Board of Directors,
(iv) loans or advances to employees in the ordinary course of business, but in
any event not to exceed $1.0 million in the aggregate outstanding at any one
time, (v) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a Wholly
Owned Subsidiary or between Wholly Owned Subsidiaries, (vii) any Affiliate
Transaction entered into prior to the Issue Date or the renewal thereof upon
substantially similar terms or (viii) indemnification payments to directors and
officers of the Company and its Restricted Subsidiaries in accordance with
applicable state laws.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary (other than a Joint Venture), and shall not
permit any Restricted Subsidiary (other than a Joint Venture), directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock,
except (i) to the Company or a Wholly Owned Subsidiary, (ii) if, immediately
after giving effect to such issuance, sale or other disposition, neither the
Company nor any of its Subsidiaries own any Capital Stock of such Restricted
Subsidiary or (iii) if, immediately after giving effect to such issuance, sale
or other disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect thereto would have been permitted to be made under the covenant described
under " -- Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition.
Limitation On Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under " -- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under " --
Limitation on Liens", (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
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least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under " -- Limitation on Sale of Assets
and Subsidiary Stock". The foregoing restriction shall not apply to any
Sale-Leaseback Transaction if (i) the lease is for a period, including renewal
rights, of not in excess of three years or (ii) the transaction is between the
Company and any Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.
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 and Consolidation. The Company shall not consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form reasonably satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under " -- Limitation on Indebtedness"; (iv) immediately after giving
effect to such transaction, the Successor Company shall have Consolidated Net
Worth in an amount that is not less than the Consolidated Net Worth of the
Company prior to such transaction; provided, however, that this clause (iv)
shall not apply to a consolidation or merger with or into a Wholly Owned
Subsidiary if, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the Successor Company (or a Person
that owns directly or indirectly all of the Capital Stock of the Successor
Company immediately following such transaction)) shall be issued or distributed
to the stockholders of the Company; and (v) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture; provided, however, that clauses (iii) and (iv)
above shall not apply if, in the good faith determination of the Board of
Directors, whose determination shall be evidenced by a resolution of the Board
of Directors, the principal purpose and effect of such transaction is to change
the state of incorporation of the Company.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
a series of transactions, all or substantially all of its assets to any Person
unless: (i) the resulting, surviving or transferee Person (if not such
Subsidiary Guarantor) shall be a Person organized and existing under the laws of
the jurisdiction under which such Subsidiary Guarantor was organized or under
the laws of the United States of America, or any State thereof or the District
of Columbia, and such Person shall expressly assume, by a Guaranty Agreement, in
a form reasonably satisfactory to the Trustee, all the obligations of such
Subsidiary Guarantor, if any, under its Subsidiary Guaranty; (ii) immediately
after giving effect to such transaction or transactions on a pro forma basis
(and treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction as having been
Incurred by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and (iii) the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer, if any, complies with the Indenture.
Future Guarantors. In the event that, after the Issue Date, a
Restricted Subsidiary Incurs any Indebtedness pursuant to paragraph (a) or
pursuant to paragraph (b) (1) (but, in the case of a Foreign Subsidiary, only in
the case of Indebtedness Incurred pursuant to clause (i) thereof), (b)(5) (but
only in the case of Refinancing Indebtedness
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with respect to Indebtedness Incurred pursuant to paragraph (a)) or (b)(10), in
each case of the covenant described under " -- Limitation on Indebtedness", the
Company shall cause such Restricted Subsidiary to unconditionally and
irrevocably Guarantee, jointly and severally, the Company's obligations with
respect to the Notes pursuant to a Subsidiary Guaranty on the terms and
conditions set forth in the Indenture and shall cause all Indebtedness of such
Restricted Subsidiary owing to the Company or any other Subsidiary of the
Company and not previously discharged to be converted into Capital Stock of such
Restricted Subsidiary (other than Disqualified Stock).
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Noteholders 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.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under " --
Certain Covenants -- Merger and Consolidation" above, (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations in the
covenants described above under "Change of Control" (other than a failure to
purchase Notes) or under " -- Certain Covenants" under " -- Limitation on
Indebtedness", " -- Limitation on Preferred Stock of Restricted Subsidiaries", "
- -- Limitation on Restricted Payments", " -- Limitation on Restrictions on
Distributions from Restricted Subsidiaries", " -- Limitation on Sales of Assets
and Subsidiary Stock" (other than a failure to purchase Notes), " -- Limitation
on Affiliate Transactions", " -- Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries", " -- Limitation on Liens", " -- Limitation on
Sale/Leaseback Transactions", " -- Limitation on Lines of Business", " -- Future
Guarantors" or " -- SEC Reports", (v) the failure by the Company to comply for
60 days after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of the Company or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10.0 million (the "cross acceleration provision"), (vii)
the occurrence of certain events of bankruptcy, insolvency or reorganization of
the Company or a Significant Subsidiary (the "bankruptcy provisions") or (viii)
any judgment or decree for the payment of money in excess of $10.0 million is
rendered against the Company or a Significant Subsidiary, remains outstanding
for a period of 60 days following such judgment and is not discharged, waived or
stayed within 10 days after notice (the "judgment default provision") or (ix) a
Subsidiary Guaranty ceases to be in full force and effect (other than in
accordance with the terms of such Subsidiary Guaranty) or a Subsidiary Guarantor
denies or disaffirms its obligations under its Subsidiary Guaranty. However, a
default under clauses (iv), (v) or (viii) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount at maturity
of the outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount at maturity of the outstanding Notes
may declare the Accreted Value of and accrued but unpaid interest, if any, on
all the Notes to be due and payable (collectively, the "Default Amount"). Upon
such a declaration, the Default Amount shall be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs and is continuing, the Default Amount on
all the Notes will ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holders of the
Notes. Under certain circumstances, the holders of a majority in principal
amount at maturity of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
<PAGE> 78
71
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount at maturity of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the holders of a majority in principal amount at maturity of the
outstanding Notes have not given the Trustee a direction inconsistent with such
request within such 60-day period. Subject to certain restrictions, the holders
of a majority in principal amount at maturity of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder of a Note or
that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any event which would constitute certain
Defaults, their status and what action the Company is taking or proposes to take
in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount at maturity of the
Notes then outstanding (including consents obtained in connection with a tender
offer or exchange for the Notes) and any past default or compliance with any
provisions may also be waived with the consent of the holders of a majority in
principal amount at maturity of the Notes then outstanding. However, without the
consent of each holder of an outstanding Note affected thereby, 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 or Accreted Value of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under " -- Optional Redemption", (v) make any Note payable in money
other than that stated in the Note, (vi) 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, (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions or (viii) make any change in any Subsidiary Guaranty that would
adversely affect the Noteholders.
Without the consent of any holder of the Notes, the Company and 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 Code, or in a manner such that the uncertificated 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
SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
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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 holders of the Notes 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 " -- Change
of Control" and under the covenants described under " -- Certain Covenants"
(other than the covenant described under " -- Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under " -- Defaults" above and the limitations contained in clauses (iii) and
(iv) under " -- Certain Covenants -- Merger and Consolidation" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding
its prior exercise of its covenant defeasance option. If the Company exercises
its legal defeasance option, payment of the 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 (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under " -- Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) under " --
Certain Covenants -- Merger and Consolidation" above. If the Company exercises
its legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor will be released from all of its obligations with respect to its
Subsidiary Guaranty.
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 redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the 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).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount at maturity of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that if an Event of
Default occurs (and is not cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity reasonably satisfactory to it against any loss, liability
or expense and then only to the extent required by the terms of the Indenture.
<PAGE> 80
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GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the
amount provided below for each $1,000 principal amount at maturity of Notes:
(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>
August 1, 1997................. $ 725.61
February 1, 1998............... 773.68
August 1, 1998................. 824.94
February 1, 1999............... 879.59
August 1, 1999................. 937.87
February 1, 2000............... 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 of a Unit and (b) an amount equal to the product of (1) the
Accreted Value for the first Semi-Annual Accrual Date less such
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 or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided, however, that the CDA shall not be deemed to be an Affiliate of the
Company and its Subsidiaries. For purposes of the provisions described under "
- -- Certain Covenants -- Limitation on Restricted Payments", " -- Certain
Covenants -- Limitation on Affiliate Transactions" and " -- Certain Covenants --
Limitations on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall
also mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power
<PAGE> 81
74
of the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Capital 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 Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (A) sales or other
dispositions of inventory, receivables and other assets in the ordinary course
of business, (B) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (C) for
purposes of the covenant described under " -- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition that constitutes a
Restricted Payment permitted by the covenant described under " -- Certain
Covenants -- Limitation on Restricted Payments", (D) a disposition of assets
with a fair market value of less than $100,000, (E) sales of the Company's ESL
systems to customers and leases, rentals or otherwise furnishing the use of such
systems to customers and (F) licenses or leases of any technology, know-how,
patents, processes, procedures, copyrights or other intellectual property, and
related escrow arrangements, for consideration equal to the fair market value
thereof, as determined in good faith by the Board of Directors (and whether or
not such consideration has been specifically allocated to such license or
lease)).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years 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 of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"CDA" means the Connecticut Development Authority.
"CDA Note" means the Company's 7.4% Convertible Note (dated August 12,
1994) in the aggregate principal amount of $5.0 million issued to the CDA.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 82
75
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted Subsidiaries,
plus, to the extent not included in such total interest expense, and to the
extent incurred by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by (or secured by the
assets of) the Company or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of the date of determination after giving effect to
any Indebtedness to be Incurred or discharged on the date of determination to
(ii) the aggregate amount of EBITDA for the four most recent fiscal quarters
ending at least 45 days prior to the date of determination (such four fiscal
quarters being herein called the "Reference Period"); provided, however, that
(1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of the Reference Period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Leverage Ratio
is an Incurrence of Indebtedness, or both, EBITDA for the Reference Period shall
be calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of the Reference Period,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of the
Reference Period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently repaid
and has not been replaced) on the date of the transaction giving rise to the
need to calculate the Consolidated Leverage Ratio, EBITDA for the Reference
Period shall be calculated on a pro forma basis as if such discharge had
occurred on the first day of the Reference Period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned during
the Reference Period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if
since the beginning of the Reference Period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for the Reference
Period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
the Reference Period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for the Reference Period and
Consolidated Interest Expense for the Reference Period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for the
Reference Period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for the Reference Period directly attributable
to the Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (4) if since the beginning of the Reference
Period the Company or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA for the Reference Period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of the Reference Period and (5) if since the beginning of the Reference Period
any Person (that subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the beginning of the
Reference Period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by the Company or a Restricted Subsidiary during the
Reference Period, EBITDA for the Reference Period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of the Reference Period. For purposes of
this definition, whenever pro forma
<PAGE> 83
76
effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months). In making any calculation of the
Consolidated Leverage Ratio for any period commencing prior to the Issue Date,
the Notes shall be deemed to have been issued on the first day of such period.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion 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 paid 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
for such period shall be included in determining such Consolidated Net
Income;
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion 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 actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid 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 assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of
<PAGE> 84
77
which the determination is being made, as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid-in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary which is designed to protect such Person
against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions described under " --
Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "
- --Change of Control".
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its consolidated Restricted Subsidiaries, (b) depreciation expense
of the Company and its consolidated Restricted Subsidiaries, (c) amortization
expense of the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (d) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and non-cash charges of, a Restricted Subsidiary shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means each Restricted Subsidiary not created or
organized in the United States or any state thereof and that conducts
substantially all of its operations outside of the United States.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in (i) the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
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"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any 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 or other obligation of such 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 of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the tenth Business Day following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
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Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets and the amount of the
obligation so secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means in respect of a Person any interest
rate swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under " -- Certain Covenants -- Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
For purposes of the definitions of "Joint Venture", "Restricted Payment" and
"Permitted Investment" and the covenant described under " -- Certain Covenants
- -- Limitation on Restricted Payments", (a) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Person) of the
fair market value of the net assets of any Person at the time that such Person
is designated a Joint Venture and (b) any property transferred to or from a
Joint Venture shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Old Notes are originally
issued.
"Joint Venture" means a Person (i) engaged in technology development,
manufacturing or distribution in a Related Business, (ii) designated by the
Company as a "Joint Venture Company" for purposes of the Indenture; provided,
however, that such designation would be permitted under the covenant described
under " -- Certain Covenants -- Limitation on Restricted Payments", and (iii) as
to which the Company and the Restricted Subsidiaries own at least 10% of the
Voting Stock, such joint venture to be deemed to include such Subsidiary of such
Person.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition 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
and proceeds from the sale or other disposition of any securities received as
consideration, 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 (i) 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
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of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon 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 Disposition, or by applicable law be, repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means (i) Norton Garfinkle, Bruce F. Failing, Jr.,
their respective spouses, issue or any spouse of their issue, (ii) any Person
controlled directly or indirectly by any one or more of the Persons referred to
in clause (i), (iii) any trust, all of the beneficiaries of which are any one or
more of the persons referred to in clause (i), or (iv) any bona fide legal
representative of any of the individuals in clause (i) duly appointed as a
result of the death or legal incapacity of such individual.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person
that will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of any such Restricted Subsidiary
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 Restricted
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; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) commission, 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 or advances to employees made in
the ordinary course of business; (vii) a Person arising as a result of any
Hedging Obligations; (viii) 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; and (ix)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under " -- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock".
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker'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 such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not
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Incurred in connection with Indebtedness and which do not in the aggregate
materially impair their use in the operation of the business of such Person; (f)
Liens securing Indebtedness Incurred to finance the construction, purchase or
lease of, or repairs, improvements or additions to, property of such Person;
provided, however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness (other than any interest thereon) secured by the Lien may not be
Incurred more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien; (g) Liens to secure Indebtedness permitted
under the provisions described in clause (b)(1) under " -- Certain Covenants --
Limitation on Indebtedness", but only to the extent secured by inventory or
accounts receivables and related assets; (h) Liens existing on the Issue Date;
(i) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (j) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (l) Liens securing
Hedging Obligations so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted to be under the Indenture, secured by a Lien on the
same property securing such Hedging Obligations; (m) Liens to secure any
Refinancing (or successive Refinancings) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f), (g),
(h), (i) and (j); provided, however, that (x) such new Lien shall be limited to
all or part of the same property that secured the original Lien (plus
improvements to or on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of (A) the
outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (f), (g), (h), (i) or (j) at the time the
original Lien became a Permitted Lien and (B) an amount necessary to pay any
fees and expenses, including premiums, related to such refinancing, refunding,
extension, renewal or replacement; (n) Liens in favor of the Company or any
Wholly-Owned Subsidiary or Subsidiary Guarantor; (o) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary that does not give rise to an Event of Default; (p) Liens associated
with leases and subleases of real property that do not materially interfere with
the ordinary conduct of the business of the Company and any of its Restricted
Subsidiaries and that are made on customary and usual terms applicable to
similar properties; and (q) Liens consisting of licenses or leases of Property
and related escrow arrangements; provided, however, that such Liens shall not
(except as described under clause (h)) secure any Indebtedness of the Company or
any Restricted Subsidiary. Notwithstanding the foregoing, "Permitted Liens" will
not include any Lien described in clauses (f), (i) or (j) above to the extent
such Lien applies to any Additional Assets acquired directly or indirectly from
Net Available Cash pursuant to the covenant described under " -- Certain
Covenants -- Limitation on Sale of Assets and Subsidiary Stock" unless the
assets that were the subject of the Asset Disposition giving rise to such Net
Available Cash were subject to Liens securing Indebtedness, in which event such
Permitted Liens may secure obligations in an amount not to exceed the amount of
such Indebtedness. For purposes of this definition, "Indebtedness" shall be
deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
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"Property" of any Person means all types of real, personal, tangible or
mixed property owned by such Person whether or not included in the most recent
consolidated balance sheet of such Person under GAAP.
"Refinance" means, in respect of any Indebtedness or Preferred Stock,
to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire,
or to issue other Indebtedness or Preferred Stock in exchange or replacement
for, such Indebtedness or Preferred Stock. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date and any business utilizing any technology, know-how, patents,
processes, procedures, copyrights or other intellectual property now or
hereinafter developed by the Company or any Restricted Subsidiary.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means (i) Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in
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such proceeding) in respect of (A) indebtedness of the Company for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which the Company is responsible or
liable unless, in the case of (i) and (ii), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes;
provided, however, that Senior Indebtedness shall not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for Federal, state, local or
other taxes owed or owing by the Company, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of the Company (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of the Company or (5) that portion of any Indebtedness which
at the time of Incurrence is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption 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 unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantor" means any Subsidiary which, pursuant to the
terms of the Indenture, has executed a Subsidiary Guaranty.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of
the Company's obligations with respect to the Notes. The form of such Guarantee
is provided for in the Indenture. Each Subsidiary Guaranty will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty,
as it relates to such Subsidiary Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Upon the sale or other disposition
of a Subsidiary Guarantor or the sale or disposition of all or substantially all
the assets of a Subsidiary Guarantor (in each case other than to the Company or
an Affiliate of the Company) permitted by the Indenture, such Subsidiary
Guarantor will be released and relieved from all its obligations under its
Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States
of America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
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recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in
clause (ii) above,
(iv) investments in commercial paper, maturing not more than
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 or any foreign country recognized
by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard and Poor's Ratings Group, and
(v) investments in securities with maturities of 90 days or
less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at
least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc.;
provided, however, that in the case of the net proceeds from the sale of the
Units, the time periods set forth in (ii), (iii), (iv) and (v) shall be two
years.
"Units" means the Units sold by the Company consisting of the Notes and
certain Warrants to purchase Common Stock.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under " -- Certain Covenants --Limitation on
Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under " --
Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be made by the Company to the Trustee by promptly filing with the Trustee a copy
of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"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 Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
<PAGE> 92
85
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income
tax considerations applicable to the exchange of the Old Notes for New Notes
pursuant to the Exchange Offer, and to the ownership and disposition of the New
Notes. This summary is based upon provisions of the Internal Revenue Code of
1986, as amended (the "Code"), regulations, rulings and decisions currently in
effect, all of which are subject to change (possibly with retroactive effect).
The discussion does not purport to deal with all aspects of federal taxation
that may be relevant to particular investors in light of their personal
investment circumstances (for example, to persons holding Notes as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss federal income tax
considerations applicable to certain types of investors subject to special
treatment under the federal income tax laws (for example, life insurance
companies, tax-exempt organizations and financial institutions). In addition,
the discussion does not consider the effect of any foreign, state, local, gift,
estate or other tax laws that may be applicable to a particular investor. The
discussion assumes that investors hold the Notes as capital assets within the
meaning of Section 1221 of the Code. Each holder is strongly urged to consult
his, her or its tax advisor regarding the particular tax consequences to such
holder of exchanging the Old Notes for the New Notes, and of the ownership and
disposition of the New Notes.
EXCHANGE
The exchange of the Old Notes for the New Notes pursuant to the
Exchange Offer should not be treated as a taxable transaction for federal income
tax purposes because the New Notes do not differ materially in kind or extent
from the Old Notes. Accordingly, no gain or loss should be recognized by a
holder who exchanges an Old Note for a New Note pursuant to the Exchange Offer,
and each New Note should be viewed as a continuation of the corresponding Old
Note. For purposes of determining gain or loss upon a subsequent sale or
exchange of the New Notes, a holder's initial basis in the New Notes will be the
same as such holder's adjusted basis in the Old Notes exchanged therefor, and
the holding period of a holder in the New Note should include the period during
which such holder held such corresponding Old Note.
INITIAL TAX BASIS
The Old Notes were issued in the Private Placement as part of an
investment unit that included the Old Notes and Warrants to acquire Common
Stock. Consequently, a purchaser of a Unit was required to allocate the purchase
price of the Unit between the Old Note and the Warrants based on their relative
fair market values at the time of purchase. For purposes of determining original
issue discount on the Notes, the Company allocated the issue price of the Units
between the Notes and Warrants based on valuation advice furnished to it by the
initial purchasers of the Units, as described below under "Tax Treatment of
Notes -- Interest and Original Issue Discount".
TAX TREATMENT OF NOTES
STATUS AS DEBT
The Company intends to treat the Notes as indebtedness and not as
equity for federal income tax purposes, and the federal income tax consequences
described below are based on that characterization. Such treatment, however, is
not binding on the Internal Revenue Service (or the courts), and there can be no
assurance that the Internal Revenue Service would not argue (or that a court
would not hold) that all or some portion of the Notes should be treated as
equity for federal income tax purposes. Among other consequences, treatment as
equity would result in all or some portion of the interest payments and/or
original issue discount on the Notes being treated as distributions with respect
to stock which would not be deductible by the Company.
INTEREST AND ORIGINAL ISSUE DISCOUNT
The Old Notes were issued with original issue discount for federal
income tax purposes. Because the New Notes are treated as a continuation of the
Old Notes, the original issue discount on the Old Notes will carry over to
<PAGE> 93
86
the New Notes, and continue to be treated in the same manner. In general,
original issue discount on the Notes, defined as the excess of "stated
redemption price at maturity" over "issue price," must be included in the
holder's gross taxable income in advance of the receipt of cash representing
that income, and such amounts will increase periodically over the life of the
Notes.
Under the Treasury Regulations, the issue price of the Units under the
Private Placement was the first price at which a substantial amount of the Units
were sold for money (ignoring for this purpose sales to the Initial Purchasers
of such Units under the Private Placement). The issue price for a Unit as so
determined was allocated between the debt instrument (i.e., the Old Note) and
the property rights (i.e., the Warrants) that comprised the Unit based on their
relative fair market values at the time of issuance. Pursuant to these rules,
and based on advice furnished to it by the Initial Purchasers, the Company
treated each Old Note as having an issue price of $644.21 and each Warrant as
being issued for $34.62. This allocation, however, is not binding on the
Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will not challenge the Company's determination of the issue
price of the Old Notes.
The Company's allocation is binding on each holder unless the holder
discloses that his or her allocation differs from the Company's allocation on a
statement attached to the holder's timely filed federal income tax return for
the year in which he, she or it acquires the investment unit. If a holder uses
an allocation different from the Company, or a holder acquired a Unit at a price
different than that on which the Company's allocation is based, the holder will
be treated as having acquired the Note for a greater or lesser amount than the
Note's issue price, 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.
Under the Treasury Regulations, a debt instrument's stated redemption
price at maturity is the sum of all payments provided by the instrument other
than payments of "qualified stated interest," which is defined as stated
interest that is unconditionally payable at least annually at a single fixed
rate. The Company believes that no part of the stated interest on the Notes will
be qualified stated interest, and therefore that the stated redemption price at
maturity of the Notes will equal their principal amount at maturity plus all
stated interest. Thus, each Note will bear original issue discount in an amount
equal to the excess of (i) the sum of its principal amount at maturity plus all
stated interest payments over (ii) its issue price.
A holder generally will be required to include in gross income the
original issue discount attributable to the Notes over their term and before
receipt of the cash attributable to such income under a method embodying an
economic accrual of such discount and calculated on the basis of a constant
yield to maturity. In determining the yield and maturity of a debt instrument
which contains a call option, such as the Notes, the Company will be deemed to
exercise the call option in a manner that minimizes the yield on the debt
instrument. If the Note is not in fact called on the presumed exercise date,
then, for purposes of the accrual of original issue discount, the yield and
maturity of the Note are redetermined by treating the Note as reissued on that
date for an amount equal to its adjusted issue price (generally the original
issue price increased by the aggregate amount of previously accrued original
issue discount less payments other than qualified stated interest) on that date.
A Registration Default, as described under "Description of the Notes --
Exchange Offer; Registration Rights", will cause additional interest to accrue
on the Notes in the manner described therein. In addition, a Change of Control
of the Company would require an additional amount to be paid on the Notes in the
event that a holder requires the Company to repurchase such holder's Notes, in
the manner described under "-- Change of Control". However, under the Treasury
Regulations, the possibility of any such additional interest or payment will not
affect the accrual of original issue discount or the yield to maturity on the
Notes unless, based on all the facts and circumstances as of the issue date, it
is more likely than not that such additional interest or payment will be paid.
The Company does not intend to treat the possibility of such additional interest
or payment as affecting the computation of original issue discount or yield to
maturity. If a holder of a Note becomes entitled to additional interest or
payments, then, for purposes of determining the accrual of original issue
discount, the yield to maturity of the Notes will be redetermined by treating
the Notes as reissued on the date that it is determined that such additional
interest or payments will be required to be paid, for an amount equal to its
adjusted issue price on such date.
<PAGE> 94
87
If a holder acquires a Note for an amount less than the "revised issue
price" (generally the original issue price increased by the aggregate amount of
previously accrued original issue discount (without regard to any reductions
described in the following sentence) less payments other than qualified stated
interest), such holder may be subject to the market discount rules described
below. If a holder acquires a Note by purchase for an amount greater than its
revised issue price, such holder will be considered to have purchased such Note
with "acquisition premium", and the amount of original issue discount that such
purchaser must include in income with respect to such Note for any taxable year
will be reduced by the portion of acquisition premium properly allocable to such
year.
A holder may make an election to include in gross income all interest
that accrues on a Note (including original issue discount, market discount and
de minimis market discount, as adjusted by any amortizable bond premium) in
accordance with an economic yield method calculated by treating the Note as
being issued on the holder's acquisition date at an issue price equal to the
holder's adjusted basis in the Note immediately after its acquisition.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION
The Notes constitute "applicable high yield discount obligations" under
the Code. As a result, the original issue discount that accrues with respect to
the Notes will not be deductible by the Company for federal income tax purposes
until paid. Moreover, since the yield to maturity of the Notes exceeds the
applicable federal rate (as set forth in Section 1274(d) of the Code) plus six
percentage points, a ratable portion of the Company's deduction for original
issue discount (the "Disqualified OID") will be permanently denied. In the case
of a corporate holder of a Note, the Disqualified OID will be treated, when
accrued, as a dividend to the extent of the Company's current or accumulated
earnings and profits for purposes of the dividends received deduction provisions
in the Code.
LIMITATION ON INTEREST DEDUCTION FOR CORPORATE ACQUISITION INDEBTEDNESS
Section 279 of the Code, and Treasury Regulations promulgated
thereunder, imposes limitations on the ability of a corporation to deduct
interest (including original issue discount) on "corporate acquisition
indebtedness". "Corporate acquisition indebtedness" is generally debt
obligations issued to provide direct or indirect consideration for the purchase
of stock or not less than two-thirds of all the operating assets of another
corporation, if certain other tests are satisfied. The maximum annual amount of
any interest deduction on corporate acquisition indebtedness is $5 million,
reduced generally by the amount of interest incurred on indebtedness issued to
acquire stock or assets which does not constitute corporate acquisition
indebtedness under the other tests. Under the Treasury Regulations, debt
obligations are issued to provide indirect consideration for an acquisition of
stock or assets for purposes of Section 279 if, inter alia, at the time of
issuance of the obligations the issuing corporation anticipated the acquisition
of such stock or assets and the obligations would not have been issued if the
issuing corporation had not so anticipated such acquisition.
As discussed in the Private Placement, the Company may use a portion of
the proceeds from the sale of the Units in connection with future acquisitions,
but the Company has no current agreement, arrangement or commitment pertaining
to any future acquisition. Based on the Treasury Regulations, the Company does
not believe that the Old Notes were issued to provide indirect consideration for
an acquisition of stock or assets within the meaning of Section 279. However
there can be no assurance that the Internal Revenue Service will agree with this
characterization. Should the Company make an acquisition of stock or assets of
another corporation (other than generally stock or assets of a foreign
corporation), it is possible that all or a portion of the Notes will be
considered by the Internal Revenue Service to constitute "corporate acquisition
indebtedness" for which interest deductions are limited under Section 279 of the
Code.
SALE OR REDEMPTION
A holder generally will recognize taxable gain or loss on the sale or
redemption of the Notes equal to the difference between the amount realized from
such sale or redemption and his or her adjusted tax basis for such Notes. Except
as discussed under " -- Market Discount," such gain or loss generally will be
capital gain or loss and
<PAGE> 95
88
will be long-term capital gain or loss if the holding period for such Notes is
more than one year. A holder's adjusted tax basis in a Note is generally equal
to the amount paid therefor, increased by accrued original issue discount and
market discount previously included in the holder's gross income with respect to
the Note, and decreased by (i) payments on the Note other than payments of
qualified stated interest and (ii) amortized bond premium with respect to the
Note (discussed below).
MARKET DISCOUNT
A holder who purchases a Note for an amount that is less than its
revised issue price will be subject to the market discount provisions of the
Code. Market discount is the excess, if any, of the Note's revised issue price
(defined above) over its basis in the hands of the acquirer immediately after
its acquisition. However, market discount will not be considered to exist if, at
the time of acquisition, the discount is less than 1/4 of 1% of the Note's
stated redemption price at maturity multiplied by the number of full years
remaining until maturity ("de minimis market discount").
When a holder disposes of a Note acquired with market discount, the
lesser of the gain recognized or the accrued market discount will be taxable to
the holder as ordinary income (and will generally be treated as interest).
Accrued market discount at such time is the total market discount multiplied by
a fraction, the numerator of which is the number of days the acquirer held the
Note and the denominator of which is the number of days from the date the
acquirer acquired the Note until its maturity date. As an alternative to this
ratable method, the holder may elect to compute the accrued market discount
based upon an economic yield to maturity.
A holder of a market discount obligation is generally required, until
the holder disposes of the obligation in a taxable transaction, to defer a
portion of the deduction of interest expense on any indebtedness incurred or
maintained to purchase or carry the obligation in an amount equal to the lesser
of (i) the amount of such interest expense in excess of the amount of interest
(including original issue discount) includible in gross income with respect to
the obligation or (ii) the amount of market discount allocable to the number of
days in the taxable year the holder held the obligation.
The Notes may be redeemed in whole or in part before maturity at the
times and under the circumstances discussed above. If the Notes are redeemed in
part, a holder of Notes acquired with market discount could be required to treat
the principal payment as ordinary income to the extent of any accrued market
discount on such Notes.
A holder of a debt instrument acquired at a market discount may elect
to include the market discount in income as the discount accrues. The current
inclusion election, once made, applies to all market discount obligations
acquired on or after the first day of the taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service. If a holder of Notes elects to include market discount in income as it
accrues, the above-described rules regarding ordinary income recognition on
dispositions and partial redemptions of such Notes and the deferral of interest
deductions on indebtedness related to such Notes would not apply.
BOND PREMIUM
A holder who acquires an obligation for an amount in excess of the
amount payable at maturity (or at an earlier call date, if a smaller premium
would result) may elect to amortize and deduct (on a constant yield basis) the
amount of such excess over the period from the acquisition date to the maturity
date, or to the earlier "call date", where appropriate, if a smaller deduction
would result, with corresponding reductions in such holder's tax basis in the
debt instrument. Amortizable bond premium is treated as an interest deduction,
except as may be provided in Treasury Regulations. An election to amortize bond
premium applies with respect to all bonds held on the first day of the taxable
year for which the election is made and to bonds thereafter acquired and may not
be revoked without the consent of the Internal Revenue Service.
<PAGE> 96
89
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will make annual reports to the Internal Revenue Service
and holders of the Notes regarding the amount of original issue discount and
Disqualified OID with respect to such Notes paid or accrued during the year, to
the extent required by law.
Under federal income tax law, a holder of Notes may, under certain
circumstances, be subject to "backup withholding" unless such holder (i) is a
corporation, or is otherwise exempt and, when required, demonstrates this fact
or (ii) provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The withholding rate is 31% of
"reportable payments," which include dividends, interest (including original
issue discount), proceeds from sale or redemption and, under certain
circumstances, principal payments.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN HOLDERS
The following discussion summarizes certain United States federal
income tax consequences generally applicable to the ownership and disposition of
the Notes by a holder who is not a United States Person ("Non-U.S. Holder"). The
term "United States Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any state thereof or an estate or trust, the income
of which is subject to federal income taxation regardless of its source. This
discussion does not purport to deal with all aspects of United States federal
income taxation that may be relevant to a Non-U.S. Holder and does not describe
any tax consequences arising out of the laws of any state, locality or foreign
jurisdiction or out of United States federal estate and gift tax laws. NON-U.S.
HOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE EXCHANGE OF OLD NOTES
FOR NEW NOTES AND OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
INTEREST AND ORIGINAL ISSUE DISCOUNT
Interest paid by the Company to a Non-U.S. Holder that is not
effectively connected with the conduct of a trade or business within the United
States by such foreign holder generally will not be subject to withholding of
United States federal income tax if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and is not a controlled foreign corporation with respect to which
the Company is a "related person" within the meaning of the Code and (ii) the
beneficial owner, under penalty of perjury, certifies that the beneficial owner
is not a United States person and provides the beneficial owner's name and
address. A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding sentence generally will be subject to withholding of U.S.
federal income tax at the rate of 30% (or a lower applicable treaty rate) on
interest payments and payments attributable to original issue discount on the
Notes.
Interest paid by the Company to a Non-U.S. Holder that is effectively
connected with the conduct of a trade or business within the United States by
such foreign holder generally will be subject to the United States federal
income tax on net income that applies to United States persons generally (and,
with respect to corporate holders under certain circumstances, the branch
profits tax).
Original issue discount that accrues while a Note is held by a Non-U.S.
Holder is generally treated in the same manner as interest described above.
Withholding attributable to original issue discount, where required, is made at
the time interest on the Note is paid or, to the extent such original issue
discount was not previously taxed, at the time the Note is sold, exchanged or
redeemed.
GAIN ON DISPOSITION
A Non-U.S. Holder generally will not be subject to United States
federal income tax (subject to the discussion under "Information Reporting and
Backup Withholding" below) on gain recognized on a sale or other disposition
(including a redemption) of Notes unless (i) the gain is effectively connected
with the conduct of a trade
<PAGE> 97
90
or business within the United States by the Non-U.S. Holder or (ii) in the case
of a Non-U.S. Holder who is a nonresident alien individual and holds the Notes
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale or disposition and either has a "tax home"
(as defined for United States federal income tax purposes) in the United States
or an office or other fixed place of business in the United States to which the
sale or disposition is attributable.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In the case of payment of interest to Non-U.S. Holders, temporary
Treasury Regulations provide that the 31% backup withholding and other reporting
will not apply to such payments with respect to which either the requisite
certification, as described above, has been received or an exemption has
otherwise been established (provided that neither the Company nor its paying
agent has actual knowledge that the holder is a United States person or the
conditions of any other exemption are not in fact satisfied). Under temporary
Treasury Regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a foreign person
upon the disposition of the Notes by or through a United States office of a
United States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a foreign person or
the holder otherwise establishes an exemption. Information reporting
requirements (but not backup withholding) will also apply to a payment of the
proceeds of a disposition of the Notes by or through a foreign office of (i) a
United States broker, (ii) a foreign broker 50% or more of whose gross income
for certain periods is effectively connected with the conduct of a trade or
business in the United States or (iii) a foreign broker that is a "controlled
foreign corporation", unless the broker has documentary evidence in its records
that the holder is a non-United States holder and certain other conditions are
met, or the holder otherwise establishes an exemption. Neither information
reporting nor backup withholding will generally apply to a payment of the
proceeds of a disposition of the Notes by or through a foreign office of a
foreign broker not subject to the preceding sentence.
REFUNDS
Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
OTHER TAX CONSIDERATIONS
There may be other federal, state, local or foreign tax considerations
applicable to the circumstances of a particular holder of Notes. ACCORDINGLY,
EACH HOLDER OF NOTES IS ADVISED TO CONSULT HIS, HER OR ITS TAX ADVISOR REGARDING
THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OF OLD NOTES FOR
NEW NOTES AND OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
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 Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 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
<PAGE> 98
91
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 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 on any
such resale of New Notes and any commission 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 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any 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 reasonable 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.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
the Company by Krugman, Chapnick & Grimshaw, Saddle Brook, New Jersey.
EXPERTS
The consolidated financial statements of Electronic Retailing Systems
International, Inc. as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
<PAGE> 99
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Accountants ................................... F-2
Consolidated Balance Sheet, December 31,
1995 and 1996 ..................................................... F-3
Consolidated Statement of Operations for
the years ended December 31, 1994, 1995
and 1996 .......................................................... F-4
Consolidated Statement of Cash Flows
for the years ended December 31, 1994, 1995
and 1996 .......................................................... F-5
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 .................................. F-6
Notes to Consolidated Financial Statements .......................... F-7
F-1
<PAGE> 100
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Electronic Retailing Systems International, Inc.
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Electronic Retailing Systems International, Inc. and its subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based upon
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Stamford, Connecticut
March 20, 1997
F-2
<PAGE> 101
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2) $ 3,210 $ 8,198
Accounts receivable - net of allowance for doubtful
accounts of $88 in 1995 and $90 in 1996 1,356 1,061
Receivables from affiliates (Note 3) 8 20
Installations in progress 522 87
Inventories - net of reserves of $195 in 1995 and
$838 in 1996 (Note 2) 1,874 821
Prepayments and other current assets 79 125
-------- --------
Total current assets 7,049 10,312
-------- --------
Equipment (Note 2) 2,047 2,444
Accumulated depreciation (1,365) (1,798)
-------- --------
Net equipment 682 646
-------- --------
Other non-current assets 585 1,302
-------- --------
TOTAL ASSETS $ 8,316 $ 12,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,549 $ 1,286
Accrued salaries and benefits 217 262
-------- --------
Total current liabilities 1,766 1,548
-------- --------
Long-term debt (Note 6) 3,335 4,989
-------- --------
Commitments (Note 8) -- --
-------- --------
Stockholders' equity
Preferred stock, undesignated (par value $1.00 per share;
1,860,000 and 2,000,000 shares authorized, none outstanding)
Series A Cumulative, Convertible Preferred Stock
(140,000 and no shares authorized; 123,246 and no shares
issued and outstanding in 1995 and 1996, including 2,049
shares issued January 1, 1996 as a stock dividend to
holders of record on December 31, 1995) 123 --
Common stock (par value $0.01 per share; 25,000,000 shares
authorized; 11,748,232 and 21,047,106 shares issued
and outstanding in 1995 and 1996, respectively) 117 210
Additional paid-in capital 38,474 50,655
Accumulated deficit (35,499) (45,142)
-------- --------
Total stockholders' equity 3,215 5,723
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,316 $ 12,260
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 102
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Product sales $ 2,227 $ 2,663 $ 4,106
Maintenance 149 310 896
-------- -------- --------
Total revenues 2,376 2,973 5,002
-------- -------- --------
COST OF GOODS SOLD
Product sales 3,316 3,552 4,488
Maintenance 506 561 966
Special inventory provision (Note 2) -- -- 750
-------- -------- --------
Total cost of goods sold 3,822 4,113 6,204
-------- -------- --------
Gross profit (loss) (1,446) (1,140) (1,202)
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative (including
amounts to related parties of $76 in 1994,
$91 in 1995 and $34 in 1996) (Note 3) 6,039 6,952 6,807
Research and development ( Note 9) 2,571 2,491 1,117
Depreciation and amortization 149 107 162
Stock option compensation (Note 10) 1,119 27 44
-------- -------- --------
Total operating expenses 9,878 9,577 8,130
-------- -------- --------
Loss from operations (11,324) (10,717) (9,332)
-------- -------- --------
OTHER INCOME (EXPENSES)
Interest income 288 134 302
Interest expense (including amounts to related parties
of $52 in 1995) (Note 3) (65) (291) (382)
Gain (loss) on short-term investments (Note 2) (177) 6 --
-------- -------- --------
Total other income (expenses) 46 (151) (80)
-------- -------- --------
NET LOSS $(11,278) $(10,868) $ (9,412)
======== ======== ========
EARNINGS PER SHARE
Weighted average common shares outstanding 11,682 11,743 16,169
======== ======== ========
Net loss per common share $ (0.97) $ (0.95) $ (0.60)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 103
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,278) $(10,868) $ (9,412)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 374 463 660
Provision for inventory obsolescence 93 94 843
Provision for doubtful accounts 38 82 168
Stock option compensation 1,119 27 44
Accounts receivable 179 (935) 126
Inventories (534) (591) 209
Other current and non-current assets (127) (252) 30
Current liabilities 110 820 (217)
-------- -------- --------
Net cash used in operating activities (10,026) (11,160) (7,549)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (303) (452) (397)
Capitalized product development costs -- (475) (592)
Proceeds from sales or maturities of short-term investments 7,040 1,027 --
-------- -------- --------
Cash provided by (used in) investing activities 6,737 100 (989)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 2 -- 12,111
Net proceeds from the issuance of long-term note and warrant 1,899 1,350 1,650
Conversion of preferred stock -- -- (235)
Net proceeds from the issuance of preferred stock -- 8,789 --
Borrowings under line of credit -- 3,000 --
-------- -------- --------
Cash provided by financing activities 1,901 13,139 13,526
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,388) 2,079 4,988
-------- -------- --------
Cash and cash equivalents at beginning of period 2,519 1,131 3,210
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,131 $ 3,210 $ 8,198
======== ======== ========
</TABLE>
There were no cash payments for income taxes in the years 1994, 1995
and 1996. Cash payments for interest expense were $45, $262 and $380 in
1994, 1995 and 1996, respectively, including payments of $52 made to
related parties in 1995. In 1995, preferred stock was issued in a non
cash exchange for surrender of $3 million of debt held by preferred
stock subscribers. In 1996, preferred stock was converted to 3,138,900
shares of common stock in a non cash transaction.
See accompanying notes to consolidated financial statements
F-5
<PAGE> 104
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL ACCUMULATED
STOCK STOCK PAID-IN CAPITAL DEFICIT
--------- ------- --------------- -----------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ -- $ 115 $ 25,318 $(13,028)
-------- ------- -------- --------
Vesting of previously issued stock options 1,119
Issuance of stock warrants 20
Issuance of 193,500 shares with exercise of
stock options 2
Net loss for year (11,278)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1994 $ -- $ 117 $ 26,457 $(24,306)
-------- ------- -------- --------
Vesting of previously issued stock options 27
Proceeds from issuance and sale of 120,000
shares of preferred stock 120 11,668
Issuance of 3,246 shares of preferred stock
as dividends 3 322 (325)
Net loss for year (10,868)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995 $ 123 $ 117 $ 38,474 $(35,499)
-------- ------- -------- --------
Vesting of previously issued stock options 44
Issuance of 65,860 shares with exercise of
stock options 1
Issuance of 2,310 shares of preferred stock
as dividends 2 229 (231)
. Proceeds from issuance and sale of 4,963,500
shares in offshore offering, and issuance of
218,957 shares to placement agent 52 10,087
Proceeds from issuance and sale of 911,657
shares in private placement 9 1,982
Conversion of Series A preferred stock and
issuance of 3,138,900 common shares (125) 31 (161)
Net loss for year (9,412)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1996 $ -- $ 210 $ 50,655 $(45,142)
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 105
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
Electronic Retailing Systems International, Inc. ("ERS" or the "Company"),
was incorporated in 1993 under the laws of the State of Delaware as a
holding company for the business and assets of Electronic Retailing
Systems International, Inc., incorporated in 1990 under the laws of
Connecticut, and an affiliated partnership. The Company develops and
supplies electronic shelf labeling systems. Electronic shelf labeling
systems replace paper price tags on retail shelves with liquid crystal
display labels and transmit pricing and other information to and from the
aisle. The Company's system is designed to address retailers' needs for
improved pricing accuracy and labor efficiencies by electronically linking
a store's shelves to its POS scanners and central computer. The Company
currently operates in North America.
Note 2 - Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions covering a broad spectrum of the Company's financial
activities, and while the Company believes these estimates to be prudent,
there exists a possibility that unexpected events might affect these
estimates. While actual results could differ from those estimates,
management believes that it is highly unlikely that any one event would
have a material effect on the Company's future operating results.
Cash Equivalents
Cash equivalents consist of short-term, highly-liquid U.S. Treasury Bills
and certificates of deposit with original maturities of less than three
months and are stated at cost, which approximates market. Interest income
is accrued as earned.
Cash and cash equivalents at December 31, 1995 included deposits of
$440,000 held as interest bearing collateral for irrevocable letters of
credit of the same amount relating to future inventory purchases in 1996.
There were no letters of credit outstanding at December 31, 1996.
Investments in Debt Securities
The Company's short-term investments have consisted primarily of corporate
debt obligations. Such investments have had maturities of less than one
year and have yielded interest at prevailing interest rates at the time of
acquisition.
During 1994, realized and unrealized losses totaling $177,000 were
recognized on short-term investments. Realized gains and realized losses
in 1994 totaled $6,000 and $106,000, respectively. There were no
short-term investments at December 31, 1995 and 1996.
F-7
<PAGE> 106
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
Financial instruments include cash, short-term investments consisting of
fixed rate overnight deposits and short-term corporate debt obligations,
letters of credit fully collateralized by cash and cash equivalents,
accrued salaries and expenses, and a convertible long-term note. Financial
instruments are carried at cost which approximates fair market value.
Inventories
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1995
consisted of approximately $674,000 of materials and supplies and
$1,200,000 of finished goods. Inventories at December 31, 1996 consist of
approximately $188,000 of materials and supplies and $633,000 of finished
goods. Inventories in excess of expected requirements due to new product
introductions are expensed currently.
In December 1996, the Company announced its new generation wireless
electronic shelf labeling system. In that connection, the Company assessed
the expected market demand for the new product and the inventory on hand
needed to support its forecasted installations and the maintenance
requirements of its existing installed base and recorded a special
provision for excess inventory of $750,000 in the fourth quarter of 1996.
Charges for excess, slow moving and obsolete inventory for the years 1994,
1995 and 1996 were $93,000, $94,000 and $843,000, respectively.
Equipment
Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of
which exceeds five years.
Product Development Costs
The Company capitalizes product development costs, principally wages and
contractor fees, after establishing commercial and technical viability.
Product development costs are stated at the lower of cost or net
realizable value. These costs are amortized using the straight-line method
over the shorter of the estimated useful life of the product or three
years. Amortization commences when the product is available for general
release to customers. As of December 31, 1995 and 1996, unamortized
capitalized costs of $468,000 and $857,000, respectively, are included as
non-current assets. Amortization expense totaled $7,000 and $203,000 for
1995 and 1996, respectively. There were no amounts capitalized or
amortized in 1994.
Revenue Recognition
Revenue is recognized when the product is shipped or upon completion of
installation of a trial electronic shelf label system, provided that no
significant obligations remain and collection of the resulting receivable
is deemed probable. Revenue from providing installation services to
customers is recognized upon the completion of an installation.
Maintenance revenue for services provided under maintenance contracts is
recognized over the service contract period. Other revenue for parts and
services is recognized when provided.
F-8
<PAGE> 107
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
which requires an asset and liability approach to the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income taxes relate to
timing differences between financial and income tax reporting for stock
option compensation, product development costs, depreciation and other
items.
Earnings Per Share
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents assumed to be outstanding
during the period. Common share equivalents consist of the Company's
common shares issuable upon exercise of stock options and stock purchase
warrants. The computation of net loss per common share does not reflect
common share equivalents that are anti-dilutive.
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), effective for fiscal years beginning after
December 15, 1995. FAS 123 indicates a preference for a fair value based
method of accounting for employee stock options, but allows for
continuation of the intrinsic value based method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB Opinion 25"). The Company adopted FAS 123 effective January 1, 1996
and has chosen to continue its use of the intrinsic value based method of
accounting. (See Note 10).
Note 3 - Related Party Transactions:
The Company incurs certain common costs on behalf of affiliates, which are
reimbursed by the affiliates. The Company subleases a portion of its
headquarters facility to an affiliate. Such common costs, including
sublease payments, amounted to $184,000, $112,000 and $63,000 in 1994,
1995 and 1996, respectively (see Note 8). Unpaid amounts are included in
receivables from affiliates at December 31, 1995 and 1996.
The Company has received consulting services and paid a former member of
its Board of Directors fees of $38,000, $34,000 and $34,000 in 1994, 1995
and 1996, respectively. The Company also received consulting services and
paid fees to another former member of the Board of Directors of $38,000
and $20,000 in 1994 and 1995, respectively.
On March 30, 1995, the Company entered into a revolving credit facility
with its principal stockholders and certain members of its Board of
Directors and their affiliates. On July 24, 1995, in connection with the
sale of preferred stock (see Note 4), $3 million in debt borrowed under
such revolving credit facility was surrendered, and the unused portion of
the facility in the amount of $2 million was terminated. Interest expense
in 1995 on amounts borrowed under the line of credit totaled $52,000, at
an average rate of prime plus 1%. Additionally, a facility fee of $100,000
was paid to the lenders pursuant to the terms of the credit facility.
F-9
<PAGE> 108
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Preferred Stock:
On July 24, 1995, the Company completed a private sale of 85,000 shares of
its newly-created Series A Cumulative, Convertible Preferred Stock, $1.00
par value ("Series A Preferred Stock"), for an aggregate purchase price of
$8.5 million. The purchase price was delivered by surrender of $3 million
of the Company's debt held by the subscribers, which consisted of certain
members of the Company's Board of Directors and their affiliates, and cash
in the amount of $5.5 million. Subsequently in 1995, an affiliate of the
Company's Chairman of the Board, and one of the subscribers, acquired
35,000 additional shares of Series A Preferred Stock at a purchase price
per share of $100.
On July 11, 1996 in connection with the Company's offshore public offering
(see Note 5) and contemporaneous private placement, holders of the
Company's Series A Preferred Stock converted their shares, in accordance
with their terms, into an aggregate of 3,138,900 shares of Common Stock,
$.01 par value ("Common Stock"). In connection with the conversion,
payments aggregating $235,000 were made to the Series A Preferred Stock
holders.
Each share of Series A Preferred Stock entitled the holder to a dividend
of $7.50 per annum, payable quarterly, which would cumulate if not paid.
Dividends were payable by the Company, at its election, in either cash or
in the form of additional shares of Series A Preferred Stock valued at
$100 per share. Dividends paid to holders of record of such stock in 1995
and 1996 were paid in the form of additional shares of Series A Preferred
Stock (aggregating 5,556 shares).
Each share of Series A Preferred Stock, valued at $100, was convertible
into shares of the Company's Common Stock at a conversion price of $4.00
(subject to certain adjustments), and was subject to redemption, at the
option of the Company, at a price of $100 under certain conditions.
Holders of Series A Preferred Stock voted together with holders of Common
Stock, each share carrying one vote, and were entitled to a liquidation
preference of $100 per share.
Note 5 - Common Stock Offering:
On July 11, 1996, the Company completed the offshore public offering of an
aggregate of 4,963,500 shares of its Common Stock, in accordance with
Regulation S under the Securities Act of 1933, and the contemporaneous
private placement to subscribers, including certain members of the
Company's Board of Directors and their affiliates, of an aggregate of
911,657 shares of Common Stock. Net proceeds from these transactions were
approximately $12 million (exclusive of non-cash expenses represented by
the issuance of 218,957 shares of Common Stock as commissions).
F-10
<PAGE> 109
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-Term Liabilities:
On August 12, 1994, the Company completed a financing arrangement with the
Connecticut Development Authority ("CDA"), under which the CDA loaned $2
million to the Company at closing and agreed to loan the Company up to an
additional $3 million through August 12, 1997. At December 31, 1995, $3.35
million was outstanding under such facility, with the remainder of the $5
million credit limit advanced in February 1996. Such indebtedness is
repayable five years after closing, accrues interest, payable monthly, at
a rate of 7.4% per annum, is subject to prepayment without premium at the
option of the Company, and is convertible into shares of the Common Stock
of the Company. Such indebtedness is secured by the Company's assets. The
Company also issued to the CDA warrants to purchase 600,000 shares of
Common Stock. At issuance, the initial conversion price of the debt and
exercise price of the warrants was $13.00 per share which was in excess of
the then market price of the Company's Common Stock of $7.00. Due to the
excess, nominal value was assigned to the warrants.
During 1995, the Company also entered into agreements with the CDA, which
became effective upon consummation of the initial sale of the Company's
Series A Preferred Stock (see Note 4), whereby, through August 12, 1997,
the conversion price of the debt held by the CDA and the exercise price of
its warrants were reduced so as to be calculated as $3.00 plus the average
market price of the Common Stock during the 18 months prior to conversion,
and thereafter as $3.00 plus the average market price of Common Stock
during the twelve months prior to conversion. Pursuant to such agreements,
and as a result of additional provisions contained in the CDA's warrants,
effective upon consummation of the sale of the Preferred Stock, and
issuance of the initial dividend thereon: (i) through August 12, 1997, the
exercise price of the CDA's warrants was reduced so as to be calculated as
$2.58 plus the average market price of the Common Stock during the 18
months prior to exercise, and thereafter as $2.58 plus the average market
price of the Common Stock during the twelve months prior to exercise, and
(ii) the number of shares subject to purchase upon exercise of the CDA's
warrants was adjusted to 699,724.
Note 7 - Customer Information:
All of the Company's sales are to customers in the retail food market
industry. Significant customer sales for the years ended December 31,
1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Customer 1994 1995 1996
-------- ---- ---- ----
<S> <C> <C> <C>
The Stop & Shop Supermarket Company -- -- 46%
Big Y Foods, Inc. -- -- 20%
Shaw's Supermarkets, Inc. -- 26% 13%
H.E. Butt Grocery Co. 14% 30% --
The Vons Companies, Inc. 67% 27% --
</TABLE>
F-11
<PAGE> 110
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable at December 31, 1995 and 1996 are unsecured and
concentrated among major supermarket chains in the United States. If the
customers within this concentration failed to pay according to the terms
of their agreements these receivables would be reduced to nominal value.
Note 8 - Commitments:
The Company leases its facilities under operating lease agreements. During
1994, 1995 and 1996, rental expense amounted to approximately $258,000,
$295,000 and $278,000, respectively.
Future minimum lease payments on a calendar year basis under
non-cancelable leases, as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Total
Commitments
-----------
<S> <C>
1997 $218,000
1998 23,000
--------
$241,000
========
</TABLE>
The Company subleases a portion of its headquarters facility to an
affiliate for which sublease payments were $63,000 in 1996. Future
sublease amounts from its affiliate are $83,000 in 1997.
Note 9 - Research and Development:
Research and development activities were a major component of the
Company's expenditures and efforts during 1994, 1995 and 1996. The
Company's research and development expenses (including the allocation of
salaries) during 1994, 1995 and 1996 were $2,571,000, $2,491,000 and
$1,117,000, respectively.
During 1994 and 1995, the Company had research and development contracts
with unaffiliated parties for both hardware and software elements of its
electronic shelf labeling system. The Company reimbursed these contractors
generally based on milestone achievements or satisfactory performance.
F-12
<PAGE> 111
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stock Option and Defined Contribution Plan:
The Company has an employee stock option plan whereby options to purchase
shares of Common Stock may be granted to key employees of the Company. In
June 1994 and December 1996, the stockholders approved an increase in the
number of authorized shares of Common Stock available for issuance under
the plan from 850,005 to 1,225,000 and from 1,225,000 to 1,775,000,
respectively. Options granted under the plan typically become exercisable
over a period of four years.
A summary of all option activity pursuant to the employee stock option
plan is as follows:
<TABLE>
<CAPTION>
Price Range Options
----------- -------
<S> <C> <C>
Options outstanding December 31, 1993 $ .01 - $6.00 697,978
--------
Option grants $ .01- $8.50 239,823
Options exercised $ .01 (193,500)
Options canceled $ .01- $6.00 (13,931)
--------
Options outstanding December 31, 1994 $ .01 - $8.50 730,370
--------
Option grants $ .01 - $5.63 480,205
Options exercised $ .01 (27,766)
Options canceled $ .01 - $8.50 (265,080)
--------
Options outstanding December 31, 1995 $ .01 - $6.00 917,729
--------
Option grants $ 1.88 - $2.25 380,784
Options exercised $ .01 (65,860)
Options canceled $ 2.25 - $6.00 (354,161)
--------
Options outstanding December 31, 1996 $ .01 - $5.875 878,492
========
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its employee stock option plan. The consolidated statement
of operations for the years ended December 31, 1994, 1995 and 1996
includes noncash stock option compensation expense of $1,119,000, $27,000,
and $44,000, respectively, representing compensation earned for service
through the periods then ended related to option grants. Had compensation
expense for the Company's employee stock option plan been determined based
on the fair value at the grant dates of awards under the plan, consistent
with FAS 123, the Company's net loss and net loss per common share would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported $(10,868,000) $(9,412,000)
Pro forma $(11,221,000) $(9,412,000)
Net loss per common share:
As reported $(0.95) $(0.60)
Pro forma $(0.98) $(0.60)
</TABLE>
F-13
<PAGE> 112
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for employee stock option grants in 1995
and 1996: dividend yield of 0%; expected volatility of 53%; risk-free
interest rate of 7%; and expected life of 5 years. The weighted average
fair value of options granted during the years ended December 31, 1995 and
1996 was $2.98 and $1.30, respectively.
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ .01 389,676 5 years $ .01 70,125 $ .01
$1.88-$3.63 371,784 9 $2.25 10,000 $1.88
$5.00-$5.875 117,032 8 $5.05 64,917 $5.09
------- -------
878,492 145,042
======= =======
</TABLE>
Additionally, the Company has a director stock option plan under which
options covering shares of Common Stock may be granted to directors of the
Company. During 1996, 122,500 options were granted to directors of the
Company to purchase an equal number of common shares pursuant to this plan
at option prices ranging from $1.875 to $3.38. In January 1997, the
stockholders approved an increase in the number of authorized shares of
Common Stock available under the plan from 50,000 to 150,000. All such
options remain outstanding as of December 31, 1996.
The Company has a defined contribution profit sharing and savings plan
which qualifies under Section 401(k) of the Internal Revenue Code for
employees meeting certain service requirements. Participants may
contribute up to 30% of their gross wages, not to exceed in any given year
a limitation set by Internal Revenue Service regulations (such limitation
was $9,500 in 1996). The plan provides for discretionary matching
contributions, as determined by the Board of Directors, to be made by the
Company. There have been no discretionary amounts contributed to the plan
as of December 31, 1996.
Note 11 - Income Taxes:
The Company has incurred net losses since inception which have generated
net operating loss carryforwards of $43.9 million for federal income tax
purposes. These carryforwards are available to offset future taxable
income and begin to expire in the years 2008 and 1998 for federal and
state income tax purposes, respectively. These losses are subject to
limitation on future years utilization should certain ownership changes
occur.
The net operating loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and
income tax purposes result in a noncurrent deferred tax benefit at
December 31, 1995 and 1996 of $17.5 million and $21.1 million,
respectively. In consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize this deferred tax benefit in the
future, the Company has recorded a valuation allowance of an equal amount
on such dates to fully offset the deferred tax benefit amount.
F-14
<PAGE> 113
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the noncurrent deferred tax asset at December
31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 14,568,000 $ 18,256,000
Stock option compensation 2,904,000 2,566,000
Other 54,000 293,000
------------ ------------
Total deferred tax benefit 17,526,000 21,115,000
Valuation allowance (17,526,000) (21,115,000)
Net noncurrent deferred tax asset $ -- $ --
============ ============
</TABLE>
In 1994, 1995 and 1996 a statutory Federal income tax rate of 34% and a
state income tax rate of 7.6%, net of the Federal tax benefit, was
applicable to the Company. Due to the Company's taxable losses the
effective tax rate was nil in each year.
The financial statement income tax provision differs from income taxes
determined by applying the statutory Federal income tax rate to the
financial statement net loss for the years ended December 31, 1994, 1995
and 1996 as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Tax benefit at Federal statutory rate $ 3,835,000 $ 3,695,000 $ 3,200,000
State income tax benefit, net of
Federal tax charge 856,000 825,000 714,000
Net loss not providing current
year tax benefit (4,358,000) (4,428,000) (3,608,000)
Other (333,000) (92,000) (306,000)
----------- ----------- -----------
Provision for income taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Note 12 - Subsequent Events:
Sale of Senior Discount Notes and Warrants
On January 24, 1997, the Company completed the sale, in a private
offering, of 147,312 Units ("Units") consisting of $147,312,000 principal
amount at maturity of 13-1/4% Senior Discount Notes due February 1, 2004
(the "Notes") together with warrants to purchase an aggregate of 2,538,258
shares of Common Stock, at an exercise price of $5.23 per share,
exercisable from the period commencing on the first anniversary of closing
through February 1, 2004.
The Units were sold to investors at a price aggregating $100 million,
representing a yield to maturity on the Notes of 13-1/4%. No cash interest
will accrue on the Notes prior to February 1, 2000. Interest will be
payable thereafter on February 1 and August 1 of each year commencing
August 1, 2000. The Notes are non-callable prior to February 1, 2001. Upon
specified change in control events, each holder has the right to require
the Company to purchase its Note at a specified price. The net proceeds to
the Company approximated $95 million.
F-15
<PAGE> 114
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The indenture under which the Notes were issued places limitations on
operations and sales of assets by the Company or its subsidiaries,
requires maintenance of certain financial ratios in order for the Company
to incur additional indebtedness (subject to specified exceptions),
requires the delivery by the Company's subsidiaries of guaranties if
specified debt is subsequently incurred by such subsidiaries, and limits
the Company's ability to pay cash dividends or make other distributions to
the holders of its capital stock or to redeem such stock.
Increase in Authorized Shares of Common Stock
On January 13, 1997, the Company's stockholders voted to approve an
increase in the number of authorized shares of Common Stock from
25,000,000 to 35,000,000 shares.
F-16
<PAGE> 115
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY INITIAL PURCHASER. NEITHER THIS PROSPECTUS NOT THE ACCOMPANYING
LETTER OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
UNTIL __________, 199_, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OF SUBSCRIPTIONS.
TABLE OF CONTENTS
PAGE
Available Information ........................ ii
Incorporation of Certain Documents by
Reference ................................. ii
Prospectus Summary ........................... 1
Risk Factors ................................. 7
The Exchange Offer ........................... 20
Use of Proceeds .............................. 28
Capitalization ............................... 29
Selected Historical Consolidated Financial
and Certain Other Data .................... 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 35
Business ..................................... 43
Management ................................... 55
Description of the Notes ..................... 56
Certain Federal Income Tax Consequences ...... 85
Plan of Distribution ......................... 90
Legal Matters ................................ 91
Experts ...................................... 91
Index to Financial Statement ................. F-1
<PAGE> 116
ELECTRONIC RETAILING
SYSTEMS
INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS
13 1/4% SENIOR DISCOUNT
NOTES DUE 2004
WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING
13 1/4% SENIOR DISCOUNT
NOTES DUE 2004
PROSPECTUS
_______ ___, 1997
<PAGE> 117
2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the provisions of Paragraph Sixth of the Certificate of
Incorporation of the Company, as amended, and Section 145 of the Delaware
General Corporation Law the Company is required to indemnify a director or
officer of the Company for expenses arising out of legal proceedings in which
the director or officer became involved by reason of his position as a director
or officer of the Company, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful. In a proceeding to procure a judgment in the
Company's favor, a director or officer may be indemnified for expenses incurred
by him in connection with the defense or settlement of the suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, except that no indemnification shall be permitted
without a court order in respect of any claim, issue, or matter as to which such
director or officer shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company. Indemnification of a
director or officer as provided above, unless court-ordered, shall be made by
the Company only upon a determination that indemnification is proper in a
specific case because the conduct of such director or officer meets the
standards set forth above. Such determination shall be made (i) by a vote of the
majority of a quorum consisting of directors who were not parties to the
proceeding involved, (ii) by independent counsel in a written opinion, or (iii)
by the stockholders of the Company.
Paragraph Seventh of the Certificate of Incorporation of the Company, as
amended, eliminates the personal liability of a director of the Company to the
Company or to any of its stockholders for monetary damages for a breach of his
fiduciary duty as a director, except in the case where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law, or obtained an improper
personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein:
Exhibit Number Description
- -------------- -----------
1.1** Purchase Agreement dated as of January 20, 1997 between the
Company and the Initial Purchasers.
3.1** Certificate of Incorporation of the Company, together with
all amendments thereto.
3.2** By-laws of the Company, together with all amendments thereto.
4.1** Indenture, dated as of January 24, 1997, between the Company
and United States Trust Company of New York (the "Trustee").
4.2** Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3** Registration Rights Agreement dated as of January 20, 1997
between the Company and the Initial Purchasers.
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the legality of
the securities being registered hereunder.
II-1
<PAGE> 118
Exhibit Number Description
- -------------- -----------
10.1 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Principal Subsidiary, Norton Garfinkle, The
G/N Garfinkle Trust, Bruce F. Failing, Jr., The Failing
Trust, Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z.
Failing, Robert D. Power and John Stevens (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Partnership, the Principal Subsidiary, and
the limited partners of the Partnership (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha,
Bruce F. Failing, Jr., Hanseatic Corporation and Garfinkle
Limited Partnership II (incorporated by reference to Exhibit
5(c) of the Company's Current Report on Form 8-K dated July
24, 1995).
10.7 Registration Rights Agreement dated as of July 24, 1995 among
the Company, Donald E. Zilkha, Bruce F. Failing, Jr.,
Hanseatic Corporation and Garfinkle Limited Partnership II
(incorporated by reference to Exhibit 5(d) of the Company's
Current Report on Form 8-K dated July 24, 1995).
10.8 Lease dated as of June 8, 1992 between the Company (as
assignee) and Wilton Office Associates Limited Partnership
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company
and Telepanel Systems, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12,
1994 among the Company, the Predecessor Corporation and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
II-2
<PAGE> 119
Exhibit Number Description
- -------------- -----------
10.12 7.4% Convertible Note dated August 12, 1994 executed by the
Company and the Principal Subsidiary to the Connecticut
Development Authority (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by
the Company to the Connecticut Development Authority
(incorporated by reference to Exhibit 10(c) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994).
10.14 Conditional Assignment and Security Agreement dated August
12, 1994 among the Company, the Principal Subsidiary and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(d) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995
between the Company and the lenders named in Annex 1
(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited
(incorporated by reference to Exhibit 5(c) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2,
1996 between the Company and Henderson Crosthwaite
Institutional Brokers Limited (incorporated by reference to
Exhibit 5(d) to the Company's Current Report on Form 8-K
dated July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K dated July 11, 1996).
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.20** Warrant Agreement dated as of January 24, 1997, between the
Company and American Stock Transfer & Trust Company.
10.21 Promissory Note dated October 7, 1992 of Paul M. Patrick in
favor of the Company (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.22** Electronic Retailing Systems International, Inc. 1993
Employee Stock Option Plan.
10.23** Electronic Retailing Systems International, Inc. 1993
Director Stock Option Plan.
11.1 Statement of Computation of Net Loss Per Common Share
(incorporated by reference to Exhibit 11.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996.
II-3
<PAGE> 120
Exhibit Number Description
- -------------- -----------
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges (incorporated by reference to Exhibit 12.1 to the
Company's Annual Report Form 10-K for the year ended December
31, 1996).
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimshaw.
24.1** Power of Attorney (appearing on Signature Page).
25.1** Form T-1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
99.1 Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
- ---------------------
* To be filed by amendment.
** Previously filed.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(2)(ii) above do not apply
if the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those
II-4
<PAGE> 121
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Company pursuant to section 13 or section 15(d) of the
Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 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 its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
(e) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) 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 the registration statement when it became effective.
II-5
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Wilton, State of Connecticut, on April
22, 1997.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By: /s/ William B. Fischer
-------------------------------------
William B. Fischer, Vice President,
Finance and Principal Financial
Officer and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
* Vice Chairman of the April 22, 1997
- ----------------------------- Board and Principal
Bruce F. Failing, Jr. Executive Officer
/s/ William B. Fischer Vice President, Finance and April 22, 1997
- ----------------------------- Principal Financial Officer and
William B. Fischer Accounting Officer
* Director April 22, 1997
- -----------------------------
Paul A. Biddelman
* Director April 22, 1997
- -----------------------------
David Diamond
* Director April 22, 1997
- -----------------------------
Norton Garfinkle
* Director April 22, 1997
- -----------------------------
George B. Weathersby
* Director April 22, 1997
- -----------------------------
Donald E. Zilkha
By: /s/ William B. Fischer *
--------------------------
(William B. Fischer, Attorney-in-fact)
II-6
<PAGE> 123
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
1.1** Purchase Agreement dated as of January 20, 1997 between the Company
and the Initial Purchasers.
3.1** Certificate of Incorporation of the Company, together with all
amendments thereto.
3.2** By-laws of the Company, together with all amendments thereto.
4.1** Indenture, dated as of January 24, 1997, between the Company and
United States Trust Company of New York (the "Trustee").
4.2** Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3** Registration Rights Agreement dated as of January 20, 1997 between
the Company and the Initial Purchasers.
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the legality of the
securities being registered hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Principal Subsidiary, Norton Garfinkle, The G/N
Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993 among
the Company, Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust, Elizabeth Z. Failing, Robert D.
Power and John Stevens (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993 among
Norton Garfinkle, The G/N Garfinkle Trust, Bruce F. Failing, Jr.,
The Failing Trust and Elizabeth Z. Failing (incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Partnership, the Principal Subsidiary, and the limited
partners of the Partnership (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993 among
the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995, between
the Company and, respectively, Donald E. Zilkha, Bruce F. Failing,
Jr., Hanseatic Corporation and Garfinkle Limited Partnership II
(incorporated by reference to Exhibit 5(c) of the Company's Current
Report on Form 8-K dated July 24, 1995).
E-1
<PAGE> 124
10.7 Registration Rights Agreement dated as of July 24, 1995 among the
Company, Donald E. Zilkha, Bruce F. Failing, Jr., Hanseatic
Corporation and Garfinkle Limited Partnership II (incorporated by
reference to Exhibit 5(d) of the Company's Current Report on Form
8-K dated July 24, 1995).
10.8 Lease dated as of June 8, 1992 between the Company (as assignee)
and Wilton Office Associates Limited Partnership (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 No. 33-59486 and incorporated herein by reference).
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc. (incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement
on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company and
Telepanel Systems, Inc. (incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12, 1994
among the Company, the Predecessor Corporation and the Connecticut
Development Authority (incorporated by reference to Exhibit 10(a)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
10.12 7.4% Convertible Note dated August 12, 1994 executed by the Company
and the Principal Subsidiary to the Connecticut Development
Authority (incorporated by reference to Exhibit 10(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by the
Company to the Connecticut Development Authority (incorporated by
reference to Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994).
10.14 Conditional Assignment and Security Agreement dated August 12, 1994
among the Company, the Principal Subsidiary and the Connecticut
Development Authority (incorporated by reference to Exhibit 10(d)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995 between
the Company and the lenders named in Annex 1 (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited (incorporated
by reference to Exhibit 5(c) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2, 1996
between the Company and Henderson Crosthwaite Institutional Brokers
Limited (incorporated by reference to Exhibit 5(d) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the Company's
Current Report on Form
E-2
<PAGE> 125
8-K dated July 11, 1996).
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on Form
8-K dated July 11, 1996).
10.20** Warrant Agreement dated as of January 24, 1997, between the Company
and American Stock Transfer & Trust Company.
10.21 Promissory Note dated October 7, 1992 of Paul M. Patrick in favor
of the Company (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 No. 33-59486).
10.22** Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan.
10.23** Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan.
11.1 Statement of Computation of Net Loss Per Common Share (incorporated
by reference to Exhibit 11.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Exhibit 12.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimshaw.
24.1** Power of Attorney (appearing on Signature Page).
25.1** Form T-1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
99.1 Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
- -----------------
* To be filed by amendment.
** Previously filed.
E-3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Electronic Retailing Systems
International, Inc. (the "Company") of our report dated March 20, 1997 relating
to the consolidated financial statements of the Company, which appears in such
Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Stamford, Connecticut
April 22, 1997
<PAGE> 1
LETTER OF TRANSMITTAL
(INCLUDING FORM W-9 AND GUIDELINES)
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS 13-1/4% SENIOR DISCOUNT NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
13-1/4% SENIOR DISCOUNT NOTES DUE 2004
PURSUANT TO THE PROSPECTUS, DATED MAY , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY
BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON , 1997
To: UNITED STATES TRUST COMPANY OF NEW YORK
By Mail: By Overnight Courier By Hand:
United States Trust United States Trust United States Trust
Company of New York Company of New York Company of New York
P.O. Box 844 770 Broadway - 13th Floor 111 Broadway
Cooper Station Corporate Trust Operations Lower level
New York, NY 10276-0844 Department New York, NY 10006
(registered or certified New York, NY 10003 Attn: Corporate Trust
mail recommended) Services
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by telephone:
(800) 548-6565
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER 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 May , 1997 (the "Prospectus"), of Electronic Retailing
Systems International, Inc., a Delaware corporation (the "Company"), and this
Letter of Transmittal (this "Letter of Transmittal"), which together constitute
the Company's offer (the "Exchange Offer") to exchange its 13 1/4% Senior
Discount Notes due 2004 (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 at maturity of its outstanding 13 1/4% Senior Discount Notes
due 2004 (the "Old Notes," and collectively with the New Notes, the "Notes").
Other capitalized terms used herein but not defined herein have the meaning
given to them in the Prospectus.
<PAGE> 2
2
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 mature on
February 1, 2004. The New Notes will accrue cash interest at a rate of 13-1/4%
per annum commencing February 1, 2000, and cash interest will be payable
thereafter on February 1 and August 1 of each year, commencing August 1, 2000.
If by [July 23, 1997] neither the Exchange Offer has been consummated nor a
shelf registration statement with respect to the Old Notes has been declared
effective (a "Registration Default"), additional cash interest will accrue on
the Notes, from and including the date on which any such Registration Default
shall occur at the rate of 0.5% per annum of the Accreted Value of the Old Notes
or New Notes, as the case may be. The Company reserves the right, at any time or
from time to time, to extend the Exchange Offer in its sole discretion, in which
case the term "Expiration Date" shall mean the latest time and date to which the
Exchange Offer is extended. The Company shall notify the Exchange Agent of any
extension by oral or written notice and will mail to the registered holders an
announcement thereof, prior to 9:00 A.M., New York City time, on the next
business day after the then Expiration Date.
This Letter is to be used by Holders of Old Notes (i) if certificates
representing the Old Notes are to be physically delivered herewith; or (ii) if
tender of Old Notes is to be made by book-entry transfer to the Exchange Agent's
account at The Depository Trust Company ("DTC"), pursuant to the procedures set
forth in the Prospectus under "The Exchange Offer - Procedures for Tendering" by
any financial institution that is a participant in DTC and whose name appears on
a security position listing as the owner of Old Notes; or (iii) if tender of Old
Notes is to be made according to the guaranteed delivery procedures set forth in
the Prospectus under "The Exchange Offer Guaranteed Delivery Procedures."
Delivery of the documents to DTC does not constitute delivery to the Exchange
Agent.
The term "Holder" with respect to the Exchange Offer means any person (i)
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; or (ii) whose Old Notes are held of record by DTC who desires to deliver
such Old Notes by book-entry transfer at DTC. The undersigned has completed,
executed and delivered this Letter of Transmittal to indicate the action the
undersigned desires to take with respect to the Exchange Offer. Holders who wish
to tender their Old Notes must complete this letter in its entirety.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THE LETTER OF TRANSMITTAL IS COMPLETED.
- --------------------------------------------------------------------------------
DESCRIPTION OF 13-1/4% SENIOR DISCOUNT NOTES DUE 2004 ("OLD NOTES")
- --------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT AT
NAME(S) AND ADDRESS(ES) CERTIFI- PRINCIPAL AMOUNT MATURITY TENDERED (MUST
OF REGISTERED HOLDER(S) CATE AT MATURITY BE IN INTEGRAL MULTIPLE
(PLEASE FILL IN, IF BLANK) NUMBERS* REPRESENTED BY OF $1,000)**
CERTIFICATE(S)
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Total:
- --------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless indicated in the column labeled "Principal Amount At Maturity
Tendered," any tendering Holder of Old Notes will be deemed to have
tendered the entire aggregate principal amount at maturity represented by
the column labeled "Aggregate Principal Amount At Maturity Represented by
Certificate(s)."
If the space provided above is inadequate, list the principal amounts at
maturity on a separate signed schedule and affix the list to this Letter of
Transmittal.
The minimum permitted tender is $1,000 in principal amount at maturity of Old
Notes. All other tenders must be in integral multiples of $1,000.
- --------------------------------------------------------------------------------
<PAGE> 3
3
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4, 5, AND 6) (SEE INSTRUCTIONS 3, 4, 5, AND 6)
To be completed ONLY if certificates To be completed ONLY if certificates
for Old Notes in a principal amount for Old Notes in a principal amount
at maturity not tendered or not at maturity not tendered or not
accepted for exchange, or New Notes accepted for exchange, or New Notes
issued in exchange for Old Notes issued in exchange for Old Notes
accepted for exchange, are to be accepted for exchange, are to be sent
issued in the name of someone other to someone other than the
than the undersigned, or if the Old undersigned, or to the undersigned at
Notes tendered by book-entry transfer an address other than that shown
that are not accepted for exchange above.
are to be credited to an account
maintained by DTC.
MAIL TO:
ISSUE CERTIFICATE TO:
Name__________________________________
Name_________________________________ (Please Print)
(Please Print) Address_______________________________
Address______________________________
______________________________________
_____________________________________ (Include Zip Code)
(Include Zip Code)
______________________________________
_____________________________________ (Tax Identification or Social
(Tax Identification or Social Security No.)
Security No.)
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_____________________________________________
DTC Book-Entry Account No.:________________________________________________
Transaction Code No.:______________________________________________________
[ ] 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 DELIVERY 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> 4
4
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 at
maturity of Old Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of 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 tender of Old Notes by a holder as set forth herein will constitute an
agreement between such holder and the Company in accordance with the terms and
subject to the conditions set forth in the Prospectus and in this Letter of
Transmittal.
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 interpretations 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 or understanding
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 of Transmittal 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 Prospectus
under "The Exchange Offer - Withdrawal of Tenders."
Unless otherwise indicated under the box entitled "Special Payment
Instructions" above, 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 DTC. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" above, 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."
<PAGE> 5
5
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
___________________________________________________________________________
Signature(s) of Owner(s)
___________________________________________________________________________
Dated: _______________, 1997
Name(s)_________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title)___________________________________________________________
Address_________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No._____________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on note
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, please set forth full title and see Instruction 6.)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 6)
Name of Firm____________________________________________________________________
Authorized Signature____________________________________________________________
Dated: _______________, 1997
<PAGE> 6
6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER TO EXCHANGE REGISTERED 13-1/4% SENIOR DISCOUNT NOTES
FOR ANY AND ALL OUTSTANDING 13-1/4% SENIOR DISCOUNT NOTES
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter of Transmittal 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
Prospectus under "The Exchange Offer -- Book-Entry Transfer." Certificates for
all physically tendered Old Notes, or confirmation of book-entry transfer, 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 of Transmittal, 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 or prior to the
Expiration Date, may tender their Old Notes pursuant to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed
Delivery Procedures." Pursuant to such procedures, (i) such tender must be made
through an Eligible Institution (as defined below) (ii) on or prior to the
Expiration Date the Exchange Agent must receive from such Eligible Institution a
properly completed and duly executed notice of guaranteed delivery substantially
in the form provided by the Company (the "Notice of Guaranteed Delivery") (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Old Notes (if possible)
and the principal amount at maturity of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five business trading
days after the Expiration Date, (i) the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, or (ii) that book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC will be effected and
confirmation of such book-entry transfer will be delivered to the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the Letter
of Transmittal, or confirmation of book-entry transfer of the Old Notes into the
Exchange Agent's account at DTC, are received by the Exchange Agent within five
business trading days after the Expiration Date.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
See "The Exchange Offer" section of the Prospectus.
<PAGE> 7
7
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 at maturity of Old Notes to be tendered in the box above entitled
"Description of Old Notes -- Principal Amount At Maturity 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 of Transmittal, 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 OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal 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 of Transmittal.
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 of Transmittal as there are different registrations of
certificates. When this Letter of Transmittal 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 of Transmittal 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 of Transmittal or any certificates or bond power 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 OF TRANSMITTAL 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 TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY
POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT COMPLETED THE BOX
ENTITLED "SPECIAL PAYMENT INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON
THIS LETTER OF TRANSMITTAL, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
<PAGE> 8
8
4. SPECIAL PAYMENT 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 of
Transmittal. 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
DTC 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 of Transmittal.
5. TAXPAYER 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 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
exchange of Old Notes 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 if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, 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.
<PAGE> 9
9
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 of
Transmittal, 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.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions and requests for assistance and requests for additional copies
of the Prospectus or this Letter of Transmittal may be directed to the Exchange
Agent at the address specified in the Prospectus. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
- --------------------------------------------------------------------------------
CERTIFICATE OLD NOTES OLD NOTES
SURRENDERED TENDERED ACCEPTED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Delivery Prepared by Checked By Date
------------------ ------------------ --------
<PAGE> 10
10
FORM W-9
(Rev. December 1996) GIVE FORM TO THE
Department of Treasury REQUESTER. DO NOT
Internal Revenue Service) REQUEST FOR TAXPAYER SEND TO THE IRS
IDENTIFICATION NUMBER AND CERTIFICATION
________________________________________________________________________________
Name (If a joint account or you changed your name, see instructions on
page 12.)
______________________________________________________________________
Business name, if different from above. (See instructions on page 12.)
______________________________________________________________________
Please Please check appropriate box: / / Individual/Sole Proprietor / /
print Corporation / / Partnership / / Other
or
type ______________________________________________________________________
Address (number, street, apt. or Requester's name and address
suite no.) (optional)
________________________________
City, state and ZIP code
________________________________________________________________________________
PART I Taxpayer Identification Number List account numbers here
(TIN) (optional)
__________________________________________
Enter your TIN in the Social Security Number
appropriate box. For / / / / / / / / / /
individuals, this is your or PART II For Payee Exempt From
social security number (SSN).
For your sole proprietors or
resident aliens, see the
instructions on page 12.
For other entities, it is Employer Identification Backup Withholding (See
your employer identification Number instructions on page 12)
number (EIN). If you do / / / / / / / / / /
not have a number, see
HOW TO GET A TIN below.
NOTE: If the account is in more
than one name, see the
chart on page 14 for
guideline on whose number
to enter.
________________________________________________________________________________
PART III Certification
________________________________________________________________________________
Under penalties of perjury, I certify that;
1. The number shown on this form is my correct taxpayer identification (or I am
waiting for number to be issued to me), and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
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.
CERTIFICATION INSTRUCTIONS. You must cross out item 2 above if you have been
notified by the IRS that you are currently subject to backup withholding because
you have failed to report all interest or dividends on your tax return. For real
estate transactions, item 2 does not apply. For mortgage interest paid, the
acquisition or abandonment of secured property, cancellation of debt,
contributions to an individual retirement arrangement (IRA), and generally
payments other than interest and dividends, you are not required to sign the
Certification, but you must provide your correct TIN. (Also, see instructions on
page 13.)
________________________________________________________________________________
Sign
Here Signature - Date -
________________________________________________________________________________
<PAGE> 11
11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE.
PURPOSE OF FORM. -- A person who is required to file an information return
with the IRS must get your correct taxpayer identification number (TIN) to
report, for example, income paid to you, real estate transactions, mortgage
interest you paid, acquisition or abandonment of secured property, cancellation
of debt, or contributions you made to an IRA.
Use Form W-9 to give your correct TIN to the person requesting it (the
requester) and, when applicable, to:
1. Certify the TIN you are giving is correct (or you are waiting for
a number to be issued),
2. Certify you are not subject to backup withholding,
3. Claim exemption from backup withholding if you are an exempt
payee.
NOTE: If a requester gives you a form other than a W-9 to request your TIN, you
must use the requester's form if it is substantially similar to this Form W-9
WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you must
withhold and pay to the IRS 31% of such payments under certain conditions. This
is called "backup withholding." Payments that may be subject to backup
withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee pay, and certain payments from
fishing boat operators. Real estate transactions are not subject to backup
withholding.
If you give the requester your correct TIN, make the proper
certifications, and report all your taxable interest and dividends on your tax
return, payments you receive will not be subject to backup withholding. Payments
you receive WILL be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS tells the requester that you furnished an incorrect TIN, or
3. The IRS tells you that you are subject to backup withholding because
you did not report all your interest and dividends on your tax return (for
reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to
backup withholding under 3 above (for reportable interest and dividend accounts
opened after 1983 only), or
5. You do not certify your TIN when required. See the Part III
instructions on page 13 for details.
Certain payees and payments are exempt from backup withholding. See the
Part II instructions on page 12.
PENALTIES
FAILURE TO FURNISH TIN. -- If you fail to furnish your correct TIN to a
requester, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
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12
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
MISUSE OF TINS. -- If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
SPECIFIC INSTRUCTIONS
NAME. -- If you are an individual, you must generally enter the name shown
on your social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security Administration
of the name change, enter your first name, the last name shown on your social
security card, and your new last name.
If the account is in joint names, list first and then circle the name of
the person or entity whose number you enter in Part I of the form.
Sole Proprietor. -- You must enter your INDIVIDUAL name as shown on
your social security card. You may enter your business, trade, or "doing
business as" name on the BUSINESS NAME line.
Other Entities. -- Enter the business name as shown on required Federal
tax documents. This name should match the name shown on the charter or other
legal document creating the entity. You may enter any business, trade or "doing
business as" name on the business name line.
PART I -- TAXPAYER IDENTIFICATION NUMBER
You must enter your TIN in the appropriate box. If you are a resident
alien and you do not have and are not eligible to get an SSN, your TIN is your
IRS individual taxpayer identification number (ITIN). Enter it in the social
security number box. If you do not have an ITIN, see HOW TO GET A TIN below.
If you are a sole proprietor and you have an EIN, you may enter either
your SSN or EIN. However, using your EIN may result in unnecessary notices to
the requester.
NOTE: See the chart on page 14 for further clarification of name and TIN
combinations.
HOW TO OBTAIN A TIN. -- If you do not have a TIN, apply for one
immediately. To apply for an SSN, get FORM SS-5 from your local Social Security
Administration office. Get FORM W-7 to apply for an ITIN or FORM SS-4 to apply
for an EIN. You can get Forms W-7 and SS-4 from the IRS by calling
1-800-TAX-FORM (1-800-829-3676).
If you do not have a TIN, write "Applied For" in the space for the TIN,
sign and date the form, and give it to the requester. For interest and dividend
payments, and certain payments made with respect to readily tradable
instruments, you will generally have 60 days to get a TIN and give it to the
requester. Other payments are subject to backup withholding.
NOTE: Writing "Applied For" means that you have already applied for a TIN OR
that you intend to apply for one soon.
PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
Individuals (including sole proprietors) are NOT exempt from backup
withholding. Corporations are exempt from backup withholding for certain
payments, such as interest and dividends. For more information on exempt payees,
see the separate instructions for the Requester of Form W-9.
<PAGE> 13
13
If you are exempt from backup withholding, you should still complete this
form to avoid possible erroneous backup withholding. Enter your correct TIN in
Part I, write "Exempt" in Part II, and sign and date the form.
If you are a nonresident alien or a foreign entity not subject to backup
withholding, give the requester a completed FORM W-8, Certificate of Foreign
Status.
PART III -- CERTIFICATION
For a joint account, only the person whose TIN is shown in Part I should
sign (when required).
1. INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE
1984 AND BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. You give your
correct TIN, but you do not have to sign the certification.
2. INTEREST, DIVIDEND, BROKER AND BARTER EXCHANGE ACCOUNTS OPENED AFTER
1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. You must sign the
certification or backup withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to the requester, you
must cross out item 2 in the certification before signing the form.
3. REAL ESTATE TRANSACTIONS. You must sign the certification. You may
cross out item 2 of the certification.
4. OTHER PAYMENTS. You must give your correct TIN, but you do not have
to sign the certification unless you have been notified that you have previously
given an incorrect TIN. "Other payments" include payments made in the course of
the requester's trade or business for rents, royalties, goods (other than bills
for merchandise), medical and health care services (including payments to
corporations), payments to a nonemployee for services (including attorney and
accounting fees), and payments to certain fishing boat crew members.
5. MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED
PROPERTY, CANCELLATION OF DEBT, OR IRA CONTRIBUTIONS. You must give your correct
TIN, but you do not have to sign the certification.
PRIVACY ACT NOTICE
Section 6109 of the Internal Revenue Code requires you to give your
correct TIN to persons who must file information returns with the IRS to report
interest, dividends, and certain other income paid to you, mortgage interest you
paid, the acquisition or abandonment of secured property, cancellation of debt,
or contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. The IRS may also
provide this information to the Department of Justice for civil and criminal
litigation and to cities, states, and the District of Columbia to carry out
their tax laws.
You must provide your TIN whether or not you are required to file a tax
return. Payers must generally withhold 31% of taxable interest, dividend, and
certain other payments to a payee who does not give a TIN to a payer.
Certain penalties may also apply.
<PAGE> 14
14
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
- --------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND SSN OF:
- --------------------------------------------------------------------------------
1. Individual The individual
2. Two or more individuals (joint The actual owner of the account or,
account) if combined funds, the first
individual on the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. The usual revocable savings The grantor-trustee(1)
trust (grantor is also
trustee)
b. So-called trust account that The actual owner(1)
is not a legal or valid trust
under state law
5. Sole proprietorship The owner(3)
6. Sole proprietorship The owner(3)
7. A valid trust, estate, or The legal entity(4)
pension trust
8. Corporate The corporation
9. Association, club, religious, The organization
charitable, educational, or
other tax-exempt organization
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account wit the Department of The public entity
Agriculture in the name of a
public entity (such as a state
or local government, school
district or prison) that
receives agricultural program
payments
- --------------------------------------------------------------------------------
- -----------------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must
be furnished.
(2) Circle the minor's name and furnish the minor's SSN.
(3) You must show your individual name, but you may also enter your business
or "doing business as" name. You may use either your SSN or EIN (if you
have one).
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the TIN of the personal representative or trustee
unless the legal entity itself is not designated in the account title.)
NOTE: If no name is circled when more than one name listed, the number will
be considered to be that of the first name listed.
