<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1997
REGISTRATION NO. 333-21893
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7373 06-1361276
(STATE OR OTHER JURISDICTION (PRIMARY SIC CODE NUMBER) (I.R.S. EMPLOYER
OF
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 LLP
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
-------------------------------------------- --------------------------------------------
<C> <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
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> 3
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
JULY , 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 July ,
1997, 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 JUNE , 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
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 June , 1997.
<PAGE> 4
(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> 5
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 Quarterly Report on Form 10-Q for the three months
ended March 31, 1997; and
(iii) 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.
2
<PAGE> 6
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".
As of March 31, 1997, the ERS ShelfNet System was installed in 70 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
3
<PAGE> 7
include five of the 15 largest supermarket chains in the United States. The
Company estimates that, as of March 31, 1997, of the approximately 29,900
supermarkets in the United States, approximately 125 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.
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).
4
<PAGE> 8
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 March 31, 1997, of the approximately 29,900 supermarkets in the United
States, approximately 125 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.
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
5
<PAGE> 9
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."
6
<PAGE> 10
Expiration Date............ 5:00 P.M., New York City time, on July , 1997,
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
7
<PAGE> 11
Notes will be obligations of the Company evidencing the same indebtedness as the
Old Notes, and will be entitled to the benefits of the same Indenture. The form
and terms of the New Notes are generally the same as the form and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act and therefore will not bear legends restricting the transfer thereof. See
"Description of the New Notes."
COMPARISON 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
8
<PAGE> 12
with the New Notes and none of which is
subordinated debt of the Company. However, the CDA
Note, in the aggregate principal amount of $5.0
million, 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
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.
9
<PAGE> 13
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, 1996 and the
notes thereto included elsewhere in this Prospectus. The summary historical
consolidated statement of operations data for the three months ended March 31,
1996 and 1997 and the summary historical consolidated balance sheet data as of
March 31, 1997 have been derived from unaudited condensed consolidated financial
statements also included elsewhere in this Prospectus and which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The unaudited interim period results are not necessarily
indicative of the results to be expected for the full year. For a discussion of
factors affecting the comparability of this data, see "Selected Historical
Consolidated Financial and Certain Other Data".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
------- -------- -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues..................... $ 941 $ 1,122 $ 2,376 $ 2,973 $ 5,002 $ 1,221 $ 520
Loss from operations......... (9,420) (16,518) (11,324) (10,717) (9,332) (2,274) (2,593)
Net loss(2).................. (9,533) (15,997) (11,278) (10,868) (9,412) (2,327) (4,270)
Net loss per common
share(3)................... -- (1.40) (0.97) (0.95) (0.60) (0.22) (0.20)
Weighted average number
of common shares
outstanding(4)............. -- 11,461 11,682 11,743 16,169 11,767 21,055
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital....................................................... $102,432
Total assets.............................................................. 110,627
Long-term debt............................................................ 102,436
Warrants to purchase common stock......................................... 5,100
Stockholders' equity...................................................... 1,529
</TABLE>
- ---------------
See Notes on page 11.
10
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5)................... $ (8,371) $(15,290) $(10,839) $(10,114) $(8,370) $(2,088) $(1,223)
Cash flows from operating
activities................ (8,133) (11,855) (10,026) (11,160) (7,549) (2,571) (1,072)
Cash flows from investing
activities................ (324) (8,641) 6,737 100 (989) (299) (274)
Cash flows from financing
activities................ 12,866 18,606 1,901 13,139 13,526 1,651 95,075
Depreciation and
amortization.............. 240 367 374 463 660 152 324
Capital expenditures........ 324 574 303 452 397 76 199
Deficiency of earnings to
fixed charges(6).......... (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
Stores with ERS ShelfNet
System installed at end of
period.................... 7 13 21 42 65 48 71
</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) 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 and
for the three months ended March 31, 1996 and 1997, such amounts were not
material.
(6) 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.
11
<PAGE> 15
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.
12
<PAGE> 16
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.
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 March 31,
1997, the Company had a cumulative net loss of approximately $70 million (which
13
<PAGE> 17
includes non-cash charges in the amount of $8.6 million for stock option
compensation expense), resulting in an accumulated deficit of $49.4 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. As of
March 31, 1997, the Company had recorded total outstanding indebtedness of
approximately $102.4 million, including $97.4 million with respect to the Notes,
and total stockholders' equity of $1.5 million.
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
14
<PAGE> 18
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 March 31, 1997, 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
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
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proceeds before the Company and its creditors would derive any value from such
subsidiary's assets. As of March 31, 1997, 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
indebtedness to the Company in the amount of $40.6 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 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
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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 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
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<PAGE> 21
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 March
31, 1997, 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 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
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<PAGE> 22
Principal Subsidiary. Principally as a result of intercompany indebtedness to
the Company of approximately $40.6 million at March 31, 1997, 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 March 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $46 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 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
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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
reliance upon this policy and in 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
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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 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."
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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
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 forth 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
July , 1997, 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.
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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.
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.
23
<PAGE> 27
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
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
24
<PAGE> 28
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.
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
25
<PAGE> 29
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.
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.
26
<PAGE> 30
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) 780-0592
111 Broadway (For Eligible Institutions Only)
Lower level Confirm by telephone:
New York, NY 10006 (800) 548-6565
Attn: Corporate Trust Services
</TABLE>
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
27
<PAGE> 31
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
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
28
<PAGE> 32
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.
29
<PAGE> 33
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of the Company as of March 31, 1997. The table should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................................ $ 101,927
========
Long-term debt
CDA Note............................................................... $ 4,989
13 1/4% Senior Discount Notes Due 2004................................. 97,447
--------
Total long-term debt................................................ 102,436
--------
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; 35,000,000 shares authorized;
21,078,206 issued and outstanding)(2)............................... 211
Additional paid-in capital............................................. 50,730
Accumulated deficit.................................................... (49,412)
--------
Total stockholders' equity.......................................... 1,529
--------
Total capitalization........................................... $ 110,627
========
</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) On April 1, 1997, the Company had 21,078,206 shares of Common Stock
outstanding, which did not include, at such date: (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 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. In April 1997, the Company issued
additional warrants exercisable with respect to 250,000 shares of Common
Stock through April 2000.
30
<PAGE> 34
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. The selected
historical consolidated statement of operations data for the three months ended
March 31, 1996 and 1997 and the selected historical consolidated balance sheet
data as of March 31, 1997 have been derived from unaudited condensed
consolidated financial statements included elsewhere in this Prospectus and
which, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the unaudited interim periods. The unaudited interim period results are not
necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 941 $ 1,122 $ 2,376 $ 2,973 $ 5,002 $ 1,221 $ 520
Cost of goods sold.................... 2,373 1,718 3,822 4,113 6,204 1,444 565
-------- -------- -------- -------- ------- ------- -------
Gross profit (loss)................... (1,432) (596) (1,446) (1,140) (1,202) (223) (45)
-------- -------- -------- -------- ------- ------- -------
Operating expenses:
Selling, general and
administrative.................... 4,628 5,966 6,039 6,952 6,807 1,696 2,017
Research and development............ 2,503 2,325 2,571 2,491 1,117 313 490
Stock option compensation(2)........ -- 7,454 1,119 27 44 -- --
Patent license fee.................. 700 -- -- -- -- -- --
Depreciation and amortization..... 157 177 149 107 162 42 41
-------- -------- -------- -------- ------- ------- -------
Total operating expenses.......... 7,988 15,922 9,878 9,577 8,130 2,051 2,548
-------- -------- -------- -------- ------- ------- -------
Loss from operations.............. (9,420) (16,518) (11,324) (10,717) (9,332) (2,274) (2,593)
-------- -------- -------- -------- ------- ------- -------
Other income (expenses):
Interest income..................... 44 438 288 134 302 34 1,046
Interest expense.................... (922) (340) (65) (291) (382) (87) (2,723)
Gain (loss) on short-term
investments....................... -- -- (177) 6 -- -- --
Other............................... (66) -- -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Total other income (expenses)..... (944) 98 46 (151) (80) (53) (1,677)
-------- -------- -------- -------- ------- ------- -------
Loss before minority interest in
consolidated affiliate............ (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
Minority interest in loss of
consolidated affiliate............ 831 423 -- -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Net loss(3).................. $ (9,533) $(15,997) $(11,278) $(10,868) $(9,412) $(2,327) $(4,270)
======== ======== ======== ======== ======= ======= =======
Earnings per share:
Weighted average number of common
shares outstanding(4)............. 11,461 11,682 11,743 16,169 11,767 21,055
======== ======== ======== ======= ======= =======
Net loss per common share(5).......... $ (1.40) $ (0.97) $ (0.95) $ (0.60) $ (0.22) $ (0.20)
======== ======== ======== ======= ======= =======
</TABLE>
- ---------------
See Notes on page 32.
31
<PAGE> 35
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1992 1993(1) 1994 1995 1996 1997
-------- ------- ------ ------ ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital............................... $ 2,800 $11,642 $3,452 $5,283 $ 8,764 $102,432
Total assets...................................... 5,445 13,241 5,195 8,316 12,260 110,627
Long-term debt.................................... 14,199 -- 1,981 3,335 4,989 102,436
Minority interest in consolidated affiliate....... 8,531 -- -- -- -- --
Stockholders' equity (deficiency)................. (19,374) 12,405 2,268 3,215 5,723 1,529
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)............................. $ (8,371) $(15,290) $(10,839) $(10,114) $(8,370) $(2,088) $(1,223)
Cash flows from operating
activities.......................... (8,133) (11,855) (10,026) (11,160) (7,549) (2,571) (1,072)
Cash flows from investing
activities.......................... (324) (8,641) 6,737 100 (989) (299) (274)
Cash flows from financing
activities.......................... 12,866 18,606 1,901 13,139 13,526 1,651 95,075
Depreciation and amortization......... 240 367 374 463 660 152 324
Capital expenditures.................. 324 574 303 452 397 76 199
Deficiency of earnings to fixed
charges(7).......................... (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
Stores with ERS ShelfNet System
installed at end of period.......... 7 13 21 42 65 48 71
</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 and for the first three months of
1997 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.
(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 and
for the three months ended March 31, 1996 and 1997 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.
32
<PAGE> 36
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 March 31, 1997, approximately 125 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 March 31, 1997, the Company has generated
cumulative revenues of $13.1 million, and has incurred a cumulative net loss of
approximately $70 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
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues. During the three month period ended March 31, 1997, the
Company's total revenues were $520,000 compared to $1,221,000 in the
corresponding quarter in 1996. Product sales in the first quarter of 1997
included $122,000 of software license fees (48% of product sales for the
quarter); no such revenues were recorded in the comparable quarter of the prior
year. In each of the three month periods ended March 31, 1997 and 1996, product
sales were to three customers within the supermarket industry. The decrease in
revenues attributable to product sales in first quarter 1997 compared to first
quarter 1996 reflects the decreased demand for the Company's previous generation
product attendant to plans to introduce the new generation
33
<PAGE> 37
product. Maintenance revenues for the three months ended March 31, 1997
increased to $266,000 from $173,000 in the corresponding 1996 period reflecting
a larger installed customer base. The Company anticipates that past patterns in
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".
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 product development costs,
warranty and maintenance costs, freight and inventory obsolescence.
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 of five years.
Cost of goods sold was $565,000 for the three months ended March 31, 1997,
compared to $1,444,000 for the three months ended March 31, 1996, reflecting
decreased product sales in 1997. The gross loss (cost of goods sold in excess of
revenues) decreased to 9% in the first quarter of 1997, from 18% in the first
quarter of 1996. Cost of goods sold for the three months ended March 31, 1997
included warranty and maintenance expenses of $242,000 compared to $200,000 for
the same period in 1996, reflecting the growing installation base for the ERS
ShelfNet System. The Company anticipates that system enhancements to be
implemented in 1997 will 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.
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 increased to $2,017,000 for the three
month period ended March 31, 1997, compared to $1,696,000 for the same period in
1996. This increase reflects efforts to expand the Company's organization in
anticipation of sales growth.
Research and Development. Research and development expenses were $490,000
for the three month period ended March 31, 1997 compared to $313,000 for the
same period in 1996, reflecting increased hardware engineering activities.
Additionally, for the three month periods ended March 31, 1997 and 1996,
respectively, the Company capitalized $75,000 and $223,000 of product
development software costs that will be amortized over the shorter of the
estimated useful life of the related software product or process or three years.
Interest Income. Interest income increased to $1,046,000 for the three
month period ended March 31, 1997, compared to $34,000 for the same period in
1996, due to increased cash and cash equivalents available for investment,
including the proceeds of the Private Placement.
Interest Expense. Interest expense increased to $2,723,000 for the three
month period ended March 31, 1997, compared to $87,000 for the same period in
1996. Interest expense in 1996 and 1997 included interest on amounts borrowed
from the CDA and additionally, in 1997, interest on the Notes. Commencing with
the consummation of the Private Placement in January 1997, the Company will
record interest on an amount equal to the gross proceeds from the Private
Placement plus prior recorded and unpaid interest at the annual rate of 13.25%.
Additional expense will be recorded as a result of the amortization of the
discount recorded on the Notes (for value attributed to the 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 of approximately $46 million for
federal and state income tax purposes, which are available to offset future
taxable income and expire through the year 2012 for federal income tax purposes.
In consideration of the Company's accumulated losses through March 31, 1997 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 condensed consolidated financial statements. See Note 11 of the
Notes to Consolidated Financial Statements included elsewhere herein and "Risk
Factors -- Potential Loss of NOLs".
34
<PAGE> 38
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's revenues were $5,002,000 in 1996, 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.
Cost of Goods Sold. 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.
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 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.
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.
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, 1996 and
1995. See Note 11 of the Notes to Consolidated Financial Statements included
elsewhere herein and "Risk Factors -- Potential Loss of NOLs".
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.
35
<PAGE> 39
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-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".
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had net working capital of $102,432,000,
reflecting cash and cash equivalents of $101,927,000, compared to net working
capital of $8,764,000, reflecting cash and cash equivalents of $8,198,000 at
December 31, 1996 and 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 during 1997 resulted primarily
from $95 million in net proceeds raised in the Private
36
<PAGE> 40
Placement, and in 1996 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.
Net cash used in operations was $1,072,000 for the three months ended March
31, 1997, compared to net cash of $2,571,000 used for operating activities for
the three months ended March 31, 1996. In the first quarter of 1997, the net
loss of $4,270,000 included $2,468,000 of non-cash interest expense not used by
operations. 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. The 1996 and 1995 net losses reflect non cash provisions for doubtful
accounts receivable of $168,000 and $82,000, respectively, and for inventory
obsolescence of $843,000 in 1996 and $94,000, respectively. The 1996 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 $274,000 for the three months
ended March 31, 1997, compared to $299,000 of cash used for investing activities
for the three months ended March 31, 1996, and $989,000 in 1996 compared to
$100,000 of cash provided by investing activities in 1995. Investing activities
included capital expenditures of $199,000 and $76,000 for the three months
ended, respectively, March 31, 1997 and 1996, and $397,000 and $452,000 in 1996
and 1995, respectively. The Company also incurred $75,000 and $223,000 in
product development costs during the respective quarterly periods and $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.
Cash from financing activities provided $95,075,000 in first quarter 1997
compared to $1,651,000 in the first quarter of 1996, and $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,
37
<PAGE> 41
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.
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. The Company has engaged
Patricof & Co. in connection with certain corporate finance services and, in
addition to fees that become due if certain transactions are consummated,
Patricof's retainer includes three-year warrants issued in the second quarter of
1997 exercisable with respect to 250,000 shares of Common Stock at an exercise
price of $5.24 per share.
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<PAGE> 42
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 March 31, 1997, the ERS ShelfNet System was installed in 70 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 March 31, 1997, of the approximately 29,900 supermarkets in the United
States, approximately 125 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 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.
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<PAGE> 43
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 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.
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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 March 31, 1997, of the approximately 29,900 supermarkets in the United
States, approximately 125 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>
NUMBER
TYPE OF STORE OF STORES
------------------------------------------------------------------ ---------
<S> <C>
Supermarkets...................................................... 29,870
Discount mass merchandisers....................................... 10,075
Chain drug stores................................................. 19,995
Convenience stores................................................ 56,000
-------
Total................................................... 115,940
=======
</TABLE>
Source: Progressive Grocer Annual Report, April 1997; MMR Annual Report,
April 21, 1997.
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.
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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.
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.
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<PAGE> 46
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.
RETAIL CHALLENGE ERS SOLUTION
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.
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.
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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.
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 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
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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.
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.
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<PAGE> 49
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 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 and, in
this connection, in May 1997 announced its first letter of intent relative to
such a distribution channel, which remains subject to definitive documentation.
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
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<PAGE> 50
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 March 31, 1997, the ERS ShelfNet System was installed in 70 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, 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
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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. During the three months ended March 31,
1996 and 1997, the Company incurred expenses for research and development of
$313,000 and $490,000, respectively, and capitalized an aggregate of $223,000
and $75,000, respectively, of software product development costs.
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 thirteen 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.
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
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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.
The Company plans to enter into a ten-year lease for new executive offices
in Norwalk, Connecticut, which the Company would occupy in July 1997. The lease
would cover approximately 16,800 square feet of space and require payment of
annual rent (in addition to increases in operating expenses and real estate
taxes) in an initial amount of approximately $267,000 increasing to
approximately $407,000 in the final year, subject to the Company's right to
terminate the lease after five years upon payment of specified sums.
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.
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<PAGE> 53
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.
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<PAGE> 54
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
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.
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<PAGE> 55
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"), 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
52
<PAGE> 56
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 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.
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<PAGE> 57
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 March 31, 1997, the total liabilities of the Company's
subsidiaries (exclusive of indebtedness owed to the Company in the amount of
$40.6 million) were approximately $6.6 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.
54
<PAGE> 58
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.
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<PAGE> 59
None of the Company, the Trustee, or any payment agent for the Global Notes
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in any of the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests 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
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<PAGE> 60
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.
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
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<PAGE> 61
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 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 March 31, 1997, such covenant would
not have permitted the Company to incur additional Indebtedness (exclusive of
the Indebtedness permitted by paragraph (b) below).
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(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 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,
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in its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such 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
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Company (less the 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 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
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(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 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
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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 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
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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
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
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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 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
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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.
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
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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.
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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
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representing 5% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
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.
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"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
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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 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
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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 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 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.
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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 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
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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 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
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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 such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and
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(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 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,
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(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.
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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
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over to 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
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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.
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.
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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 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
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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.
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.
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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 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 September , 1997, all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
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The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer 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 LLP, 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.
87
<PAGE> 91
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheet as of 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
Interim Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of December 31, 1996 and March 31, 1997
(unaudited)...................................................................... F-15
Condensed Consolidated Statement of Operations for the three months ended March 31,
1996 and 1997 (unaudited)........................................................ F-16
Condensed Consolidated Statement of Cash Flows for the three months ended March 31,
1996 and 1997 (unaudited)........................................................ F-17
Notes to Condensed Consolidated Financial Statements (unaudited).................... F-18
</TABLE>
F-1
<PAGE> 92
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> 93
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> 94
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> 95
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 7,040 1,027 --
investments...........................................
-------- -------- --------
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 1,899 1,350 1,650
warrant...............................................
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> 96
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 2
stock options................................
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 120,000 120 11,668
shares of preferred stock....................
Issuance of 3,246 shares of preferred stock as 3 322 (325)
dividends....................................
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 1
options......................................
Issuance of 2,310 shares of preferred stock as 2 229 (231)
dividends....................................
Proceeds from issuance and sale of 4,963,500 52 10,087
shares in offshore offering, and issuance of
218,957 shares to placement agent...............
Proceeds from issuance and sale of 911,657 9 1,982
shares in private placement..................
Conversion of Series A preferred stock and (125) 31 (161)
issuance of 3,138,900 common shares..........
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> 97
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.
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.
F-7
<PAGE> 98
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-8
<PAGE> 99
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 100
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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.
F-10
<PAGE> 101
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
NOTE 10 -- STOCK OPTION AND DEFINED CONTRIBUTION PLANS:
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.
F-11
<PAGE> 102
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
- ------------ ----------- --------- -------- ----------- --------
<C> <C> <S> <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 applies APB Opinion 25 and related interpretations in
accounting for its employee and director stock option plans. 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 and director stock option plans been
F-12
<PAGE> 103
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined based on the fair value at the grant dates of awards under the plans,
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>
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 and director 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 employee and
director options granted during the years ended December 31, 1995 and 1996 was
$2.98 and $1.31 respectively.
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.
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>
F-13
<PAGE> 104
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-14
<PAGE> 105
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................... $ 8,198 $ 101,927
Accounts receivable............................................... 1,061 1,051
Inventories....................................................... 821 645
Prepayments and other current assets.............................. 232 371
-------- --------
Total current assets...................................... 10,312 103,994
-------- --------
Equipment........................................................... 2,444 2,643
Accumulated depreciation.......................................... (1,798) (1,930)
-------- --------
Net equipment..................................................... 646 713
-------- --------
Other non-current assets............................................ 1,302 5,920
-------- --------
Total assets........................................................ $ 12,260 $ 110,627
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................. $ 1,548 $ 1,562
-------- --------
Total current liabilities................................. 1,548 1,562
-------- --------
Long-term debt...................................................... -- --
CDA Note, 7.4%.................................................... 4,989 4,989
Senior Discount Notes, 13.25%..................................... -- 97,447
-------- --------
Total long-term debt...................................... 4,989 102,436
-------- --------
Common stock purchase warrants...................................... -- 5,100
-------- --------
Commitments......................................................... -- --
-------- --------
Stockholders' equity
Preferred stock (par value $1.00 per share, 2,000,000 shares
authorized, none issued and outstanding)
Common stock (par value $1.00 per share 25,000,000 and 35,000,000
shares authorized, 21,047,106 and 21,078,206 shares issued and
outstanding in 1996 and 1997).................................. 210 211
Additional paid-in capital........................................ 50,655 50,730
Accumulated deficit............................................... (45,142) (49,412)
-------- --------
Total stockholders' equity................................ 5,723 1,529
-------- --------
Total liabilities and stockholders' equity.......................... $ 12,260 $ 110,627
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-15
<PAGE> 106
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
REVENUES
Product sales.......................................................... $ 1,048 $ 254
Maintenance............................................................ 173 266
------- -------
Total revenues................................................. 1,221 520
------- -------
COST OF GOODS SOLD
Product sales.......................................................... 1,244 323
Maintenance............................................................ 200 242
------- -------
Total cost of goods sold....................................... 1,444 565
------- -------
Gross profit (loss).................................................... (223) (45)
------- -------
OPERATING EXPENSES
Selling, general and administrative.................................... 1,696 2,017
Research and development............................................... 313 490
Depreciation and amortization.......................................... 42 41
------- -------
Total operating expenses....................................... 2,051 2,548
------- -------
Loss from operations................................................... (2,274) (2,593)
------- -------
OTHER INCOME (EXPENSES)
Interest income........................................................ 34 1,046
Interest expense....................................................... (87) (2,723)
------- -------
Total other income (expenses).................................. (53) (1,677)
------- -------
Net loss............................................................... $(2,327) $(4,270)
======= =======
EARNINGS PER SHARE
Weighted average common shares outstanding............................. 11,767 21,055
======= =======
Net loss per common share.............................................. $ (0.22) $ (0.20)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-16
<PAGE> 107
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
------- --------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss............................................................ $(2,327) $ (4,270)
Other adjustments to reconcile net loss to net cash used in
operating activities.............................................. (244) 3,198
------ --------
Cash used in operating activities................................. (2,571) (1,072)
------ --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures................................................ (76) (199)
Capitalized product development costs............................... (223) (75)
------ --------
Cash used in investing activities................................. (299) (274)
------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt........................ 1,650 89,900
Proceeds from issuance of common stock warrants..................... -- 5,100
Proceeds from exercise of stock options............................. 1 75
------ --------
Cash provided by financing activities............................. 1,651 95,075
------ --------
Net (decrease) increase in cash and cash equivalents................ (1,219) 93,729
------ --------
Cash and cash equivalents at beginning of period.................... 3,210 8,198
------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 1,991 $101,927
====== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE> 108
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 -- BASIS OF CONSOLIDATION:
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 condensed consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
NOTE 2 -- BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the three month period ended March
31, 1997 are not necessarily indicative of the results to be expected for the
full year ending December 31, 1997. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
Earnings (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 earnings (loss) per common share does not reflect common share
equivalents that are anti-dilutive.
NOTE 3 -- INVENTORIES:
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1996 consisted of
$188,000 of materials and supplies and $633,000 of finished goods. Inventories
at March 31, 1997 consist of $143,000 of materials and supplies and $502,000 of
finished goods. Inventories in excess of expected requirements due to new
product introductions or product enhancements are expensed currently.
NOTE 4 -- SALE OF SENIOR DISCOUNT NOTES AND WARRANTS:
On January 24, 1997, the Company completed the sale, in a private offering
(the "Private Placement"), of 147,312 Units ("Units") consisting of $147,312,000
principal amount at maturity of 13.25% Senior Discount Notes due February 1,
2004 (the "Notes") together with warrants (the "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 13.25%. 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
Notes at a specified price. The net proceeds to the Company from the sale of the
F-18
<PAGE> 109
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
Units approximated $95 million, of which $5.1 million was attributed to the
Warrants based on an estimate of their fair value.
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.
Commencing with the consummation of the Private Placement in January 1997,
the Company will record interest on an amount equal to the gross proceeds from
the Private Placement plus prior recorded and unpaid interest at the annual rate
of 13.25%. Additional expense will be recorded as a result of the amortization
of the discount recorded on the Notes (for value attributed to the Warrants) and
the amortization of the costs of issuance.
NOTE 5 -- NEW ACCOUNTING STANDARD:
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 "Earnings per Share" ("FAS 128") to be effective for
financial statements for periods ending after December 15, 1997.
The changes required by FAS 128 adjust the calculation of earnings per
share ("EPS") under generally accepted accounting principles in the U.S. to be
more consistent with international standards. Under the new standard, companies
will replace the reporting of "primary" EPS with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, without
consideration for common stock equivalents. "Fully diluted" EPS will be replaced
by "diluted" EPS, which will be similar to fully diluted EPS as previously
computed.
Due to the Company's generation of losses there is no difference
anticipated between "primary" EPS as reported by the Company and "basic" EPS as
computed under FAS 128.
NOTE 6 -- SUBSEQUENT EVENT:
The Company has engaged Patricof & Co. in connection with certain corporate
finance services and, in addition to fees that become due if certain
transactions are consummated, Patricof's retainer includes three-year warrants
issued in the second quarter exercisable with respect to 250,000 shares of
Common Stock at an exercise price of $5.24 per share.
F-19
<PAGE> 110
======================================================
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. NEITHER THIS PROSPECTUS NOR 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 12
The Exchange Offer.................... 21
Use of Proceeds....................... 29
Capitalization........................ 30
Selected Historical Consolidated
Financial and Certain Other Data.... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 33
Business.............................. 39
Management............................ 51
Description of the Notes.............. 52
Certain Federal Income Tax
Consequences........................ 81
Plan of Distribution.................. 86
Legal Matters......................... 87
Experts............................... 87
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL SEPTEMBER , 1997, 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.
======================================================
======================================================
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
-----------------
JUNE , 1997
======================================================
<PAGE> 111
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------------------------
<C> <S>
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 LLP 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).
</TABLE>
II-1
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------------------------
<C> <S>
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).
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).
</TABLE>
II-2
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------------------------
<C> <S>
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 to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges (incorporated by
reference to Exhibit 12 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 LLP (included in Exhibit 5.1).
24.1** Power of Attorney.
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
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
** 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.
II-3
<PAGE> 114
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
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-4
<PAGE> 115
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 June
2, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ -------------
<C> <S> <C>
* Vice Chairman of the Board and June 2, 1997
- ------------------------------------------ Principal Executive Officer
Bruce F. Failing Jr.
/s/ WILLIAM B. FISCHER Vice President, Finance and June 2, 1997
- ------------------------------------------ Principal Financial Officer and
William B. Fischer Accounting Officer
* Director June 2, 1997
- ------------------------------------------
Paul A. Biddelman
* Director June 2, 1997
- ------------------------------------------
David Diamond
* Director June 2, 1997
- ------------------------------------------
Norton Garfinkle
* Director June 2, 1997
- ------------------------------------------
George B. Weathersby
* Director June 2, 1997
- ------------------------------------------
Donald E. Zilkha
By: /s/ WILLIAM B. FISCHER*
- ------------------------------------------
(William B. Fischer, Attorney-in-fact)
</TABLE>
II-5
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<S> <C>
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 LLP 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).
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).
</TABLE>
E-1
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<S> <C>
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 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 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges (incorporated by
reference to Exhibit 12 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).
</TABLE>
E-2
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<S> <C>
23.1 Consent of Price Waterhouse LLP.
23.2** Consent of Krugman Chapnick & Grimshaw LLP (Included in Exhibit 5.1).
24.1** Power of Attorney.
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
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
** 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
June 2, 1997
