<PAGE>
As filed with the Securities and Exchange Commission on June 9, 2000.
Registration No. 333-34882
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
eRoomSystem Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 3610 87-0540713
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(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Address and telephone number of principal executive offices)
Gregory L. Hrncir, General Counsel and Secretary
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Name, address and telephone number of agent for service)
Copies to:
Michael J. Bonner Michael D. DiGiovanna
John C. Jeppsen Parker Duryee Rosoff & Haft
Robert C. Kim 529 Fifth Avenue
Kummer Kaempfer Bonner & Renshaw New York, New York 10017
3800 Howard Hughes Parkway, 7th Floor (212) 878-1700
Las Vegas, Nevada 89109
(702) 792-7000
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after the
effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class of Securities Number of Shares to be Proposed Maximum Aggregate
to be Registered Registered Offering Price(1) Amount of Registration Fee
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<S> <C> <C> <C>
Common stock 2,070,000 $20,700,000 $5,465
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Common stock for Selling Stockholders 200,000 $ 2,000,000 $ 528
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
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 in 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission acting pursuant
to such Section 8(a) may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus:
(i) one to be used in connection with an offering by eRoomSystem
Technologies, Inc. of 1,800,000 shares of common stock (2,070,000
shares if the underwriters elect to exercise their over-allotment
option) (the "Prospectus"); and
(ii) one to be used in connection with the sale of 200,000 shares of common
stock currently outstanding and issued to certain selling stockholders
(the "Selling Stockholder Prospectus").
The Prospectus and the Selling Stockholder Prospectus will be substantially
similar except for the cover page, information with respect to the selling
stockholders and other updating information, all of which will be provided
through a post-effective amendment to the Registration Statement on Form SB-2.
An alternative cover page has been included herein and labeled "Alternative Page
for Selling Stockholder Prospectus."
The selling stockholders are restricted from selling their shares of common
stock until 180 days after the closing of the Registrant's initial public
offering, or for a longer period as required by the National Association of
Securities Dealers, Inc. or the Nasdaq Stock Market not to exceed one year.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 9, 2000
PROSPECTUS
1,800,000 SHARES OF COMMON STOCK
[eROOMSYSTEM LOGO]
eROOMSYSTEM TECHNOLOGIES, INC.
This is an initial public offering of 1,800,000 shares of common stock of
eRoomSystem Technologies, Inc. There is currently no public market for our
common stock.
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We have applied for quotation of the common stock on the Nasdaq
SmallCap Market under the symbol "ERMS." We currently estimate that the initial
public offering price per share will be between $8.00 and $10.00.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price.......................................... $ $
Underwriting discounts and commissions............................ $ $
Proceeds to eRoomSystem Technologies, before expenses.................. $ $
</TABLE>
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eRoomSystem Technologies has granted the underwriters an option for a
period of 30 days to purchase up to 270,000 additional shares of common stock.
The securities being sold by us are being offered on a "firm commitment"
basis by Donald & Co. Securities Inc. as representative of the underwriters.
Donald & Co. Securities Inc. expects to deliver the shares against payment on or
about , 2000.
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THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------
DONALD & CO. SECURITIES INC.
______________, 2000
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. eRoomSystem Technologies, Inc. may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell these securities,
and it is not seeking an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
<PAGE>
[Alternative Page for Selling Stockholder Prospectus]
SUBJECT TO COMPLETION, DATED __________, 2000
PROSPECTUS
200,000 SHARES OF COMMON STOCK ON BEHALF OF SELLING STOCKHOLDERS
[eROOMSYSTEM LOGO]
EROOMSYSTEM TECHNOLOGIES, INC.
The stockholders named under the caption "Selling Stockholders" from time
to time may offer to sell up to 200,000 shares of common stock of eRoomSystem
Technologies, Inc.
We are not selling any shares of common stock on behalf of selling
stockholders and will not receive any cash or other proceeds in connection with
the sale of shares by selling stockholders.
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eRoomSystem Technologies' common stock is traded on the Nasdaq SmallCap
Market under the symbol "ERMS." On __________, 2000, the last reported sale
price of eRoomSystem Technologies' common stock was __________.
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THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------
______________, 2000
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. eRoomSystem Technologies, Inc. may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell these securities,
and it is not seeking an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
<PAGE>
[INSIDE FRONT COVER]
The inside front cover is entitled "Total Intelligent In-Room Solution
eRoomSystem" and contains graphics of the Registrant's current and future
products and services using a hub and spoke format. The products and services
depicted are: eRoomServ Refreshment Center-TM-, eRoomSafe-TM-,
eRoomMaintenance-TM-(*), eRoomEnergy Management-TM-(*), eRoomManagement-TM-(*),
eRoomHousekeeping-TM-(*), eRoomData Management-TM-(*), and eRoomInternet
Connectivity-TM-(*), with a statement that the asterisks (*) denote products and
services that are under development.
Along the bottom of the inside front cover, there are graphics of the logos
of a selected group of the Registrant's customers and the following statement:
"These companies are a sampling of existing customers and corporate accounts.
Their brands and product names are trademarks or registered trademarks of their
respective companies. Our use of these trademarks or registered trademarks in
this prospectus should not be construed as an endorsement of our products or
this offering."
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
"RISK FACTORS" AND OUR FINANCIAL STATEMENTS BEFORE MAKING AN INVESTMENT
DECISION.
OUR BUSINESS
eRoomSystem Technologies has developed and introduced to the lodging
industry an intelligent, in-room computer platform and communications network,
or the eRoomSystem. The eRoomSystem is a computerized platform and
processor-based system designed to collect and control data. In addition, the
eRoomSystem supports our fully-automated and interactive eRoomServ Refreshment
Centers, or Refreshment Centers, electronic room safes, or eRoomSafes, and other
proposed applications. These other applications include, or will include,
information management services, in-room energy management capabilities, credit
card/smart card capabilities for direct billing, network access solutions, and
remote engineering and maintenance services.
Our interactive Refreshment Centers provide hotel guests with a selection
of up to 33 different beverages and snacks and offer the lodging industry an
opportunity to capture additional in-room revenues and reduce operating costs.
Our eRoomSafes have sufficient storage space for large items such as laptop
computers, video cameras and briefcases and generate additional revenue. Our
products interface with the hotel's property management system through our
eRoomSystem communications network. The hotel's property management system posts
usage of our products directly to the hotel guest's room account.
The solutions offered by our eRoomSystem and related products have allowed
us to establish relationships with several premier hotel chains, including
Marriott International, operator of Marriott, Ritz-Carlton, Renaissance and
Residence Inn; Promus Hotel Corporation, operator of Doubletree Hotels, Embassy
Suites and Hampton Inn; Bass Hotels, operator of Holiday Inn, Crowne Plaza and
the Hotel Inter-Continental; and Carlson Hospitality Worldwide, operator of
Radisson Hotels Worldwide, Regent International Hotels and Country Inn and
Suites.
We believe that our hotel relationships provide us with the opportunity to
install our eRoomSystem and related products worldwide.
The focus of our business model is a revenue sharing program that allows us
to partner with our customers with respect to our products. Historically, we
have experienced resistance from some hotels to purchase our products because of
the initial capital expenditure required. Through our revenue sharing program,
we install our products at little or no upfront cost to our customers and share
in the recurring revenues generated from sales of goods and services related to
our products.
One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
eleven million room-nights of data. Through our eRoomSystem, we are able to
collect information regarding the usage of our products on a real-time basis. We
use this information to help our customers increase their operating
efficiencies. We also intend to market this information to suppliers of goods
sold in our Refreshment Centers and to other users desiring information on the
buying patterns of hotel guests for goods and services.
We believe that our eRoomSystem and developing technologies will provide a
foundation for expansion into the healthcare and time-share industries. We will
be able to provide healthcare facilities with a comprehensive room information
and management system that will allow these facilities to provide patients with
a wide array of in-room amenities not available to them in the past. These
amenities include Refreshment Centers, eRoomSafes, direct dial long distance,
on-demand movies, Internet access and other products and services commonly found
in a hotel room. Similar opportunities exist in the time-share industry because
many time-share facilities do not have a front desk or a property management
system to bill for in-room services. By offering a direct credit card billing
system, a healthcare or time-share facility can offer similar services available
in hotels.
OUR OFFICES
We maintain offices at 3770 Howard Hughes Parkway, Suite 175, Las Vegas,
Nevada 89109 and 390 North 3050 East, St. George, Utah 84790. Our telephone
number is (800) 316-3070.
-2-
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by eRoom: 1,800,000 shares
Common stock to be outstanding after the offering: 6,194,434 shares
Use of proceeds: We intend to use the net proceeds from this offering
for funding the production and installation of
eRoomSystems, Refreshment Centers and eRoomSafes,
repayment of a substantial portion of our outstanding
indebtedness and related accrued interest, payment of
cash dividends on our Series A and Series C convertible
preferred stock, advertising and promotional expenses,
research and development and enhancement of our
information management services, and general corporate
purposes and working capital.
Proposed Nasdaq SmallCap Market symbol: "ERMS"
</TABLE>
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The number of shares of common stock to be outstanding after the
offering is based on the number of shares outstanding as of June 7, 2000 and
does not include 2,502,815 shares of common stock issuable upon exercise of
outstanding stock options and warrants as of June 7, 2000, with a weighted
average exercise price of $5.78 per share.
--------------------------
Unless otherwise noted, all information contained in this prospectus
assumes that:
- all outstanding convertible preferred stock will be converted
into 2,085,928 shares of common stock upon the closing of this
offering, including 143,943 shares of common stock to be issued
upon the conversion of Series C convertible preferred stock;
- all outstanding convertible notes issued in conjunction with our
Series C convertible preferred stock will not be converted into
shares of common stock and will be paid in full from the proceeds
of this offering;
- the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments, if
any; and
- the public offering price will be $9.00 per share.
-3-
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial information for our business.
The summary financial information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 356 $ 710 $ 4,666 $ 1,011 $ 541 $ 114 $ 49
Cost of revenue................... 301 804 3,339 793 362 45 14
Gross margin (deficit)............ 55 (94) 1,327 218 179 69 35
Income (loss) from operations..... (805) (1,804) (219) (6,983) 1,421 4,428 (1,027)
Net income (loss)................. (877) (2,219) (1,000) (9,000) 335 4,154 (1,240)
Dividends related to convertible
preferred stock................. - - - (19) (607) (36) (415)
Net income (loss) attributable to
common stockholders............. (877) (2,219) (1,000) (9,018) (273) 4,118 (1,655)
Basic and diluted net income
(loss) per common share (1)..... (1.56) (2.61) (0.76) (2.98) (0.08) 1.16 (0.75)
Basic and diluted weighted
average common shares
outstanding (1)................. 560 850 1,314 3,029 3,221 3,545 2,197
Basic and diluted supplemental
pro forma net loss per common
share (1)....................... (1.07) (1.56)
Basic and diluted supplemental
pro forma weighted average
common shares outstanding (1)... 5,163 4,245
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
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PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED (3)
-------------- --------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................... $ 15 $ 15 $ 12,915
Working capital (deficit).............................. (3,272) (3,272) 10,906
Total assets........................................... 5,042 5,042 17,971
Long-term liabilities.................................. 994 994 1,050
Total stockholders' equity (deficit)................... (289) (289) 13,833
</TABLE>
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(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
data.
(2) The pro forma amounts reflect the conversion, upon the closing of this
offering, of our outstanding Series A, Series B and Series C convertible
preferred stock into 400,000 shares, 1,541,985 and 106,061 shares of our
common stock, respectively.
(3) Pro forma as adjusted amounts reflect the pro forma adjustments at note (2)
above, as well as the sale of 1,800,000 shares of common stock in this
offering at an assumed initial public offering price of $9.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, the conversion of the remaining
shares of our Series C convertible preferred stock into an additional
37,882 shares of common stock, and the issuance of 200,000 shares of common
stock in connection with the bridge loan.
-4-
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE YOU
PURCHASE ANY SHARES OF OUR COMMON STOCK. THE FOLLOWING RISKS, IF THEY OCCUR,
COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS OF
OPERATIONS. IF THAT OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO EROOM
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE CONTINUED OPERATING
LOSSES, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY
We have a history of operating losses. For the years ended December 31,
1998 and 1999 and the three months ended March 31, 2000, we have incurred net
losses applicable to common stockholders of $9,018,187, $272,744 and $1,654,718,
respectively, and our operations have used $2,931,871, $2,304,807 and $708,129
of cash, respectively. As of December 31, 1998 and 1999 and March 31, 2000, we
had accumulated deficits of $14,258,747, $14,531,491 and $16,186,209,
respectively, working capital deficits of $4,523,186, $2,650,616 and $3,271,963,
and stockholders' deficits of $2,428,105, $23,852 and $289,813, respectively. In
addition, we are in default under our promissory notes in the aggregate
principal amount of $1,138,820.
If our revenues decline or grow at a slower rate than we anticipate, or if
our spending levels exceed our expectations or cannot be adjusted to reflect
slower revenue growth, our business would be severely harmed. We cannot assure
you that revenues will grow in the future or that we will generate sufficient
revenues for profitability, or that profitability, if achieved, can be sustained
on an ongoing basis.
GIVEN OUR RECURRING LOSSES, ACCUMULATED DEFICITS AND DEFAULTS UNDER MANY OF
OUR DEBT AGREEMENTS, WE MAY BE UNABLE TO CONTINUE AS A GOING CONCERN
Our independent auditors issued a report on their audit of our consolidated
financial statements for the years ended December 31, 1998 and 1999. Their
report contains an explanatory paragraph in which they state that our history of
recurring losses, our working capital and stockholders' deficits and our
defaults under many of our debt agreements raise substantial doubt regarding our
ability to continue as a going concern.
We are attempting to raise additional equity capital through this offering
and to arrange additional debt financing for our products. Subsequent to
December 31, 1999, we received gross proceeds of $2,237,500 in debt financing
and $712,500 in additional preferred equity financing through private offerings.
If we fail to complete this offering, we cannot assure you that we will have
sufficient capital to fund operations or that we will be able to arrange
additional financing for our products.
DUE TO THE CAPITAL INTENSIVE NATURE OF OUR BUSINESS, WE WILL BE UNABLE TO
INCREASE OUR REVENUES OR ACHIEVE PROFITABILITY IF WE DO NOT OBTAIN FUNDING
PURSUANT TO OUR EXISTING FINANCING ARRANGEMENT OR OTHERWISE
The emphasis of our business model on a revenue sharing program
significantly increases our need for long-term financing in addition to the
proceeds from this offering because we offer our products at little or no
upfront cost to our customers. In order to address our long-term capital needs,
we have entered into an exclusive post-installation financing arrangement with
an equipment financier. Under the financing arrangement, our equipment financier
will finance up to 150% of our costs for the Refreshment Centers and eRoomSafes
upon the completion of a 90-day seasoning period after installation and the
satisfaction of pre-funding requirements. These pre-funding requirements, many
of which are outside our control, include minimum performance, occupancy and
liquidity requirements. If our customers fail to meet our equipment financier's
pre-funding requirements or if our equipment financier were to delay or refuse
to provide our required financing, we cannot assure you that other long-term
financing will be available in sufficient amounts or on terms acceptable to us,
or at all. Our inability to obtain long-term financing will prevent us from
placing additional products under our revenue sharing program or manufacturing
products for sale. In addition to our long-term financing arrangement and the
proceeds of this
-5-
<PAGE>
offering, we may require additional short-term financing to
cover the costs of the production and installation of our products until the
completion of the 90-day seasoning period.
IF WE FAIL TO SHIFT SUCCESSFULLY OUR BUSINESS MODEL FROM SALES TO A REVENUE
SHARING PROGRAM, WE MAY BE UNABLE TO INCREASE OUR REVENUES OR ACHIEVE
PROFITABILITY
We have traditionally relied upon the sale of our products. Recently, we
shifted the focus of our business model from product sales to our revenue
sharing program. Our business model is new and our ability to generate revenues
or profits is unproven. Under our revenue sharing program, we offer our products
at little or no upfront cost to our customers and share the revenue generated by
our products over a seven-year period. Our success under our revenue sharing
program is dependent upon the participating hotel's compliance with covenants
regarding the placement of our Refreshment Centers, the location in the hotel
and quantity of competing vending machines that sell goods similar to those in
our Refreshment Centers, and the price of goods sold through the vending
machines. We cannot assure you that our portion of the revenues generated will
be sufficient to cover the costs to produce, install, maintain and finance our
products.
THE INTEREST RATE FOR OUR LONG-TERM FINANCING WILL RESULT IN A HIGHER
INTEREST RATE THAN WE MAY HAVE BEEN ABLE TO NEGOTIATE IF WE WERE STRONGER
FINANCIALLY WHICH WILL RESULT IN REDUCED OPERATING AND PROFIT MARGINS
The financing arrangement we negotiated with the equipment financier will
result in an interest rate higher than the interest rate we may have been able
to negotiate if we were stronger financially. Due to the exclusive nature of
this financing arrangement, our ability to obtain financing for revenue sharing
agreements at more advantageous interest rates during the seven-year term of the
financing arrangement will be contractually restricted.
THE FAILURE TO ESTABLISH ONE OR MORE THIRD PARTY TURNKEY MANUFACTURING
SOURCES TO MEET OUR PROJECTED DEMAND WOULD RESULT IN THE REDUCTION OF CASH FLOW
AND OUR INABILITY TO SUPPORT OUR REVENUE SHARING PROGRAM
Our Refreshment Centers require a limited amount of assembly at our St.
George, Utah facility. Since our existing facility is not sufficient to meet our
projected growth, we will either have to establish one or more third party
turnkey manufacturing sources, expand our assembly facility or hold orders for
our products unfulfilled. We presently intend to establish one or more third
party turnkey manufacturing sources to meet our projected demand. If our
installations increase significantly, our ability to establish a sufficient
turnkey manufacturing source is critical to our future success.
IF OUR EXISTING INFRASTRUCTURE IS NOT SUFFICIENT TO MANAGE GROWTH, WE WILL
BE UNABLE TO DELIVER AND INSTALL OUR PRODUCTS ON A TIMELY BASIS
We intend to expand our customer base for our current products and to
develop and market new products and services. If we are successful, our business
will require the implementation of expanded operational and financial systems,
procedures and controls, billing functions, the training of a larger employee
base, and increased coordination among our software, hardware, accounting,
finance, marketing, sales and field service staffs. Our assembly and service and
installation departments are presently insufficient to assemble, install, manage
and service our projected growth. We are actively recruiting personnel for our
assembly and service and installation departments to meet our future needs. If
we cannot recruit additional personnel to meet our projected growth, we will not
be able to deliver and install our products on a timely basis.
INTENSE COMPETITION FROM COMPANIES MARKETING IN-ROOM AMENITIES TO THE
LODGING INDUSTRY MAY RESULT IN REDUCED OPERATING MARGINS AND LOSS OF MARKET
SHARE
The market for in-room amenities in the lodging industry is competitive,
and we expect competition to intensify in the future. Our competitors vary in
size and in the scope and breadth of the products and services they offer. Our
competitors, such as Dometic, Bartech, Inc., MiniBar America, Inc. and ElSafe,
Inc., have longer operating histories, larger customer bases, greater brand
recognition, and substantially greater capital, research and development,
manufacturing, marketing, service, support, technical and other resources than
we do. As a result, our competitors may be able to devote greater resources to
marketing campaigns, adopt more aggressive pricing policies
-6-
<PAGE>
or devote substantially more resources to customer and business development than
we can. We also anticipate additional competition from new entrants into the
room management and related aspects of our business. In addition, we may from
time to time make pricing, service or marketing decisions or acquisitions as a
strategic response to changes in the competitive environment. This increased
competition may result in reduced operating margins and loss of market share.
WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS AS WE HAVE LITTLE
OR NO EXPERIENCE IN THE HEALTHCARE AND TIME-SHARE INDUSTRIES OR WITH RESPECT TO
OUR NEW PRODUCTS AND SERVICES
As we have traditionally focused our marketing efforts on the lodging
industry, we propose to expand the marketing of our eRoomSystem, Refreshment
Centers and eRoomSafes to the healthcare and time-share industries. As we have
little or no experience in these new industries, we may not be successful in
marketing our products and services outside of the lodging industry. As a
result, we will be confronted with challenges and competition that we have never
faced before. We cannot assure you that we will be successful in expanding our
products and services or that we will be able to meet the new challenges and
competitors associated with these new industries.
Our growth strategy also consists of expanding our product offerings to
include services we have not provided in the past. For example, we plan to offer
new products and services, such as in-room energy management, coordination of
housekeeping and engineering activities, Internet access, videoconferencing and
other communications. As we have little or no experience with respect to these
new products and services, we may not be successful in expanding our product
offerings. As a result, we cannot assure you that we will be successful in
expanding our products and services or that we will be able to meet the new
challenges and competitors associated with the expansion of our products and
services.
WE ARE LIKELY TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY
REVENUES AND OPERATING RESULTS WHICH MAY MAKE THE PRICE OF OUR COMMON STOCK
DIFFICULT TO PREDICT
Our quarterly operating results have varied in the past, and we expect that
our revenues and operating results will continue to fluctuate significantly from
quarter to quarter due to a variety of factors, many of which are outside of our
control. Our revenues for the first, second, third and fourth quarters of 1998
and 1999 were 25.3%, 2.5%, 2.7%, 69.5% and 19.3%, 27.6%, 27.6% and 25.7%,
respectively, of our total revenues for the years then ended. Some important
factors affecting our quarterly revenues and operating results, in order of
their relative magnitude, are:
- changes in the percentage of our products sold versus products
placed pursuant to our revenue sharing program;
- changes in our operating expenses as we expand operations;
- timing and execution of major customer orders;
- pricing changes by our competitors in the industry; and
- changes in economic conditions, such as a recession.
IF WE ARE UNABLE TO OBTAIN ALL OF THE TRADEMARKS, SERVICE MARKS AND PATENTS
FOR WHICH WE HAVE MADE APPLICATIONS OR ARE OTHERWISE UNABLE TO PROTECT OUR
CURRENT INTELLECTUAL PROPERTY, OUR ABILITY TO ESTABLISH BRAND NAME RECOGNITION
OF OUR EROOMSYSTEM, PRODUCTS AND SERVICES OR OUR COMPETITIVE POSITION MAY BE
HARMED
We have made trademark or service mark applications for eRoomSystem,
eRoomServ Refreshment Center, eRoomSafe, eRoomManagement, eRoomEnergy
Management, eRoomData Management, eRoomInternet Connectivity, eRoomMaintenance
and eRoomHousekeeping. In addition, we have submitted two patent applications
with respect to our Refreshment Center. If we are unable to obtain all of the
trademarks, service marks and patents for which we have made applications, we
may not be able to establish brand name recognition of our eRoomSystem, products
and services.
-7-
<PAGE>
We believe our intellectual property is important to our competitive
position and is a significant aspect of the products we provide. If we are
unable to protect our intellectual property against unauthorized use by others,
our competitive position could be harmed. We generally enter into
confidentiality or non-compete agreements with most of our employees and
consultants, and control access to and distribution of our documentation and
other proprietary intellectual property. Despite these precautions, we cannot
assure you that these strategies will be adequate to prevent misappropriation of
our proprietary intellectual property. We could be required to expend
significant amounts to defend our proprietary rights in our intellectual
property.
OUR FAILURE TO MAINTAIN OUR CURRENT RELATIONSHIPS WITH HOTEL CHAINS, TO
ENTER INTO DEFINITIVE AGREEMENTS WITH OTHER HOTEL CHAINS AND TO ENTER INTO
AGREEMENTS WITH THE FRANCHISEES OF THESE HOTEL CHAINS MAY RESULT IN OUR
INABILITY TO INCREASE REVENUES OR ACHIEVE PROFITABILITY
We are the exclusive or preferred vendor of interactive computerized
Refreshment Centers for a number of premier hotel chains. We are currently
pursuing similar arrangements with other hotel chains as a part of our growth
strategy. These arrangements may not generate any sales or placements of our
products. Even if we are, or become, the exclusive or preferred vendor of
Refreshment Centers to hotel chains, we must also enter into definitive
agreements with the respective franchisees of these hotel chains for the sale or
placement of our products. The failure to maintain our current relationships
with hotel chains, secure additional relationships and enter into definitive
agreements with franchisees of these hotel chains may result in an inability to
increase revenues or achieve profitability.
OUR ABILITY TO MARKET SUCCESSFULLY TO THE INTERNATIONAL LODGING INDUSTRY IS
SUBJECT TO OUR INEXPERIENCE AND OUR ABILITY TO COMPLY WITH FOREIGN LAWS AND
REGULATIONS
Part of our growth strategy is to expand into the international lodging
market. As the international lodging market represents only a small portion of
our current business, we will have to allocate significant resources in order to
promote our products internationally. Revenues from our current operations, let
alone revenues from our proposed international operations, may not offset the
expense of establishing and maintaining these international operations. We may
not have sufficiently experienced sales personnel to effectively market and sell
our products in international markets. We may be required to enter into
distributorship or other similar agreements for particular geographic areas. If
so, we cannot assure you that we will be successful in soliciting the best
distributors, or that if distributors are selected, that the additional costs of
such distributors will not erode our ability to achieve profitable sales or
revenue sharing arrangements for the placement of our products. Some additional
factors that may impact our ability to initiate and maintain successful
operations in foreign markets include, among others, compliance with foreign
laws and regulations, fluctuations in foreign currency, general political and
economic trends, and language and cultural differences.
RISKS RELATED TO OUR INDUSTRY
A DOWNTURN IN THE LODGING INDUSTRY OR THE ECONOMY IN GENERAL MAY RESULT IN
REDUCED REVENUES UNDER OUR REVENUE SHARING PROGRAM OR REDUCED SALES OF OUR
PRODUCTS
Historically, we have received substantially all of our revenues from the
sale or placement under a revenue sharing program of our products in hotels in
the lodging industry, and we expect that these revenues will account for a
substantial majority of our revenues for the foreseeable future. Our dependence
on the lodging industry, including their guests, makes us vulnerable to
downturns in the lodging industry. Such a downturn could result in some hotels
delaying or declining to purchase or place our products or failing to renew our
maintenance agreements, or it could result in fewer purchases by hotel guests of
goods and services from our products installed in hotels.
The lodging industry is cyclical in nature and is sensitive to the general
economic environment. A downturn in the general economic environment could
adversely affect hotel occupancy rates, average daily room rates and revenue per
available room. Time spent by individuals on travel and leisure is typically
discretionary for consumers and may be particularly affected by adverse trends
in the general economy. The success of our operations depends, in part, upon
discretionary consumer spending and economic conditions affecting disposable
consumer income such as employment, wages and salaries, business conditions,
interest rates, availability of credit
-8-
<PAGE>
and taxation. Any significant deterioration in general economic conditions that
adversely affects these factors could also have a material adverse effect on our
business.
DUE TO THE HEIGHTENED REGULATORY ENVIRONMENT IN WHICH HOTEL-CASINOS
OPERATE, WE MAY BE SUBJECT TO INCREASED SCRUTINY, REQUIRED TO EXPEND ADDITIONAL
RESOURCES OR FOREGO SUCH BUSINESS
Due to the heightened regulatory environment in which hotel-casinos
operate, and our intent to market to these properties, our operations may be
subject to review by a hotel-casino's compliance committee to verify that its
involvement with us would not jeopardize its gaming license. If our history or
operations present problems for regulated customers or potential customers, such
as hotel-casinos, we would either have to expend resources to address or
eliminate the concerns or forego the business. Under either scenario, our
ability to increase our revenues or achieve profitability may be negatively
impacted.
RISKS RELATED TO THIS OFFERING
DUE TO OUR HISTORY OF OPERATING LOSSES AND THE UNPREDICTABILITY OF OUR
STOCK PRICE ON THE OPEN MARKET, WE MAY NOT BE ABLE TO OBTAIN AN INITIAL LISTING
OR THEREAFTER MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE NASDAQ SMALLCAP
MARKET
We intend to make an application for listing of our common stock on the
Nasdaq SmallCap Market. Assuming that we are listed initially, we must meet
minimum criteria for continued listing in order to maintain the listing of our
common stock on the Nasdaq SmallCap Market. As we have a history of operating
losses and as there has not been a public market for our common stock, we may
not be able to meet the requirements for continued listing on the Nasdaq
SmallCap Market. In the event that our common stock no longer meets the listing
requirements of the Nasdaq SmallCap Market, our common stock will most likely be
traded on the OTC Bulletin Board or the National Quotation Bureau Pink Sheets.
If our common stock is no longer traded on the Nasdaq SmallCap Market, the
visibility of our common stock to the market will most likely be reduced.
OUR EXECUTIVE OFFICERS AND MEMBERS OF OUR BOARD OF DIRECTORS, INCLUDING
DIRECTOR DESIGNEES, WILL EXERCISE SIGNIFICANT CONTROL OVER EROOMSYSTEM
TECHNOLOGIES AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE
THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED TO A VOTE OF
STOCKHOLDERS
Immediately following this offering, our executive officers and members of
our board of directors, including director designees, will own approximately
25.8% of the outstanding shares of our common stock, 24.97% if the underwriters'
over-allotment option is exercised in full. These stockholders will have the
power to influence all matters requiring approval by our stockholders, including
the election of directors and approval of mergers and other significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of eRoomSystem Technologies.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price for our common stock
to decline. Upon completion of this offering, and based upon assumptions set
forth in this prospectus, there will be 6,194,434 outstanding shares of common
stock, of which 1,800,000 shares will be sold in this offering plus shares
issued upon exercise of the underwriter's over-allotment option, if any. All of
the shares sold in this offering will be immediately available for resale. In
addition, in connection with the bridge loan of $1,500,000 we received, we are
registering 200,000 shares of common stock under the registration statement
relating to this prospectus. These shares may be sold no earlier than 180 days
following the completion of this offering by seven selling stockholders. In
light of existing lock-up arrangements, 1,437,083 shares will be immediately
available for resale in accordance with Rule 144(k) under the Securities Act,
and 95,430 shares will be available for sale 90 days after the date of this
prospectus subject to restrictions set forth in Rule 144 under the Securities
Act.
-9-
<PAGE>
In addition, we have options and warrants outstanding to purchase 2,502,815
shares of our common stock, of which options and warrants 2,427,898 shares are
immediately exercisable. The underlying shares of common stock will be available
for sale one year after the date of exercise subject to the restrictions set
forth in Rule 144 under the Securities Act.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING AND WE
MAY NOT USE THE PROCEEDS EFFECTIVELY OR IN A MANNER WITH WHICH YOU AGREE
As of the date of this prospectus, we intend to use a majority of the
proceeds from this offering to provide funding for production and installation
of Refreshment Centers and eRoomSafes, to repay a substantial portion of our
outstanding indebtedness and related accrued interest, to pay cash dividends on
our Series A and Series C convertible preferred stock, to fund advertising and
promotional expenses, to conduct research and development and enhance our
information management services and to fund general corporate purposes and
working capital. Because of the number and variability of factors that determine
our use of the net proceeds from this offering, if for some reason we do not use
the proceeds in the manner described above, we cannot assure you that you will
agree with our use of the proceeds. Pending their use, we intend to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments or accounts.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION AND DISPARITY IN STOCK PURCHASE PRICE
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after this offering. Accordingly, purchasers of common stock
in this offering will experience immediate and substantial dilution of
approximately $6.88 in net tangible book value per share, or approximately
76.44% of the assumed offering price of $9.00 per share. In contrast,
stockholders as of March 31, 2000 paid an average price of $3.29 per share.
Investors will incur additional dilution upon the exercise of outstanding stock
options and warrants.
PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND NEVADA LAW COULD
DETER POTENTIAL ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE DESIRABLE,
AND THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT
Our articles of incorporation and bylaws contain provisions that could
delay or prevent a change in control. These provisions include the ability of
our board of directors to issue undesignated preferred stock without stockholder
approval, commonly referred to as "blank check" preferred stock, with rights
senior to those of common stock, the limitation on the persons who can call
special meetings of stockholders, and the establishment of advance notice
requirements for matters to be presented to stockholder meetings. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock.
In addition, Nevada law makes it more difficult for a third party to
acquire us. Some of these provisions include the establishment of a
supermajority stockholder voting requirement to approve an acquisition by a
third party of a controlling interest and the imposition of time restrictions
and additional approvals for an acquisition of us by an interested stockholder.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock.
-10-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, the following:
- the use of proceeds of this offering;
- those pertaining to the implementation of our operating and
growth strategy; and
- our projected capital expenditures.
These statements may be found under "Prospectus Summary," "Risk Factors,"
"Dividend Policy," "Capitalization," "Dilution," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements typically are identified by use of terms such as
"may," "will," "would," "expect," "anticipate," "estimate" and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from those contained in
forward-looking statements due to a number of factors, including:
- our ability to achieve corporate contracts with large hotel
chains and definitive agreements with franchisees;
- our successful management of new product development;
- our ability to outsource the manufacture and assembly of our
products effectively;
- our ability to finance our products effectively and profitably;
- our ability to maintain and expand our revenue sharing program;
- our ability to compete effectively in the lodging industry;
- our ability to successfully diversify into the international,
healthcare, cruise ship and time-share markets;
- our ability to manage expansion effectively; and
- general economic and business conditions in our markets
and industry.
You should also consider carefully the statements under "Risk Factors" and
other sections of this prospectus, which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking
statements.
-11-
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock we are offering will be approximately $14.0 million, or approximately
$16.2 million if the underwriters' over-allotment option is exercised in full.
"Net proceeds" are what we expect to receive after paying the underwriting
discount and related offering expenses. Assuming the underwriter does not
exercise the over-allotment option, we expect to pay an underwriting discount
and non-accountable expense allowance of $1,417,500 and expenses related to this
offering of approximately $820,000. For the purpose of estimating net proceeds,
we are assuming that the public offering price will be $9.00 per share.
We intend to use the net proceeds from the sale of the shares for the
following purposes and in the following amounts:
<TABLE>
<CAPTION>
PROPOSED USE AMOUNT PERCENTAGE
------------ ------ ----------
<S> <C> <C>
Funding for production and installation of eRoomSystems, Refreshment
Centers and eRoomSafes.............................................. $ 5,320,000 38.1%
Repayment of a substantial portion of our outstanding indebtedness and
related accrued interest............................................ 4,015,000 28.8%
Payment of cash dividends on our Series A convertible preferred stock.. 235,000 1.7%
Payment of cash dividends on our Series C convertible preferred stock.. 11,000 0.1%
Advertising and promotional expenses................................... 1,693,000 12.1%
Research and development and enhancement of information management
services............................................................ 800,000 5.7%
General corporate purposes and working capital......................... 1,886,000 13.5%
================== ===================
TOTAL $ 13,960,000 100.0%
================== ===================
</TABLE>
The proceeds allocated to the production and installation of
Refreshment Centers and eRoomSafes will be used to purchase the components for
the assembly of our Refreshment Centers and eRoomSafes and the materials for the
installation of our Refreshment Centers and eRoomSafes.
The proceeds allocated to the repayment of our outstanding indebtedness
and related accrued interest has been calculated as of June 30, 2000. This
outstanding indebtedness consists of the following:
- Promissory notes bearing interest rates ranging from 10% to 15%
per annum issued from 1996 to 1999 and related accrued interest in
the aggregate amount of approximately $1,138,820, all of which are
currently in default;
- Promissory note bearing an interest rate of 10% per annum issued
to RSG Investments, LLC, an entity in which John J. Prehn, one of
our director designees, is a co-manager and a member, and related
accrued interest in the amount of $818,750;
- Promissory note issued to Ash Capital, LLC, an entity controlled
by Dr. Alan C. Ashton, one of our director designees, and related
accrued interest in the amount of $287,405;
- Repayment of bridge loan bearing an interest rate of 9% per annum
and related accrued interest in the amount of $1,528,125; and
- Convertible subordinated promissory notes bearing an interest rate
of 7% per annum issued in conjunction with our Series C
convertible preferred stock and related accrued interest in the
amount of $241,656.
-12-
<PAGE>
On September 28, 1999, we entered into an Equipment Transfer Agreement with
RSG Investments whereby we executed in favor of RSG Investments a promissory
note in the original principal amount of $750,000. This promissory note bears an
interest rate of 10% per annum and is payable on June 30, 2000. Since this
promissory note was issued in conjunction with the satisfaction of our prior
obligations to RSG Investments, we did not receive any proceeds from the
issuance of this promissory note.
On February 15, 2000, Ash Capital loaned us $500,000 in the form of a
promissory note bearing an interest rate of 10% per annum and payable on June
30, 2000. We used the proceeds from this loan for the production and
installation of eRoomSystems and Refreshment Centers and general and
administrative expenses. We have made payments of $230,000 on this promissory
note as of June 7, 2000.
On April 12, 2000, we closed our private placement of units, each unit
consisting of 7% Series C convertible preferred stock, a convertible
subordinated promissory note and warrants to purchase common stock. We used the
gross proceeds of $950,000 from this private placement for the production and
installation of eRoomSystems, Refreshment Centers and eRoomSafes and general and
administrative expenses.
On April 13, 2000, we issued a subordinated promissory note in the original
principal amount of $1,500,000, bearing interest at the rate of 9% per annum, or
the bridge loan, and 200,000 shares of common stock in conjunction with the
bridge loan. We used the proceeds from the bridge loan to fund the production
and installation of eRoomSystems, Refreshment Centers and eRoomSafes and general
and administrative expenses.
The above discussion represents our present intentions for the use of the
proceeds of this offering based on our currently contemplated operations,
business plan and the prevailing economic and industry conditions. Changes in
the use of proceeds of this offering may be made in response to changes in our
financial condition, business plans or growth strategy and changes in general
industry conditions.
-13-
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. Our
board presently, and for the foreseeable future, intends to retain all of our
earnings, if any, for the development of our business. The declaration and
payment of cash dividends in the future will be at the discretion of our board
and will depend upon a number of factors, including, among others, our future
earnings, operations, funding requirements, restrictions under our credit
facility, our general financial condition and any other factors that our board
considers important. Investors should not purchase our common stock with the
expectation of receiving cash dividends.
The terms of our outstanding shares of Series A convertible preferred
stock, Series B convertible preferred stock and Series C convertible preferred
stock provide for annual cumulative dividends of 8%, 6% and 7%, respectively.
Although no cash dividends have been paid to date to holders of our Series
A convertible preferred stock, holders of such preferred stock have accrued cash
dividends of $198,443 as of March 31, 2000 and will have accrued cash dividends
of $234,452 as of June 30, 2000.
As for our Series B convertible preferred stock, we have issued dividends
of $209,351 in the form of 51,420 shares of common stock as of March 31, 2000
and will have issued dividends of $303,027 in the form of 82,645 shares of
common stock as of June 30, 2000.
With respect to our Series C convertible preferred stock, holders of such
preferred stock will have accrued cash dividends of $10,557 as of June 30, 2000.
We intend to pay all accrued dividends to holders of Series A convertible
preferred stock and holders of Series C convertible preferred stock from the net
proceeds of this offering. Upon the closing of this offering, no shares of
Series A, Series B or Series C convertible preferred stock will be outstanding
and, as a result, no further dividends will accrue.
-14-
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of our outstanding
shares of Series A, Series B and Series C convertible preferred stock
into 2,048,046 shares of our common stock; and
- on a pro forma as adjusted basis to reflect:
- the conversion of our outstanding shares of Series A, Series B
and Series C convertible preferred stock into 2,085,928 shares of
our common stock;
- the immediate amortization of our $24,461 preferred stock
discount, the immediate amortization of our $4,903 debt discount
and the issuance of 12,500 warrants valued at $16,233 related to
the Series C convertible preferred stock;
- the issuance of the bridge loan, including the issuance of
200,000 shares of common stock, of which $1,051,402 was allocated
to debt and $440,374 to common stock; and
- the pro forma adjustment, as well as the issuance of 1,800,000
shares of common stock by us in this offering at an assumed
initial public offering price of $9.00 per share, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------------------------------
Pro Forma As
Actual Pro Forma Adjusted
--------------- --------------- --------------
<S> <C> <C> <C>
Notes payable and current portion of long-term debt and
capital lease obligations................................. $ 2,139,048 $ 2,139,048 $ 889,048
=============== =============== ==============
Long-term debt and capital lease obligations, net of current
portion................................................... $ 994,413 $ 994,413 $ 1,050,434
--------------- --------------- --------------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par
value; 500,000 shares authorized, 360,000 shares
outstanding (actual), none outstanding (pro forma
and pro forma as adjusted)........................... 1,332,953 - -
Series B convertible preferred stock, $0.001 par
value; 2,500,000 shares authorized, 2,081,680
shares outstanding (actual), none outstanding (pro
forma and pro forma as adjusted)..................... 6,482,592 - -
Series C convertible preferred stock, $0.001 par
value; 2,000,000 shares authorized, 161,535 shares
outstanding (actual), none outstanding (pro forma
and pro forma as adjusted)........................... 456,407 - -
Undesignated preferred stock, $0.001 par value;
5,000,000 shares authorized; no shares outstanding
(actual, pro forma and pro forma as adjusted)........ - - -
Common stock, $0.001 par value; 50,000,000 shares
authorized, 2,108,506 shares outstanding (actual),
4,156,553 (pro forma) and 6,194,434 (pro forma as
adjusted)............................................ 2,109 4,157 6,195
Additional paid-in capital............................... 6,783,026 19,967,188 34,539,943
Warrants and options outstanding......................... 1,454,309 1,454,309 1,470,542
Notes receivable from stockholders....................... (615,000) (615,000) (615,000)
Accumulated deficit...................................... (16,186,209) (21,100,467) (21,568,429)
--------------- --------------- --------------
Total stockholders' equity (deficit)................. (289,813) (289,813) 13,833,251
--------------- --------------- --------------
Total capitalization.............................. $ 704,600 $ 704,600 $ 14,883,685
=============== =============== ==============
</TABLE>
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<PAGE>
DILUTION
Our pro forma net tangible book value (deficit) as of March 31, 2000 was
approximately $(989,000), or $(0.24) per share of common stock. Pro forma net
tangible book value (deficit) per share is determined by dividing the amount of
our pro forma tangible assets less total liabilities by the pro forma number of
shares of common stock outstanding at that date. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the pro forma as
adjusted net tangible book value per share of common stock immediately after the
completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us at an assumed initial public offering price of $9.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, and the application of the estimated net
proceeds from this offering, our pro forma as adjusted net tangible book value
as of March 31, 2000 would have been approximately $13,134,512 or $2.12 per
share. This represents an immediate increase in pro forma net tangible book
value to our existing stockholders of $2.36 per share and an immediate dilution
to purchasers in this offering of $6.88 per share, or 76.44% of the assumed
initial public offering price of $9.00 per share. If the initial public offering
price is higher or lower, the dilution to purchasers in this offering will be
greater or less, respectively.
<TABLE>
<CAPTION>
<S> <C> <C>
The following table illustrates the dilution on a per share basis:
Assumed initial public offering price per share........................... $ 9.00
Pro forma net tangible book deficit per share at March 31, 2000......... $ (0.24)
Increase in pro forma net tangible book value per share attributable to
this offering........................................................ 2.36
----------
Pro forma as adjusted net tangible book value per share after this
offering................................................................ 2.12
----------
Dilution per share to new investors....................................... $ 6.88
==========
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma as adjusted net tangible book value at March 31, 2000 would have
been approximately $2.37 per share, representing an immediate increase in pro
forma net tangible book value of $2.61 per share to our existing stockholders
and an immediate dilution in pro forma net tangible book value of $6.63 per
share to purchasers in this offering.
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate effective cash consideration paid to us and the average price per
share paid by existing stockholders and new investors purchasing shares of
common stock in this offering. The calculation below is based on an assumed
initial public offering price of $9.00 per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------- ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 4,394,434 71% $ 14,469,408 47% $ 3.29
New investors.................... 1,800,000 29% 16,200,000 53% $ 9.00
--------------- --------- ---------------- ---------
Total....................... 6,194,434 100% $ 30,669,408 100%
=============== ========= ================ =========
</TABLE>
This discussion and table assumes no exercise of any stock options and warrants
outstanding as of March 31, 2000, and includes the conversion of Series A,
Series B and Series C convertible preferred stock into common stock. As of March
31, 2000, there were options and warrants outstanding to purchase a total of
2,490,317 shares of common stock with a weighted average exercise price of $5.78
per share. To the extent that any of these options and warrants are exercised,
there will be further dilution to new investors.
-16-
<PAGE>
SELECTED FINANCIAL DATA
This section presents selected historical financial data of eRoomSystem
Technologies. You should read carefully the financial statements included in
this prospectus, including the notes to the financial statements. The selected
information in this section is not intended to replace the financial statements.
We derived the selected consolidated statement of operations data presented
below for each of our 1998 and 1999 fiscal years and the balance sheet data at
December 31, 1998 and 1999 from our audited consolidated financial statements
appearing elsewhere in this prospectus.
We derived the selected consolidated statement of operations data presented
below for each of our 1995, 1996 and 1997 fiscal years and the balance sheet
data at December 31, 1995, 1996 and 1997 from our audited financial statements
not appearing in this prospectus.
We derived the selected consolidated statement of operations date below for
each of our March 31, 1999 and 2000 three month periods provided and the balance
sheet data at March 31, 2000 from our unaudited interim consolidated financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales ........................ $ 169 $ 360 $ 4,431 $ 917 $ 144 $ -- $ --
Revenue sharing arrangements ......... 129 269 133 46 213 64 9
Maintenance fees ..................... 58 81 102 48 183 50 40
--------- --------- --------- --------- --------- --------- ---------
Total revenue ..................... 356 710 4,666 1,011 540 114 49
--------- --------- --------- --------- --------- --------- ---------
Cost of revenue:
Product sales ........................ 221 625 3,203 711 118 -- --
Revenue sharing arrangements ......... 50 110 55 21 166 39 7
Maintenance fees ..................... 30 69 81 61 78 5 7
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenue ............. 301 804 3,339 793 362 44 14
--------- --------- --------- --------- --------- --------- ---------
Gross margin (deficit) ................. 55 (94) 1,327 218 178 69 35
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Selling general and administrative
(exclusive of non cash
compensation) ....................... 771 1,439 1,231 2,058 2,388 422 520
Research and development (exclusive
of non cash compensation) ........... 89 271 216 285 271 73 50
Non cash compensation expense
(income) ............................ -- -- 99 4,858 (3,902) (4,854) 492
--------- --------- --------- --------- --------- --------- ---------
Total operating (income) ......... 860 1,710 1,546 7,201 (1,243) (4,358) 1,062
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations .......... (805) (1,804) (219) (6,983) 1,421 4,428 (1,027)
--------- --------- --------- --------- --------- --------- ---------
Other income (expense):
Interest expense ..................... (73) (430) (809) (1,923) (1,445) (341) (304)
Equity in income of unconsolidated,
wholly owned subsidiary ............. -- -- -- -- 148 -- 88
Interest and other income ............ 1 15 28 313 211 67 2
--------- --------- --------- --------- --------- --------- ---------
Other income (expense), net ....... (72) (415) (781) (1,610) (1,086) (274) (213)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
loss ................................. (877) (2,219) (1,000) (8,593) 335 4,154 (1,240)
Extraordinary loss, net of income
taxes ................................ -- -- -- (407) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) ...................... $ (877) $ (2,219) $ (1,000) $ (9,000) $ 335 $ 4,154 $ (1,240)
========= ========= ========= ========= ========= ========= =========
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends related to convertible
preferred stock ...................... $ -- $ -- $ -- $ (18) $ (607) $ (36) $ (415)
========= ========= ========= ========= ========= ========= =========
Net income (loss) attributable to
common stockholders .................. $ (877) $ (2,219) $ (1,000) $ (9,018) $ (272) $ 4,118 $ (1,655)
========= ========= ========= ========= ========= ========= =========
Basic and diluted net income (loss)
per common share ..................... $ (1.56) $ (2.61) $ (0.76) $ (2.98) $ (0.08) $ 1.16 $ (0.75)
========= ========= ========= ========= ========= ========= =========
Basic and diluted weighted average
common shares outstanding ............ 560 850 1,314 3,029 3,221 3,545 2,197
========= ========= ========= ========= ========= ========= =========
Basic and diluted supplemental pro
forma net loss per common share ...... $ (1.07) $ (1.56)
========= =========
Basic and diluted supplemental pro
forma weighted average common
shares outstanding ................... 5,163 4,245
========= =========
BALANCE SHEET DATA:
Cash ................................... 236 188 330 2 113 15
Working capital deficit ................ (666) (2,191) (3,702) (3,358) (2,651) (3,272)
Total assets ........................... 1,316 2,911 2,429 2,520 4,351 5,042
Long-term liabilities .................. 1,270 2,340 83 63 867 994
Total stockholders' deficit ............ (986) (2,666) (2,441) (2,428) (24) (290)
</TABLE>
-----------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
data.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes to our financial statements, included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors," "Special Note Regarding
Forward-Looking Information" and elsewhere in this prospectus.
OVERVIEW
We design, assemble and market our eRoomSystem, an intelligent, in-room
computer platform and communications network. The eRoomSystem supports our line
of fully-automated and interactive Refreshment Centers and electronic
eRoomSafes, and other proposed applications for use in the lodging and other
industries. Historically, we have installed our principal products, our
Refreshment Centers and eRoomSafes, in hotels. Our proprietary eRoomSystem uses
our patented credit card technology that integrates with our file server located
at the hotel, or the eRoomSystem file server.
DESCRIPTION OF REVENUES
We generate revenue from either the sale or revenue sharing of our
products. Under the revenue sharing agreements, we receive a portion of the
sales generated by our products and, under a number of these agreements, are
guaranteed a minimum daily revenue amount. We also generate revenues from
maintenance and support services.
Historically, we have been restricted in our ability to market our products
due to limited working capital. Prior to 1998, our marketing efforts focused
primarily on selling our products. In 1998, as a result of the lodging
industry's general lack of available financing or capital for the purchase of
equipment, we modified our business model to emphasize our revenue sharing
program as our primary product placement program. As a result of our shift in
focus to our revenue sharing program, our gross revenues decreased in 1998 and
1999 and significantly greater capital requirements were added to our business
model. However, our revenue sharing program provides us with an ongoing
seven-year revenue stream under each revenue sharing agreement. Because our
customers in the lodging industry traditionally have limited capacity to finance
the purchase of our products, we designed our revenue sharing program to require
little or no upfront cost to our customers. Through our revenue sharing plan, we
install our products at little or no cost to our customers and share in the
recurring revenues generated from sales of goods and services related to our
products. Ownership of the eRoomSystems, Refreshment Centers and eRoomSafes is
retained by us throughout the term of the revenue sharing agreements. We retain
the right to re-deploy any systems returned to us upon the expiration or earlier
termination of the revenue sharing agreements. We believe that our revenue
sharing program will increase future placements of our products; however, we
cannot assure that we will be successful in this effort.
We have experienced substantial fluctuations in revenues from
period-to-period as a result of limited working capital to fund the assembly of
our products and to maintain sufficient component inventories. In addition to
limited working capital, fluctuations in revenues have partially resulted from
the transition to our revenue sharing program under which revenues are
recognized over the seven-year life of the contract instead of immediately upon
installation of the product.
We expect that for the foreseeable future, the majority of our revenues
will result from the placement of our products pursuant to our revenue sharing
program, followed by sales and, to a lesser extent, from maintenance agreements.
We project that we will receive approximately 60% of the recurring revenues from
the sale of goods generated by the eRoomSystems, Refreshment Centers and
eRoomSafes placed under the revenue sharing agreements. Our customers receive
the remainder of the recurring revenues. Over the term of a revenue sharing
agreement, we estimate that the revenues over the initial years are sufficient
for us to recover our costs.
-19-
<PAGE>
We have installed more than 11,500 Refreshment Centers and 4,000 eRoomSafes
primarily in the United States, as well as in Brazil and the Bahamas. We intend
to continue to offer our products domestically and internationally to the
lodging industry, and tailor our products and services for introduction into the
healthcare, time-share and cruise line industries. We anticipate that a
significant portion of our future revenues will be derived from these markets;
however, we cannot assure you that we will be successful in this effort.
We also plan to increase our revenues in the foreseeable future by bundling
additional products and services with our current products, such as our in-room
energy management system, a thin client network which consists of a
centrally-managed network of computers configured with only essential equipment
and without CD-ROM drives, diskette drives and peripheral expansion slots, a
high-speed wired and wireless communications network allowing for Internet and
intranet access, and information management services. We anticipate that as the
installation base of our products increases, the marketability and value of the
information we collect and manage will increase. We also expect to generate
revenue from the packaging and marketing of our information-based data as our
installation base expands.
REVENUE RECOGNITION
Revenues from sales of our products are recognized upon completion of
installation and acceptance by the customer.
Revenues from the placement of our Refreshment Centers and eRoomSafes under
our revenue sharing program are accounted for similar to an operating lease with
the revenues recognized as earned over the term of the agreement. In some
instances, our revenue sharing agreements provide for a guaranteed minimum daily
payment by the hotel.
We negotiate our portion of the revenues generated under our revenue
sharing program based upon the cost of the equipment installed and the estimated
daily sales per unit for the specific customer. We seek a targeted rate of
return.
We enter into installation, maintenance and license agreements with our
customers. Installation, maintenance and license revenues are recognized as the
services are performed, or pro rata over the service period. We defer all
revenue paid in advance relating to future services and products not yet
installed and accepted by our customers.
We anticipate profit margins will increase as a result of greater placement
of our products pursuant to our revenue share program. We also expect to improve
our future profit margins if we are successful in obtaining revenues through the
sale of higher-priced, higher-margin, value added products such as our proposed
in-room energy management system, high-speed wired and wireless communication
network for use with the Internet and the intranet and our information
management services.
Maintenance fees are expected to constitute a greater percentage of total
revenues in the future due to our focus on revenues generated from our revenue
sharing program, which requires maintenance agreements. Our installation,
maintenance and license agreements stipulate that we collect a maintenance fee
per Refreshment Center per day to be paid monthly. We expect to generate gross
profit margins of 50% from our maintenance-related revenues. In addition, we
estimate that maintenance revenues will represent 5% of total revenues.
DESCRIPTION OF EXPENSES
Cost of product sales consists primarily of production, shipping and
installation costs. Cost of revenue sharing arrangements consists primarily of
depreciation of capitalized costs for the products placed in service. We
capitalize the production, shipping, installation and sales commissions related
to the Refreshment Centers and eRoomSafes placed under revenue sharing
agreements. Cost of maintenance fee revenues primarily consists of expenses
related to customer support and maintenance.
-20-
<PAGE>
Selling, general and administrative expenses include selling expenses
consisting primarily of advertising, promotional activities, trade shows and
personnel-related expenses and general and administrative expenses consisting
primarily of professional fees, salaries and related costs for accounting,
administration, finance, human resources, information systems and legal
personnel.
Research and development expenses consist of payroll and related costs for
hardware and software engineers, quality assurance specialists, management
personnel, and the costs of materials used by these employees in the development
of new or enhanced product offerings.
In accordance with Financial Accounting Standards Board, or FASB, Statement
of Financial Accounting Standards, or SFAS, No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," development costs
incurred in the research and development of new software products to be sold,
leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material to
date. We have charged our software development costs to research and development
expense in our consolidated statements of operations.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of total revenues for the years and three month periods indicated:
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
1998 1999 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales.......................................... 90.6% 26.7 0.0% 0.0%
Revenue share arrangements............................. 4.6 39.5 56.5 18.7
Maintenance fees....................................... 4.8 33.8 43.5 81.3
-------------- -------------- -------------- --------------
Total revenue....................................... 100.0 100.0 100.0 100.0
-------------- -------------- -------------- --------------
Cost of revenue:
Product sales.......................................... 70.3 21.8 -- --
Revenue share arrangements............................. 2.1 30.7 34.6 14.4
Maintenance............................................ 6.0 14.6 4.6 14.3
-------------- -------------- -------------- --------------
Total cost of revenue............................... 78.4 67.1 39.2 28.7
-------------- -------------- -------------- --------------
Gross margin.............................................. 21.6 32.9 60.8 71.3
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative (exclusive of
non-cash compensation)................................ 203.5 441.8 370.9 1,059.8
Research and development (exclusive of non-cash
compensation)......................................... 28.1 50.2 64.3 101.4
Non cash compensation expense (income)................. 480.3 (721.8) (4,261.5) 1,001.7
-------------- -------------- -------------- --------------
Total operating expenses............................ 711.9 (229.8) (3,826.3) 2,162.9
-------------- -------------- -------------- --------------
Income (loss) from operations............................. (690.3) 262.7 3,337.1 (2,091.6)
-------------- -------------- -------------- --------------
Other income (expense):
Interest expense....................................... (190.1) (267.3) (299.7) (618.4)
Equity in income of unconsolidated, wholly owned
subsidiary............................................ -- 27.3 -- 179.8
Interest and other income.............................. 30.9 39.0 59.1 4.8
-------------- -------------- -------------- --------------
Other expense, net.................................. (159.2) (201.01) (240.6) (433.8)
-------------- -------------- -------------- --------------
Income (loss) before income taxes and extraordinary loss.. (849.5) 61.7 3,646.5 (2,525.4)
Income (loss) before extraordinary loss................... (849.5) 61.7 3,646.5 (2,525.4)
Extraordinary loss, net of income taxes................... (40.3) -- -- --
-------------- -------------- -------------- --------------
Net income (loss)......................................... (889.8)% 61.7% 3,646.5% (3,370.2)%
============== ============== ============== ==============
Dividends related to convertible preferred stock.......... (1.8) (112.3) (31.2) (844.7)
============== ============== ============== ==============
Net income (loss) attributable to common stockholders..... (891.6)% (50.6)% 3,615.3% (3,370.2)%
============== ============== ============== ==============
</TABLE>
-21-
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Product Sales -- We did not recognize revenue from product sales in the
three months ended March 31, 1999 or March 31, 2000. The lack of revenue from
product sales is consistent with our continued emphasis to place our products
pursuant to our revenue sharing arrangement.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $64,341 for the three months ended March 31, 1999 and $9,162
for the three months ended March 31, 2000, representing a decrease of $55,179,
or 86%. In September 1999, we transferred approximately 2,000 Refreshment
Centers under revenue share arrangements to RSi BRE, an unconsolidated, wholly
owned subsidiary. Because RSi BRE is not consolidated, the related revenues are
not included in our financial statements. Rather, we record our equity in RSi
BRE's income for each respective period. The revenue sharing revenue for these
units was recognized as revenue sharing income during the three months ended
March 31, 1999. Subsequent to the transfer of the revenue sharing units in
September 1999, we produced and installed approximately 800 additional
Refreshment Centers and approximately 800 eRoomSafes through the three months
ended March 31, 2000 which have been transferred to RSi BRE.
Maintenance Fee Revenues -- Our maintenance fee revenues were $49,567 for
the three months ended March 31, 1999 and $39,937 for the three months ended
March 31, 2000, representing a decrease of $9,630, or 19%, from the three months
ended March 31, 1999 to the three months ended March 31, 2000. The decrease from
the three months ended March 31, 1999 to the three months ended March 31, 2000
was due primarily to the expiration of maintenance contracts representing 753
units.
COST OF REVENUE
Cost of Product Sales Revenue -- We did not realize any cost of product
sales revenue during the three months ended March 31, 1999 or during the three
months ended March 31, 2000.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was
$39,409 during the three months ended March 31, 1999 and $7,073 during the three
months ended March 31, 2000, representing a decrease of $32,336, or 82%. The
gross margin percentage on revenue sharing revenue was 39% in the three months
ended March 31, 1999 and 23% in the three months ended March 31, 2000. The
decrease in gross margin percentage on revenue sharing revenue from the three
months ended March 31, 1999 to the three months ended March 31, 2000 resulted
from the impact of placing more expensive Refreshment Centers, which included
eRoomSafes, without a corresponding increase in the related revenues. We have
adjusted the percentage of revenues allocated to us to provide for a higher
percentage of revenues for units including eRoomSafes.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$5,260 in the three months ended March 31, 1999 and $7,020 in the three
months ended March 31, 2000 representing an increase of $1,760, or 33%. The
gross margin percentage on maintenance revenues was 89% in the three months
ended March 31, 1999 and 82% in the three months ended March 31, 2000. The
decrease in gross margin percentage from the three months ended March 31,
1999 to the three months ended March 31, 2000 was mainly due to the
expiration of contracts representing 753 units and our reduced revenue to
cover fixed costs associated with the cost of maintenance revenue.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and administrative
expenses, exclusive of non-cash compensation expense (income), were $422,442 in
the three months ended March 31, 1999 and $520,344 in the three months ended
March 31, 2000, representing an increase of $97,902, or 23%. Selling, general
and administrative expenses represented 371% of our total revenues in the three
months ended March 31, 1999 and 1060% of our total revenues in the three months
ended March 31, 2000. The increase from the three months ended
-22-
<PAGE>
March 31, 1999 to the three months ended March 31, 2000 was primarily due to the
increase of staffing in anticipation of increased product placement activity in
subsequent quarters.
Research and Development Expenses -- Research and development expenses were
$73,231 in the three months ended March 31, 1999 and $49,788 in the three months
ended March 31, 2000, representing a decrease of $23,443, or 32%. Research and
development expenses represented 64% of our total revenue in the three months
ended March 31, 1999 and 101% of our total revenue in 1999. The decrease in
research and development expenses resulted from the reorganization of the
research and development department in an effort to maximize the efficiency of
its operation.
Non-Cash Compensation Expense (Income) -- Non-cash compensation income was
$4,858,150 in the three months ended March 31, 1999 and non-cash compensation
expense was $491,825 in the three months ended March 31, 2000. During 1999, the
estimated fair value of our common stock declined resulting in the reversal of a
portion of the compensation expense previously recorded. The initial
compensation expense recorded in 1998 related to the issuance of 1,471,000
shares of common stock to three officers and a former consultant. During the
year ended December 31, 1998, we recognized compensation related to these
variable awards. As a result of a decline in the value of our common stock
during the three months ended March 31, 1999, we reversed compensation expense
related to these awards. The non-cash compensation expense recorded in the three
months ended March 31, 2000 resulted from payments in the form of options to
purchase common stock and payments in the form of common stock to consultants of
the company.
Other Income (Expense), Net -- Other expense was $274,093 in the three
months ended March 31, 1999 and $213,018 in the three months ended March 31,
2000, representing a decrease of $61,075, or 22%. The decrease is due primarily
to the recognition of $88,296 in equity income from a wholly owned subsidiary,
RSi BRE and reduced interest expense related to the amortization of deferred
financing costs.
Income Taxes -- As of March 31, 2000, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $11 million that expire at various dates from 2008 to 2020. We had
net deferred tax assets, including our net operating loss carryforwards and
other temporary differences between book and tax deductions, that total
approximately $4.1 million as of March 31, 2000. A valuation allowance in the
amount of $4.1 million has been recorded as of March 31,1999 as a result of
uncertainties regarding the realizability of the net deferred tax assets.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Product Sales -- Our product sales revenue was $916,650 in 1998 and
$144,282 in 1999, representing a decrease of $772,368, or 84%, from 1998 to
1999. During 1998, we shifted our focus from selling products to placing
products pursuant to our revenue sharing program. Additionally, during 1998, we
produced and placed approximately 2,000 refreshment centers under revenue share
arrangements which subsequently have been transferred to RSi BRE, an
unconsolidated, wholly owned subsidiary. Because RSi BRE is not consolidated,
the related revenues are not included in our financial statements. Rather, we
record our equity in RSi BRE's income for each respective period. The decrease
from 1998 to 1999 was due to our transition from product sales to placement of
our products pursuant to our revenue sharing program, a lack of sufficient
working capital and an additional 436 refreshment centers which were produced
and installed in 1999, but which have been transferred to RSi BRE.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $46,524 in 1998 and $213,654 in 1999, representing an increase
of $167,130, or 359%, from 1998 to 1999. During 1998, we began placing products
under revenue sharing arrangements after we shifted our focus from sales of
products. The increase from 1998 to 1999 was due to our continuing transition
from product sales to placement of our products pursuant to our revenue sharing
program.
Maintenance Fee Revenues -- Our maintenance fee revenues were $48,288 in
1998 and $182,581 in 1999, representing an increase of $134,293, or 278%, from
1998 to 1999. The increase from 1998 to 1999 was due
-23-
<PAGE>
primarily to maintenance revenues we earn related to the Refreshment Centers
owned by RSi BRE. We perform the maintenance of the RSi BRE units and
accordingly receive the maintenance revenues. The increase is also due to our
placement of additional products pursuant to our revenue sharing program.
COST OF REVENUE
Cost of Product Sales Revenue -- Our cost of product sales revenue was
$711,355 in 1998 and $118,010 in 1999, representing a decrease of $593,345, or
83%, from 1998 to 1999. The gross margin percentage on product sales was 22% in
1998 and 18% in 1999. The decrease in gross margin percentage on product sales
from 1998 to 1999 primarily resulted from further reductions in production and
corresponding increases in the cost per unit, and fixed costs from unapplied
overhead costs.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing revenue was
$21,104 in 1998 and $165,995 in 1999, representing an increase of $144,891, or
687%, from 1998 to 1999. The gross margin percentage on revenue sharing revenue
was 55% in 1998 and 22% in 1999. The decrease in gross margin percentage on
revenue sharing revenue from 1998 to 1999 resulted from the impact of placing
more expensive Refreshment Centers, which included eRoomSafes, without a
corresponding increase in the related revenues. When we initially began
including eRoomSafes with Refreshment Centers, our intent was that a separate
charge would be paid by the hotel guest for use of the safe. However, separate
charges were not consistently implemented by the hotels. Subsequently, we have
adjusted the percentage of revenues allocated to us when eRoomSafes are
included.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was $60,797
in 1998 and $78,518 in 1999 representing an increase of $17,721, or 29%, from
1998 to 1999. The gross margin percentage on maintenance revenues was (26%) in
1998 and 57% in 1999. The increase in gross margin percentage from 1998 to 1999
was mainly due to the placement of additional units which enabled us to cover
our fixed overhead costs.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and administrative
expenses, exclusive of non-cash compensation expense (income), were $2,058,150
in 1998 and $2,387,811 in 1999, representing an increase of $329,661, or 16%,
from 1998 to 1999. Selling, general and administrative expenses represented 204%
of our total revenues in 1998 and 442% of our total revenues in 1999. The
increase from 1998 to 1999 was primarily due to the creation of an allowance for
bad debts on notes receivable to purchase shares of preferred stock.
Research and Development Expenses -- Research and development expenses were
$284,532 in 1998 and $271,231 in 1999, representing a decrease of $13,301, or
5%, from 1998 to 1999. Research and development expenses represented 28% of our
total revenue in 1998 and 50% of our total revenue in 1999.
Non-Cash Compensation Expense (Income) -- Non-cash compensation expense was
$4,858,105 in 1998 and non-cash compensation income was $3,901,696 in 1999,
representing a reversal of the expense of $3,901,696 from 1998 to 1999. During
1998, the estimated fair value of our common stock increased resulting in
compensation expense. During 1999, the estimated fair value of our common stock
declined resulting in the reversal of a portion of the compensation expense
previously recorded. The initial compensation expense recorded in 1998 related
to the issuance of 1,471,000 shares of common stock to three officers and a
former consultant. During the year ended December 31, 1998, we recognized
compensation related to these variable awards. As a result of a decline in the
value of our common stock during the year ended December 31, 1999, we reversed
compensation expense related to these awards.
Other Income (Expense), Net -- Interest expense was $1,922,638 in 1998 and
$1,444,532 in 1999, representing a decrease of $478,106, or 25%, from 1998 to
1999. The decrease is due primarily to the conversion of $2.3 million of
borrowings to equity during 1998 and the corresponding decrease in related
interest expense and amortization of deferred financing costs.
Income Taxes -- As of December 31, 1999, we had net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $10.0 million that expire at various dates from 2008 to 2019. We
had
-24-
<PAGE>
net deferred tax assets, including our net operating loss carryforwards and
other temporary differences between book and tax deductions, total approximately
$3.8 million as of December 31, 1999. A valuation allowance in the amount of
$3.8 million has been recorded as of December 31, 1999 as a result of
uncertainties regarding the realizability of the net deferred tax assets.
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK
During 1998, we obtained equity capital through the issuance of Series A
convertible preferred stock which provides for annual cumulative dividends of
8%. The dividends on Series A convertible preferred stock represented $18,541 in
1998, $144,000 in 1999 and $35,901 in the three months ended March 31, 2000.
Series A convertible preferred stock will convert to common stock upon the
closing of this offering. In connection with the Series A convertible preferred
stock, we will record an additional dividend of $1.8 million upon conversion
which represents the contingent beneficial conversion feature, a conversion
feature that provides for conversion at a ratio greater than one-to-one, that
will accrue to the Series A convertible preferred stockholders at the date of
conversion.
During 1999, we obtained equity capital through the issuance of Series B
convertible preferred stock which provides for annual cumulative dividends of
6%. The dividends on the Series B convertible preferred stock are payable in
shares of common stock and represented $141,899 in 1999 and $67,452 in the three
months ended March 31,2000. Series B convertible preferred stock will convert to
common stock upon the closing of this offering. In addition, the holders of
Series B convertible preferred stock received a $1,249,008 beneficial conversion
feature at the date of issuance and an additional $2,498,016 beneficial
conversion feature on March 29, 2000 in connection with our three-for-four
reverse stock split. In addition, the amendment and restatement of the
Certificate of Designation for Series B convertible preferred stock on April 12,
2000 which modified the conversion rate required the recognition of an
additional beneficial conversion feature. The beneficial conversion feature, as
modified, is being accrued as a dividend between the date of issuance of the
Series B convertible preferred stock and September 28, 2000, the date which the
holders of Series B convertible preferred stock have the right to convert their
shares of Series B convertible preferred stock into shares of common stock on a
1.5-for-1 basis.
During March and April 2000, we obtained equity capital through the
issuance of Series C convertible preferred stock which provides for annual
cumulative dividends of 7%. As of March 31, 200, there were no dividends accrued
on the Series C convertible preferred stock. As of June 30, 2000, dividends of
$10,557 will have accrued. Since the Series C convertible preferred stock will
be automatically converted into common stock upon the close of this offering, no
additional dividends will accrue after the close of this offering.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had cash of $14,575 and a working capital deficit
of $3,271,963 compared to cash of $113,252 and a working capital deficit of
$2,650,616 at December 31, 1999. The decreases in cash and working capital were
the result of cash being used in operations, investment in RSi BRE, increases in
inventories and increases in deferred offering and financing costs. These uses
of cash were offset, in part, by the proceeds from our Series C convertible
preferred stock offering and the proceeds from the issuance of promissory notes.
Our net cash used in operating activities for the three months ended March
31, 2000 was $708,129. Cash used in operating activities was primarily
attributable to a net loss from operations of $491,825, excluding non-cash
compensation expense of $491,825. Our net cash used in operating activities for
the year ended December 31, 1999 was $2,304,807. Cash used in operating
activities was primarily attributed to a net loss before the impact of non-cash
compensation income of $3,901,696. Our net cash used in operating activities for
the year ended December 31, 1998 was $2,931,871, mostly due to a net loss of
$8,999,646. This loss was partially attributable to non-cash compensation
expense of $4,858,105, a non-cash loss on debt extinquishment of $407,000,
non-cash interest expense of $777,666, amortization debt offering and financing
costs of $605,236 and was partially offset by interest accrued on notes
receivable from stockholders of $274,691.
Our primary investing activities have historically consisted of
expenditures relating to our revenue sharing program and for property and
equipment. Investing activities for the three months ended March 31, 2000
consisted of purchases for equipment and additional investments in RSi BRE.
Additionally in 1999, we invested $572,544 in RSi BRE. The expenditures in 1999
for Refreshment Centers were $1,711,105 compared to $246,161 for 1998. We
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expect our investing activity to increase significantly in the third and fourth
quarter of 2000 due to an increased placement of our products under our revenue
sharing program. Additionally, we anticipate that we will experience an increase
in our capital expenditures and lease commitments for property and equipment
consistent with anticipated growth in operations, infrastructure and personnel.
Our financing activities provided $656,373 of cash for the three months
ended March 31, 2000. For the three months ended March 31, 2000, cash provided
from financing activities consisted of $357,177 received from the sale of
preferred stock and $583,304 from borrowings on promissory notes. Our financing
activities provided $2,900,872 and $4,712,097 for the years ended December 31,
1998 and 1999, respectively. In 1999, cash provided by financing activities
consisted of $4,439,775 from the sale of preferred stock and warrants, $477,669
from borrowings, and $299,195 from notes payable to officers and stockholders.
In 1999, cash used for financing activities consisted of $400,789 of payments on
borrowings, $15,753 of payments on capital lease obligations, and $88,000 of
deferred offering costs. In 1998, cash provided by financing activities
consisted of $2,265,058 from borrowings and $390,043 and $600,275 from the sale
of common and preferred stock, respectively. In 1998, cash used for financing
activities consisted of $127,971 of payments on borrowings, $12,500 of payments
on notes payable to a stockholder and officer, $9,190 of payments on capital
lease obligations and $204,843 of offering costs.
During 1999, we entered into an exclusive post-installation financing
arrangement with an equipment financier to provide funding for products which we
place with customers under revenue sharing agreements. Under the terms of the
financing arrangement, the equipment financier will fund up to 150% of the cost
to purchase, assemble and install each product that has been in service for 90
days subject to the property meeting minimum performance, occupancy and
liquidity requirements. We are obligated to repay the financing over seven
years, with a formula-based variable interest rate. As part of the financing,
eRoomSystem Technologies will form a new entity, eRoomSystem SPE, Inc., a Nevada
corporation and wholly owned subsidiary. eRoomSystem SPE will own all the
products funded by the equipment financier as well as those under revenue
sharing agreements. The equipment financier will take a senior security interest
in the products financed under the financing agreement.
As of March 31, 2000, our debt, secured by our assets, consisted of
$130,000 in notes issued in a 1996 private debt offering, $431,750 in notes
issued in a 1997 private debt/equity offering, $35,115 in notes issued in a 1999
private debt offering, a $1,555,554 obligation payable to RSG Investments, and a
$100,000 note payable to an individual. This obligation payable to RSG
Investments consists of a $750,000 promissory note. As of March 31, 2000, our
unsecured debt consisted of a $158,354 note payable to a corporation for
services performed, $9,734 in notes payable to a bank and secured by vehicles, a
$6,062 note an individual, a convertible promissory note $135,198, as well as
$71,704 of capital lease obligations. As of March 31, 2000, we had an
accumulated deficit of $16,186,209, and we were in default under a significant
portion of our debt obligations. Additionally, we were past due with several of
our accounts payable vendors which could affect our ability to procure inventory
and services for our operations. We need to obtain additional financing to fund
payment of past due and current debt obligations and to provide working capital
for operations.
With respect to our material commitments, we have entered into operating
leases for our facilities and equipment and have entered into employment
agreements with certain officers and key employees. We operate our facilities
and equipment under non-cancellable operating leases with future minimum rental
payments of $104,030, $119,836 and $132,886 for the years ending December 31,
2000, 2001 and 2002, respectively. The future minimum lease payments on
capitalized leases are calculated to be $35,728, $35,728 and $27,776 for the
years ending December 31, 2000, 2001 and 2002, respectively. Under our current
agreements with our officers and key employees, we will pay base salaries of
$964,400, $995,625 and $1,089,300 for the years ending December 31, 2000, 2001
and 2002, respectively.
We believe that our current cash on hand, after receiving approximately
$869,250 of net proceeds from the sale of units consisting of Series C
convertible preferred stock, convertible promissory notes and warrants to
purchase common stock, the $500,000 loan dated February 15, 2000 from Ash
Capital, the $1.5 million bridge loan dated April 13, 2000 from a group of
investors, together with the net proceeds from this offering and the funds from
our long-term equipment financing arrangement will be sufficient to meet our
capital expenditures and working capital requirements, including those from our
planned expansion, for at least the next twelve months. However, we may need to
raise additional funds to support more rapid expansion, respond to competitive
pressures, invest in our new technology offerings and other product offerings or
respond to unanticipated requirements. We cannot assure
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you that additional funding will be available to us in amounts or on terms
acceptable to us. If sufficient funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of
additional product development opportunities, develop or enhance our products or
services, or otherwise respond to competitive pressures would be significantly
limited.
PRIOR PRIVATE PLACEMENTS AND FINANCINGS
Since our incorporation, we have funded our operations primarily through
loans and through sales of our common and preferred stock.
From July 1996 through March 1997, we raised gross proceeds of $1,470,000
from a private placement of promissory notes secured by our assets. Each $20,000
promissory note had a term of one year and was accompanied by a warrant to
purchase 3,300 shares of common stock at $2.67 per share exercisable for the
lesser of five years or three years from the close of this offering. We issued
warrants to purchase a total of 242,550 shares of common stock to investors and
warrants to purchase 86,250 shares of common stock to our placement agent. The
promissory notes were all in default as of January 1998. In order to avoid
foreclosure on our assets, we issued to the holders of these promissory notes
warrants to purchase an aggregate of 61,629 shares of common stock at $2.67 per
share and an aggregate of 13,781 shares of common stock. Subsequently, in 1998,
holders of promissory notes in the aggregate original principal amount of
$1,040,000 converted their promissory notes into 208,000 shares of Series A
convertible preferred stock and, in 1999, holders of promissory notes in the
aggregate original principal amount of $300,000 converted their promissory notes
and accrued interest into 119,374 shares of Series B convertible preferred
stock. We issued 13,125 shares of common stock to the placement agent for
assisting in the conversion of promissory notes into Series A convertible
preferred stock. As of March 31, 2000, the outstanding promissory notes
consisted of $130,000 in principal and $38,959 of accrued interest and were
accruing, collectively, warrants to purchase 644 shares of common stock per
month until paid in full. Although all of the outstanding promissory notes are
in default, we intend to pay off these promissory notes from the proceeds of
this offering.
From April 1997 through December 1997, we realized gross proceeds of
$1,986,000 from a private placement of units where each $10,000 unit consisted
of 938 shares of common stock and a 15% secured promissory note in the principal
amount of $5,000. We issued our placement agent 24,018 shares of common stock
and our merchant banker 139,846 shares of common stock in exchange for services
related to this private placement. In September 1998, holders of promissory
notes in the aggregate original principal amount of $115,000 converted their
promissory notes and accrued interest into 11,665 shares of common stock. Then,
in May 1999, holders of promissory notes in the aggregate original principal
amount of $425,051 converted their promissory notes and accrued interest into
173,976 shares of Series B convertible preferred stock. As of March 31, 2000,
outstanding promissory notes consisted of $431,750 in principal and $159,480 of
accrued interest. Although all of the outstanding promissory notes are in
default, we intend to pay off these promissory notes from the proceeds of this
offering.
In May 1997, we received a loan in the original principal amount of
$100,000 from an individual bearing interest at the rate of 15% per annum with a
one year term. We issued 7,125 shares of common stock in connection with this
note. As of March 31, 2000, our obligation was $130,417 including accrued
interest. We intend to pay off this promissory note from the proceeds of this
offering.
From January 1998 through March 1998, we received gross proceeds of
$760,000 from the sale of Series A convertible preferred stock. In addition,
$1,040,000 of outstanding promissory notes were converted into 208,000 shares of
our Series A convertible preferred stock. We issued warrants to purchase 6,840
shares of common stock exercisable at $16.00 per share, and 13,125 shares of
common stock valued at $10.67 per share, to our placement agent. Pursuant to the
terms of our Series A convertible preferred stock, dividends of 8% per annum
began to accrue on November 14, 1998. As of March 31, 2000, holders of Series A
convertible preferred stock were owed dividends of $198,444, collectively. We
intend to pay such dividends from the proceeds of this offering.
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From January 1998 through March 1998, we realized gross proceeds of
$379,000 from a private placement of our common stock at $10.67 per share. We
issued 35,531 shares of common stock to investors and warrants to purchase 4,264
shares of common stock at $12.80 per share to our placement agent.
In April 1998, we issued a $100,000 short-term promissory note to an
investor which was subsequently converted into 9,375 shares of common stock at a
price of $10.67 per share. In addition, this investor was granted an additional
1,500 shares of common stock as an inducement to convert the promissory note,
which was valued at $10.67 per share and recorded as additional interest expense
in 1998.
From May 1998 through August 1998, we received gross proceeds of $561,520
from a private placement of 60-day promissory notes convertible into shares of
common stock at maturity at $10.67 per share. These promissory notes and accrued
interest were converted into 54,296 shares of common stock. We issued 7,875
shares of common stock as a finder's fee.
On July 19, 1998, we received a loan of $1,500,000 from RSG Investments.
Although we were obligated to repay the funds by January 30, 1999, we defaulted
and remained in default until we entered into the Equipment Transfer Agreement
with RSG Investments on September 28, 1999. After the repayment of a portion of
the obligation and the conversion of a portion of the obligation into shares of
Series B convertible preferred stock, we remain obligated to RSG Investments in
the principal amount of $750,000. As of March 31, 2000, we owed RSG Investments
$750,000 in principal plus accrued interest which we intend to payoff from the
proceeds of this offering.
From February 1999 through May 1999, we received gross proceeds of $350,000
from the private placement of 90-day promissory notes. These promissory notes
have an interest rate of 15% per annum and accrue common stock at a rate of 38
shares every 30 days for every $1,000 of principal outstanding. Subsequently,
promissory notes in the aggregate original principal amount of $134,885 have
been repaid and promissory notes in the aggregate original principal amount of
$180,000 plus interest have been converted into 81,909 shares of Series B
convertible preferred stock. As of March 31, 2000, we have issued 49,401 shares
of common stock as interest and have $35,115 in outstanding principal and $7,947
of accrued interest. The promissory notes are in default. We intend to pay off
these promissory notes with the proceeds realized from this offering.
From March 1999 through October 1999, we conducted a private placement of
our Series B convertible preferred stock at $3.00 per share. Through this
private placement, we issued 1,355,047 shares of Series B convertible preferred
stock in exchange for cash subscriptions of $4,065,133 and 726,633 shares of
Series B convertible preferred stock in exchange for outstanding promissory
notes, unpaid salaries to officers and $500,000 due to RSG Investments.
On February 15, 2000, we received a $500,000 loan from Ash Capital. Dr.
Alan C. Ashton is a director designee of eRoomSystem Technologies and owns 100%
of Ash Capital. The Ash Capital loan is evidenced by a promissory note bearing
simple interest at the rate of 10% per annum, payable on May 31, 2000, and
secured by our assets. Ash Capital was issued a warrant to purchase 18,750
shares of common stock exercisable at $4.80 per share through the second
anniversary date of the close of this offering. The Ash Capital loan will be
repaid partially from the sale of selected Refreshment Centers and partially
from the net proceeds of this offering.
From March 2000 through April 12, 2000, we conducted a private placement of
$100,000 units consisting of a 7% convertible promissory note in the original
principal amount of $25,000, 23,077 shares of Series C convertible preferred
stock and a warrant to purchase 5,000 shares of common stock at an exercise
price of $6.60 per share. Through this private placement, we raised gross
proceeds of $950,000, issued promissory notes in the original principal amount
of $237,500, issued 219,227 shares of Series C convertible preferred stock and
issued warrants to purchase 47,500 shares of common stock.
On April 13, 2000, we received the bridge loan in the principal amount of
$1,500,000. The bridge loan is evidenced by a promissory note, or the Bridge
Note, and bears interest at the rate of nine percent per annum. The bridge loan
matures on the earlier of the closing of this offering or October 12, 2000. In
addition, we issued 200,000 shares of our common stock as part of the bridge
loan transaction.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," or SFAS 133. SFAS 133 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including derivative instruments embedded in other
contracts, or collectively referred to as derivatives, and for hedging
activities. This statement is effective for financial statements issued for all
fiscal quarters of fiscal years beginning after June 15, 2000. We do not expect
this statement to have a material impact on our results of operations, financial
position or liquidity.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our products require a limited amount of assembly at our facility in the
United States. We purchase refrigerators from suppliers in Mexico, Italy and
China on a purchase order basis in U.S. Dollars. All other components for our
products are purchased from suppliers based in the United States. Our products
are primarily marketed in the United States, the Bahamas and Brazil, and we
intend to further expand our marketing to the international lodging market and
to other industries domestically and internationally. As a result, our financial
results could be affected by weak economic conditions in foreign markets.
Because all of our revenues will be denominated in U.S. Dollars, a strengthening
of the dollar could make our products less competitive in foreign markets.
As we expand operations internationally, we will continue to evaluate our
foreign currency exposures and risks and develop appropriate hedging or other
strategies to manage those risks. We have not revised our current business
practices to conform to Europe's conversion to the Euro.
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BUSINESS
OVERVIEW
eRoomSystem Technologies has developed and introduced to the lodging
industry an intelligent, in-room computerized platform and communications
network, or the eRoomSystem. The eRoomSystem is a computerized platform and
processor-based system designed to collect and control data that supports our
Refreshment Centers, eRoomSafes and other applications. These other applications
include in-room management capabilities, information management services, direct
credit card billing and network access solutions.
Our eRoomSystem delivers in-room solutions that reduce operating costs,
enhance hotel guest satisfaction and provide higher operating profits to our
customers. The solutions offered by our eRoomSystem and related products have
allowed us to establish relationships with premier hotel chains.
We have installed more than 11,500 Refreshment Centers and 4,000
eRoomSafes. These include installations in many of the Marriott International
flagship properties, such as the New York Marriott Marquis, the J.W. Marriott in
Washington D.C., the Marriott Camelback Inn and others. We have an exclusive
contract with the purchasing subsidiary of Promus Hotel Corporation, operator of
Doubletree Hotels, Embassy Suites and Hampton Inn, which was recently purchased
by Hilton Hotels Corporation. We are negotiating with Bass Hotels, operator of
Holiday Inn, Crowne Plaza and the Hotel Inter-Continental, and Carlson
Hospitality Worldwide, operator of Radisson Hotels Worldwide, Regent
International Hotels and Country Inn and Suites, to become their exclusive or
preferred vendor. We have also installed our products in the Hilton, Best
Western, Ramada and other established hotel chains. We believe that these
relationships provide us with the opportunity to install our eRoomSystem
worldwide, while our enabling technologies will provide for a natural expansion
of our products and services into the healthcare, time-share and cruise line
industries.
Our business model focuses on our revenue sharing program that allows us to
partner with our customers with respect to our products. Through our revenue
sharing program, we install our products at little or no upfront cost to our
customers and share in the recurring revenues generated from sales of goods and
services related to our products.
LODGING MARKET
According to the 1999 HORWATH WORLDWIDE HOTEL INDUSTRY STUDY, the worldwide
hotel marketplace consists of approximately 11.7 million hotel rooms. The
regions below contain the following number of hotel rooms:
<TABLE>
<CAPTION>
REGION HOTEL ROOMS
------------------------------------- ------------------------
<S> <C>
Europe 4.7 million
United States 3.5 million
Central and South America 1.5 million
Asia 1.5 million
Other regions 0.5 million
------------------------
TOTAL 11.7 MILLION
========================
</TABLE>
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Of these 11.7 million hotel rooms, approximately three million hotel rooms
are owned, managed or franchised by the ten largest hotel chains, as follows:
<TABLE>
<CAPTION>
ROOMS UNITED ROOMS
HOTEL CHAIN TOTAL ROOMS STATES INTER-NATIONAL REPRESENTATIVE BRANDS
------------------- ---------------- -------------- -------------- -----------------------------------------
<S> <C> <C> <C> <C>
Cendant 529,000 482,000 47,000 Ramada, Days Inn and Howard Johnson
Bass Hotels 461,000 341,000 120,000 Holiday Inn, Crowne Plaza and the Hotel
Inter-Continental
Marriott International 328,000 258,000 70,000 Ritz-Carlton, Marriott, Renaissance and
Residence Inn
Accor 326,000 87,000 239,000 Sofitel, Novatel and Red Roof Inns
Choice Hotels 305,000 252,000 53,000 Comfort Inns & Suites, Clarion and
Econolodge
Best Western 302,000 187,000 115,000 Best Western
International
Hilton Hotels 277,000 270,000 7,000 Hilton, Doubletree Hotels, Embassy
Corporation Suites and Hampton Inn
Starwood Hotels 225,000 146,000 79,000 Sheraton, Westin and St. Regis
Carlson Hospitality 106,000 66,000 40,000 Radisson Hotels Worldwide, Regent
Worldwide International Hotels and Country Inns
and Suites
Hyatt Hotels 80,000 55,000 25,000 Hyatt and Hyatt Regency
---------------- -------------- ------------
TOTAL 2,939,000 2,144,000 795,000
================ ============== ============
</TABLE>
SOURCES: 1999 DIRECTORY OF HOTEL & MOTEL COMPANIES; HOTELS MAGAZINE - CORPORATE
300 RANKING, JULY 1999; TRAVEL RESEARCH INTERNATIONAL LIMITED; LODGING
HOSPITALITY MAGAZINE - THE BRANDS REPORT, AUGUST 1999.
Of the hotel chains listed above, we have installed more than 10,000
Refreshment Centers and 3,500 eRoomSafes in hotels operated by Marriott
International, Best Western International, Cendant, Bass Hotels and Hilton
Hotels Corporation.
Many hotel properties are rated through either Automobile Association of
America's diamond rating or Mobil's star rating. In order to obtain a four- or
five-diamond rating from Automobile Association of America, the hotel properties
are required to have minibars in all of their hotel rooms. Under Mobil's
star-rating, the presence of minibars in a property's hotel rooms provides
points that can be used toward a four- or five-star rating. Therefore, we
believe that we can market our products to the lodging industry as an in-room
amenity to enhance a hotel's ability to receive a four- or five-diamond rating
or a four- or five-star rating.
OUR PRODUCTS AND SERVICES
eROOMSYSTEM
Since our inception, it has been our objective to innovate the in-room
amenities offered by the lodging industry. Our proprietary technologies create
an intelligent, in-room computerized platform and communications network that
comprise our eRoomSystem. At the core of our eRoomSystem is our proprietary
hardware and software that operate as a multi-tasking imbedded operating system.
Our hardware and software can operate multiple devices and provide an
interactive environment. The interactive environment provided through our
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eRoomSystem allows the hotel guest to input and receive information. Interactive
features for the hotel guest include locking and unlocking our products,
receiving pricing information from the liquid crystal display as well as other
functions.
The eRoomSystem provides the communication link between the hotel guest,
our products, the eRoomSystem file server, and the file server located at our
headquarters, or the eRoomSystem master file server. Our software is remotely
upgradable from our facilities. We can also remotely adjust prices, change
messages on the liquid crystal display and change the input touchpad layout.
From our facilities, we can lock our products in the event a participating hotel
fails to pay any fees or otherwise violates the terms of its agreement, as well
as determine whether our products are active and working properly.
The eRoomSystem consists of a microprocessor, memory, input/output ports,
communications transceiver, liquid crystal display, touchpad, power supply and
our proprietary software. The proprietary architecture of our circuit boards has
been designed to minimize the need for hardware upgrades. The eRoomSystem
includes an embedded system processor that handles simple instructions and
routes all billing functions and processor-intensive instructions to the
eRoomSystem file server.
The eRoomSystem provides a platform that collects information relating to
the usage of our products. The eRoomSystem is capable of supporting other
functions such as the management of in-room energy, including heating, air
conditioning, lighting and television and the establishment of a
trouble-shooting system to manage in-room repairs and maintenance. Another
extension of the eRoomSystem is a direct credit card billing process for the
healthcare and time-share industries.
eROOMSERV REFRESHMENT CENTERS
Historically, our primary source of revenue has been from the sale or
revenue sharing of our Refreshment Centers. We currently have orders on-hand for
approximately 6,800 Refreshment Centers, 4,400 of which include eRoomSafes.
Sales orders account for approximately 2,100 Refreshment Centers and
approximately 900 eRoomSafes, which will generate approximately $2.1 million of
product sales. Products to be placed under revenue sharing agreements include
approximately 4,700 Refreshment Centers, 3,500 of which include eRoomSafes.
Refreshment Centers are modular in design and consist of our eRoomSystem, a
small compression or thermoelectric refrigeration unit and our unique
multi-vending rack. Our multi-vending rack displays up to 33 different beverages
and/or snacks and maintains a full appearance through a gravity-based design.
Upon removal of a product from the Refreshment Center, the gravity-based design
uses the weight of the remaining products to cause such products to roll or
slide forward toward the front of the multi-vending rack. The repair or
replacement of any component of our Refreshment Center is relatively simple and
is provided at no additional charge to the property. The Refreshment Center
communicates through the eRoomSystem, which uses the hotel's existing telephone
lines, cable television lines or electrical power outlets.
Our Refreshment Centers operate as follows:
- A hotel guest selects a beverage or snack from our Refreshment Center;
- The purchase is immediately confirmed on the liquid crystal display
and acknowledged by an audible beep;
- The transaction information, such as product type, price and time of
purchase, is simultaneously transferred to the eRoomSystem file
server;
- The eRoomSystem file server communicates on a real-time basis with the
hotel's property management system and periodically with our
eRoomSystem master file server; and
- The hotel's property management system posts the purchase to the hotel
guest's room account.
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The sales data from the eRoomSystem is transmitted to the eRoomSystem file
server from which the hotel can access periodic sales activities, inventory
levels for restocking purposes and demographic data.
eROOMSAFE
Our eRoomSafes are electronic in-room safes offered in conjunction with our
eRoomSystem. The eRoomSafes include an encrypted combination that can be changed
by the hotel guest. The eRoomSafes have storage space large enough for laptop
computers, video cameras and briefcases. The eRoomSafe utilizes the eRoomSystem
to interface with the eRoomSystem file server which, in turn, communicates with
the hotel's property management system.
A common problem with in-room safes occurs at checkout when a guest may
leave the safe locked or forget to remove his or her valuables. With our
competitors' room safes, the locked safe would typically go unnoticed until a
subsequent hotel guest attempts to use the safe. Through the eRoomSystem, our
eRoomSafe automatically notifies the hotel at checkout that the safe door is
locked, providing the guest with an opportunity to remove any valuables before
leaving the hotel.
THE FOLLOWING DIAGRAM REPRESENTS THE STRUCTURE AND COMMUNICATIONS
NETWORK OF OUR eROOMSYSTEM, THE eROOMSYSTEM FILE SERVER, THE HOTEL
PROPERTY MANAGEMENT SYSTEM, AND THE eROOMSYSTEM MASTER FILE SERVER:
[GRAPHIC]
eROOMDATA MANAGEMENT
One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
eleven million room-nights of data. The eRoomSystem file server collects
information regarding the usage of our Refreshment Centers on a real-time basis.
We use this information to help our customers increase their operational
efficiencies. The information we obtain is unique because we categorize the
information according to specific consumer buying patterns and demographics.
The information we collect has value in several key areas. First, we
currently offer our customers, as part of our service and maintenance agreement,
specific information about their guests' buying patterns and provide
non-confidential information about other hotels in similar geographic regions.
Second, as we continue to increase our installed room base, we believe that the
information we collect will have value to the suppliers of goods sold in our
Refreshment Centers, such as Coca-Cola, PepsiCo, Anheuser-Busch, Miller Brewing,
Frito-Lay, Mars and others. Third, we are developing information services to
categorize purchases in response to specific in-room advertising programs by
such suppliers.
Our lodging customers benefit in various ways from the information we
provide. The hotels are responsible for restocking the goods sold from our
Refreshment Centers. The real-time sales data generated by our
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Refreshment Centers helps the hotel to maximize personnel efficiencies. The
transfer of sales data to the hotel prevents guest pilferage and minimizes
disputes over refreshment center usage, both of which are prevalent in the
lodging industry. Finally, the ability to track product sales performance allows
the hotel to stock the Refreshment Centers with more popular items, which
generally leads to increased sales of product from the Refreshment Centers. Our
system can provide reports on daily restocking requirements, product sales
statistics showing daily, monthly and annual statistics, overnight audits,
inventory control and a variety of customized reports.
The chart below is an example of the type of information we can collect
from a property where our products are installed:
[GRAPHIC]
As indicated above, a supplier of goods will be able to determine its
market share by property and geographic region. We are developing an
Internet-based system where suppliers will be able to track product movement,
market share and other information by country, region, state, city or property
type.
We intend to develop strategic relationships with companies in the
information services industry in order to maximize our proprietary information.
S. Leslie Flegel will join our board upon the closing of this offering to assist
us in packaging and marketing our proprietary information. Mr. Flegel is the
chief executive officer and Chairman of the Board of The Source Information
Management Company, a leading provider of information and management services in
the United States and Canada. In addition, we will consider utilizing one or
more other companies to assist us in the roll-out of our information services
products.
FUTURE PRODUCTS AND SERVICES
Our research and development and marketing departments are analyzing
additional value added products and services to be delivered to our customers
using the platform of our eRoomSystem. We believe that such additional products
and services can be bundled with our eRoomSystem or separately marketed to
lodging industry customers to provide additional revenue sources for us.
Although the development and delivery schedules vary for each new product and
service, we believe that each of the following will be ready for marketing
within the next twelve months:
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eROOMINTERNET CONNECTIVITY. We intend to offer a high-speed wireless
communications network that is designed to allow guests the option of using
their laptop computers to roam throughout a property while connected to the
property's network for Internet or intranet use. The high-speed wireless
communications network will be able to operate at 11 mega bits per second, or
mbps.
We have signed a letter of intent with a wireless network provider for the
exclusive use of its product in the lodging, healthcare, time-share and cruise
line industries. This network consists of a master antenna with a range of up to
150 feet in any direction. In larger properties, these master antennas can be
linked together to create a wireless communications network similar to a
cellular telephone network on a smaller scale. To obtain wireless network
access, guests can rent a PCMCIA card for their laptop computers from the
hotel's front desk. PCMCIA cards provide wireless connectivity through a
built-in transceiver and are compatible with PC and Macintosh computers.
We also intend to increase the speed of our existing communications network
to 10 mbps. With a high-speed network in place, we could offer our customers a
low-cost in-room networked computer configured with only essential equipment and
without CD-ROM drives, diskette drives or expansion slots, or the thin client
platform. Each computer in the thin client platform will consist of a monitor,
keyboard and an interpreter which will allow for access to the Internet or an
intranet. In addition, the high-speed network could be used as an Ethernet port
for laptop users to access the Internet or an intranet.
eROOMENERGY MANAGEMENT. We are developing a technology by which our
eRoomSystem will detect in-room movement through heat and/or motion sensors. Our
eRoomSystem will control other devices in the room through an infrared
communications portal. This technology is being developed for the lodging
industry as a means of offering an energy management system. When a room is
occupied, our eRoomSystem will give the guest complete control of the heating
and air conditioning, lighting, television and other facilities in the room.
When the room is unoccupied, the eRoomSystem will control each of these systems
and adjust each according to the most energy efficient settings. When a guest
opens the door to re-enter the room, our eRoomSystem will adjust all devices to
their original settings. By adjusting the heating and air conditioning either up
or down, typically 5 to 10 degrees, depending on the time of year, and turning
off the television and lights when a room is unoccupied, a hotel or other
facility can realize energy cost savings.
eROOMMAINTENANCE. Through the eRoomSystem, we also intend to offer remote
engineering and maintenance services. The eRoomSystem links each room to other
areas of the property. By connecting each room to the front desk and to the
engineering departments, we will create a management tool and communication
link. When an in-room maintenance problem is discovered by engineering or
housekeeping, the hotel employee can enter a code on the touchpad of our
eRoomSystem, which will transmit the information to engineering and inform the
front desk of a problem. If the problem is of a material nature, the front desk
can hold the room until the repairs have been made. As soon as the problem is
resolved, engineering or housekeeping will enter a code that notifies the front
desk that the room has been repaired and is available for a guest.
eROOMHOUSEKEEPING. We intend to design our eRoomSystem to dispatch
housekeeping in the most efficient manner while prioritizing the rooms that need
to be cleaned. eRoomHousekeeping will permit housekeepers to enter a room and
input their personal codes on the eRoomSystem touchpad. eRoomHousekeeping then
proceeds to time how long it takes housekeeping to prepare the room. When
completed, housekeeping inputs their codes again. The system then informs them
which room needs to be cleaned next. If occupancy is high, eRoomHousekeeping can
direct housekeeping personnel to an unoccupied room that is scheduled for
check-out. If occupancy is low and additional clean rooms are currently
available, eRoomHousekeeping can direct housekeepers to rooms that are
temporarily unoccupied by guests who have elected to stay another night. This
process optimizes housekeeping operations, minimizes guest disturbances and in
turn saves both time and money.
eROOMMANAGEMENT. Our eRoomSystem has the capability to support standard
credit card and smart card readers for direct billing to a customer's credit
card, as well as other point of sale and automated teller-type functions. When
we enter the healthcare and time-share industries, we will offer a direct credit
card billing process. By placing a credit card reader adjacent to a hospital bed
or in a time-share room, we can offer a billing solution previously unavailable.
This billing process will allow healthcare and time-share properties to offer
services and products similar to those found in hotel rooms, such as Refreshment
Centers, eRoomSafes, on-demand movies,
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direct dial long distance, Internet access and video games. We hold three
patents for a credit card point of sale terminal technology that supplies
billing solutions for these services.
SALES AND MARKETING
Historically, we have derived our revenues from the lodging industry. To
date, we have installed more than 11,500 Refreshment Centers and 4,000
eRoomSafes. We have established relationships with Marriott International,
Promus Hotel Corporation and Carlson Worldwide Hospitality and are negotiating
to become the exclusive vendor for Bass Hotels. In 1999, the J.W. Marriott in
Washington D.C. and the Doubletree Denver accounted for 26.7% and 16.0% of our
revenues, respectively; however, this concentration of revenues is not expected
to continue as the revenues were the result of one-time product sales. We are
currently shifting our business model to a revenue sharing program where we
generate revenues over the seven-year term of each revenue sharing agreement.
Our sales and marketing program consists of the following strategic
initiatives:
DEPLOYMENT OF AN EXPANDED REGIONAL SALES FORCE. Our initial strategy is to
hire four additional full-time employees as regional sales managers in the
United States. We currently employ two regional sales managers and retain four
independent sales representatives.
DEVELOPMENT OF AN IN-HOUSE SALES DEPARTMENT. We intend to develop an
in-house sales department whose primary objective will be to focus on the
limited-service hotel sector. Each inside sales person will have a specific
geographic responsibility and will work in concert with his or her regional
sales manager. This approach should allow eRoomSystem Technologies to increase
its market penetration by targeting mid-scale through luxury-class properties
throughout highly concentrated hotel markets within the United States.
CONTINUED MARKETING OF THE REVENUE SHARING PROGRAM. Emphasis on our revenue
sharing program is a critical part of our sales and marketing strategy.
Historically, the lodging industry has been resistant to purchase our products
because of the initial capital expenditure required. In addition to product
sales, we now offer our products through a revenue sharing program. Our revenue
sharing program allows us to become partners with our hotel clients by
installing our products at little or no upfront cost to the hotel and sharing
the revenues generated from goods sold from, and usage of, our products. Our
equipment financier will finance up to 150% of our costs of our products placed
under our revenue sharing program, subject to satisfaction of funding
requirements. Our products will secure the financing of the equipment financier,
which is payable over seven years.
CONTINUED IMPLEMENTATION OF THE CORPORATE ACCOUNT STRATEGY. Our corporate
account strategy involves the research, documentation and implementation of
plans associated with hotel chains, brands, management companies and real estate
investment trusts. Through this strategy, we propose to enter into a corporate
agreement that defines the relationship between eRoomSystem Technologies and the
respective corporate entity. Although the franchisees of these corporate hotel
chains may not be required to purchase our products or have them placed on a
revenue sharing basis, the corporate entity would recommend to its franchisees
the use of our products. We anticipate that by the end of 2001, the majority of
all sales and revenue sharing agreements will be generated indirectly as a
result of our corporate account strategy.
We have an exclusive vendor relationship with the purchasing subsidiary for
Promus Hotel Corporation. Promus has agreed to use its best efforts to cause our
eRoomSystem and related products to be installed in up to 71,000 of its
corporate-owned and franchised hotel rooms. We have also installed our
eRoomSystem in a number of flagship properties for Marriott International,
including the New York Marriott Marquis, the J.W. Marriott in Washington, D.C.,
the J.W. Marriott Lennox in Atlanta, the Marriott Camelback Inn and others. In
June 2000, we are scheduled to install our products into another Marriott
flagship property, the new J.W. Marriott in Miami. Through our relationship with
Marriott, we have been designated as Marriott's automated system of choice.
We were recently selected a recommended vendor for Carlson Worldwide
Hospitality, representing Radisson Hotels Worldwide, Regent International and
Country Inn and Suites. In addition, in the third quarter of 2000 we intend to
install, on a trial-basis, our eRoomSystem and related products in The Bellagio
-The Resort, the flagship hotel-casino of Mirage Resorts, Inc., which was just
acquired by MGM Grand, Inc. We are currently in
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negotiations with other major hotel-casinos for placement of our products. We
are targeting Las Vegas given it has the most hotel rooms of any city in the
world, with approximately 115,000 rooms.
CREATION AND ENHANCEMENT OF STRATEGIC MARKETING ALLIANCES. In conjunction
with our corporate account strategy, our objective is to enter into a number of
marketing alliance plans. A marketing alliance plan is a strategic relationship
with a third-party whereby a finder's fee is paid to the party for its efforts
in closing a sale or revenue sharing transaction.
IMPLEMENTATION OF A COMPREHENSIVE DOMESTIC AND INTERNATIONAL MARKETING
PLAN. We are implementing a comprehensive marketing strategy. We have entered
into an agreement with Hall Communications, Inc. of Las Vegas, Nevada to provide
us with brochures, corporate name and logo development, an interactive website,
signage, a trade show booth, corporate video and compact disk presentations,
media advertisements and other services relative to product design and corporate
communications.
We intend to implement our international marketing strategy utilizing the
core marketing structure that we are developing domestically, including website,
support materials, trade show materials, industry specific advertisements, to
support our global growth strategy. eRoomSystem Technologies has a signed letter
of intent with a Caribbean-based company authorizing it to serve as a limited
distributor of our products in the Caribbean. We are also negotiating with
potential distributors in Europe.
We intend to hire a marketing coordinator who will oversee our advertising
and promotional efforts by primarily utilizing hospitality trade publications.
Our objective is to establish an international presence through partnering with
various trade publications. In addition, we plan to attend trade shows and
pursue promotional activities through a strong public-relations program.
EXPANSION INTO THE HEALTHCARE, TIME-SHARE AND CRUISE LINE INDUSTRIES
We believe that the healthcare industry is a natural extension for our
eRoomSystem, our related products and our patented credit card technology. We
will be able to provide healthcare facilities with a comprehensive room
information and management system that will allow them to provide patients with
a wide array of in-room amenities not available in the past. These amenities
include Refreshment Centers, eRoomSafes, direct dial long distance, on-demand
movies, Internet access and other products and services commonly found in a
hotel room. We have completed a beta-test at the Miami Heart Institute, a
facility managed by Columbia HCA, and have an agreement with Miami Heart
Institute to install our eRoomSystem, Refreshment Centers and eRoomSafes and to
provide the billing process for direct dial long distance and on-demand movies
through third-party suppliers. Our installation at the Miami Heart Institute
should occur in the second half of 2000.
We also believe the same opportunities exist in the time-share industry
because most time-share facilities do not have a front desk or a property
management system to bill for in-room services. By offering a direct credit card
billing system a time-share facility can offer the same services available in
hotels.
We are also currently exploring the design and engineering parameters
necessary to offer our products and services to the cruise line industry.
SUPPLIERS AND ASSEMBLY
We purchase various electrical and mechanical components, injection molded
parts and basic cube refrigerators from various manufacturers and electronics
firms. For example, we purchase our basic cube refrigerators from Absocold,
Sanyo Corporation, Avanti or Indel-B. Although we propose to establish a turnkey
manufacturing source, we currently obtain our components on a purchase order
basis. Historically, our suppliers have been dependable and able to meet
delivery schedules on time. We believe that, in the event we cannot obtain our
components from our current suppliers, alternate suppliers can be located
without incurring significant costs or delays. We do not rely on any one
supplier, the loss of which would inhibit our ability to assemble our products
on a timely basis.
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Our eRoomSystems, Refreshment Centers and eRoomSafes require a limited
amount of assembly. This assembly involves electronic assembly, wiring and
testing. At our St. George, Utah facility, we are able to assemble up to 2,000
units monthly. Since our existing facility is not sufficient to meet our
projected growth, we will either have to establish a turnkey manufacturing
source, expand our assembly facility or hold orders for our products
unfulfilled. In the event that our current facility is insufficient to meet our
projected growth, we propose to establish one or more third party turnkey
manufacturing sources with contract manufacturers.
COMPETITION
eROOMSYSTEM. Although we are not aware of another company that provides
in-room services through the hotel room's in-room refrigerator, there are
several companies that provide in-room video entertainment and information
services, such as cable television, pay-per-view movies, the Internet, video
games and guest services. In addition, we may face competition from
communications companies, such as cable companies, telecommunications companies,
Internet and high-speed connectivity companies, and direct broadcast satellite
companies, who may be able to modify their existing infrastructure to provide
in-room entertainment and/or information services. Many of these companies have
longer operating histories, larger customer bases, greater brand recognition and
greater financial, research and development, manufacturing, marketing and
technical resources. Further, as technology is subject to rapid change, new
technological advancements in components used for in-room services could
adversely affect our growth strategy.
eROOMSERV REFRESHMENT CENTERS. We face competition from suppliers of
semi-automated minibars, such as Dometic, MiniBar America, Inc. and Bartech
Inc., and suppliers of honor bars, such as Dometic and MiniBar America, Inc.
Semi-automated minibars are minibars that permit sales to be automatically
posted to a hotel guest's room account. Honor bars are small refrigerators where
sales are manually posted to a hotel guest's room account by housekeeping
services. Our fully-automated Refreshment Centers differ from semi-automated
minibars and honors bars in that our Refreshment Centers permit automatic
posting to a hotel guest's room account, notify the hotel guest when a purchase
has been made on our flat panel display, provide the hotel with real-time
transaction information for stocking and product placement purposes and, with
the eRoomSystem, serve as a platform for additional in-room services.
Although Dometic possesses a significant share of the honor bar market,
Dometic is principally a refrigerator manufacturer. MiniBar America is
principally a manufacturer of honor bars. Bartech is a French-based company that
uses Indel-B refrigerators in its semi-automated minibar product. Although
Bartech has generated most of its sales from Europe, it has recently established
an office in the United States.
These companies may have stronger relationships in the lodging industry,
longer operating histories, larger customer bases, greater brand recognition and
greater financial, research and development, manufacturing, marketing and
technical resources. Although these competitors do not offer fully-automated
minibars, these competitors compete with us for the placement of units in hotel
rooms. Further, we compete with these companies on the basis of price, service,
technology and financing options.
eROOMSAFES. The in-room safe industry is a very competitive market with
competitors throughout the world. ElSafe Inc. is the market leader with almost
400,000 room safes installed worldwide with installations in over 45 countries.
CISA Worldwide is another competitor which maintains offices in the United
States, Asia, the Middle East, Africa and Latin America. The principal products
of ElSafe and CISA Worldwide are electronic safes, which allow the hotel guest
to enter a combination to lock and unlock the safe instead of a key. Although
these competitors offer stand-alone electronic safes, our fully electronic safes
work in conjunction with our eRoomSystem. We compete with these companies on the
basis of price, service, technology and financing options.
eROOMDATA MANAGEMENT. Many companies currently providing information
management services may have longer operating histories, larger customer bases
and greater financial resources. However, we believe that we are the only
company currently gathering and disseminating information to properties with
respect to the in-room use of Refreshment Centers.
WIRELESS COMMUNICATION NETWORK. There are an increasing number of
competitors in the wireless telecommunications industry in the United States and
throughout the world. Although implementation of advanced
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wireless communication networks is still in the early stages in the lodging and
guest-related industries, we believe that competition for these properties will
intensify as other businesses realize the profit potential of designing and
implementing wireless communication network services within such facilities.
Even though we intend to employ relatively new technologies, there may be a
continuing competitive threat from even newer technologies. We also expect that
the price we will charge for designing, implementing and maintaining such
wireless communication networks may decline over time as new competitors enter
the market.
INTELLECTUAL PROPERTY
We rely on a combination of trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers and business partners to protect our proprietary rights in our
products, services, know-how and information. We currently hold three patents,
Patent Nos. 4,857,714, 4,883,948 and 4,939,352, filed under the name "Credit
Card Storage System," all of which protect the use of our credit card
technology. These three patents expire on August 14, 2006, November 27, 2006 and
July 2, 2007, respectively. These patents have not been highly utilized in the
lodging industry, but we believe they are important to our future product
offerings in the healthcare and time-share industries. In addition, we applied
for trademarks and service marks for eRoomSystem, eRoomServ Refreshment Center,
eRoomSafe, eRoomManagement, eRoomEnergy Management, eRoomData Management,
eRoomInternet Connectivity, eRoomMaintenance and eRoomHousekeeping. We have also
registered our logo as presented on the cover of this prospectus and have
submitted two patent applications with respect to our Refreshment Centers.
Our proprietary software consists of three modules and provides the
operating system for our eRoomSystem. The first module is a multi-tasking
operating system that permits messages to be scrolled on the flat panel
display of our eRoomSystem and allows hotel guests to interface with our
products. The second module is a Windows-Registered Trademark- based program
that provides a communication link between our eRoomSystem, our eRoomSystem
hotel file server and the hotel's property management system. The third
module is a Windows(R) based program that collects data from our eRoomSystem
hotel file server and provides a variety of management and operational
reports to eRoomSystem Technologies and our customers.
We do not know if our patent application or any future patent application
will be issued with the full scope of claims we seek, if at all, or whether any
patents we receive will be challenged or invalidated. Our means of protecting
our proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology. We cannot be certain
that our services do not infringe on patents or other intellectual property
rights that may relate to our services. Like other technology-based businesses,
we face the risk that we will be unable to protect our intellectual property and
other proprietary rights, and the risk that we will be found to have infringed
on the proprietary rights of others.
RESEARCH AND DEVELOPMENT
We currently have two software developers and one hardware engineer on our
staff. Our research and development department focuses on upgrading our
proprietary software and hardware that make up our eRoomSystem. As we expand our
business, we will need to increase the size of our research and development
department in order to integrate additional services into our eRoomSystem and
modify our eRoomSystem as needed to serve other markets.
HISTORICAL SUMMARY
We were originally incorporated under the laws of the State of North
Carolina on March 17, 1993 as InnSyst! Corporation. On September 28, 1993,
InnSyst! merged with and into RoomSystems, Inc., a Virginia corporation,
incorporated on August 12, 1993, or RoomSystems Virginia, whereby RoomSystems
Virginia was the surviving entity. On April 29, 1996, RoomSystems Virginia
merged with and into RoomSystems, Inc., a Nevada corporation, or RoomSystems.
Through an agreement and plan of reorganization approved by a majority of our
stockholders dated December 31, 1999, RoomSystems became the wholly owned
subsidiary of RoomSystems International Corporation. Pursuant to this agreement
and plan of reorganization, all shares of RoomSystems common stock, including
all shares of common stock underlying outstanding options and warrants, Series A
convertible preferred stock and Series B convertible preferred stock were
exchanged for the identical number and in
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the same form of securities of RoomSystems International Corporation. On
February 1, 2000, we changed our name from RoomSystems International Corporation
to RoomSystems Technologies, Inc. Subsequently, on March 29, 2000, with the
approval of our stockholders, we changed our name to eRoomSystem Technologies,
Inc.
We have three wholly owned subsidiaries, RoomSystems, RSi BRE and
eRoomSystem SPE. RoomSystems is our service and maintenance subsidiary that
installs all of our products, provides electronic software upgrades to our
customers, provides customer service and maintenance for our products and trains
hotel personnel on the use and maintenance of our products. The outstanding
shares of RoomSystems common stock has been pledged to our equipment financier.
RSi BRE was formed as part of the Equipment Transfer Agreement we entered
into with RSG Investments. RSi BRE currently holds approximately 3,100
Refreshment Centers and approximately 1,800 eRoomSafes. RSG Investments was
granted the right to receive a maximum of $0.57 per Refreshment Center per day
of the revenue realized from the Refreshment Centers held by RSi BRE. We do not
have control over RSi BRE. The board of directors of RSi BRE consists of a
majority of outside directors. RSi BRE may not make cash distributions without
the unanimous approval of its board of directors. We will gain control over RSi
BRE when we satisfy our obligations to RSG Investments, including the $750,000
promissory note and their rights in the revenue stream from the Refreshment
Centers held by RSi BRE. The outstanding shares of RSi BRE common stock has been
pledged to RSG Investments.
eRoomSystem SPE was formed as part of our long-term financing with our
equipment financier. eRoomSystem SPE will own all the products funded by the
equipment financier under our revenue sharing program. The equipment financier
will take a senior security interest in all of the assets of eRoomSystem SPE.
Unlike RSi BRE, we will control eRoomSystem SPE and its financial results will
be consolidated with those of eRoomSystem Technologies and RoomSystems.
GOVERNMENT REGULATION
We are subject to laws and regulations applicable to businesses generally,
as well as to laws and regulations directly applicable to the lodging industry.
These laws and regulations relate to qualifying to do business in the various
states and in foreign nations in which we currently have, or propose to have,
our products.
Apart from laws and regulations applicable to us, some of our existing and
potential customers are subject to additional laws or regulations, such as laws
and regulations related to liquor and gaming, which may have an adverse effect
on our operations. Due to the licensing requirements relating to the sale of
alcohol, the inability of our revenue-sharing partners to obtain or maintain
their liquor licenses will result in the loss of revenues for our
revenue-sharing partners and us. In addition, due to the heightened hotel-casino
regulatory environment, and our intent to market to hotel-casinos, our
operations may be subject to review by a hotel-casino's compliance committee to
verify that its involvement with us would not jeopardize its gaming license. If
our history or operations present problems for a hotel-casino, we would either
have to expend resources to address or eliminate the concerns or forego the
business.
PROPERTY AND EMPLOYEES
We maintain an office at 3770 Howard Hughes Parkway, Suite 175, Las Vegas,
Nevada. We lease office space at the rate of $1,590 per month. The office lease
commenced on October 15, 1997 and expires on September 15, 2000. We also have
offices and a research and development and assembly facility located at 390
North 3050 East, St. George, Utah. This lease commenced on November 1, 1997 and
expires on October 31, 2002. The monthly lease rate is $9,000.
We currently employ thirty-four full-time and three part-time employees in
our St. George, Utah facility and two full-time employees in our Las Vegas
office. We anticipate the largest growth in employees will occur in the area of
field operations. None of our employees is subject to a collective bargaining
agreement.
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We currently have nine employees engaged in product assembly. Currently,
our in-house staff installs our products at our customers' properties. Our
in-house staff, which currently consists of six employees, also performs
physical maintenance of our products under our maintenance agreements.
Eventually, we will outsource a portion of the installation and maintenance of
our products.
LEGAL PROCEEDINGS
We are from time to time parties to various legal proceedings arising out
of our business. Apart from the following discussion, we believe that there are
no proceedings pending or threatened against us which, if determined adversely,
would have a material adverse effect on our business, financial condition,
results of operations or liquidity.
In December 1997, Royal W. Minson II, our former president and chief
operating officer, received 121,875 shares of our common stock, or the Minson
Shares, upon the exercise of options and executed demand promissory notes in the
aggregate original principal amount of $568,750 to pay for the Minson Shares. On
September 27, 1999, Mr. Minson filed for protection in the United States
Bankruptcy Court for the Northern District of California, Case No.
99-47533-TD-7, under Chapter 7 of the United States Bankruptcy Code. The
bankruptcy schedules list the Minson Shares as an asset and the demand
promissory notes as liabilities. On January 5, 2000, the Bankruptcy Court
entered a discharge order. We have filed a proof of claim for the demand
promissory notes executed by Mr. Minson, plus accrued interest on such notes. In
addition, our proof of claim sets forth offsets to Mr. Minson's asset claim of
$130,000 of unpaid salary owed to him by us. On May 26, 2000, we offered to
purchase the Minson Shares for $120,000 plus debt extinguishment of $723,667.29,
representing the value of the outstanding demand promissory notes and accrued
interest. Our offer is expressly contingent upon the approval of the bankruptcy
court and the closing of the transaction by June 30, 2000.
On March 2, 1999, Willow Creek Systems, Inc., a former supplier of circuit
boards, brought an action against us that is currently pending in Salt Lake
County Third District Court, State of Utah, Civil No. 99-0902417. In its
complaint, Willow Creek alleges breach of contract and seeks payment in the
amount of approximately $125,000 from us for materials delivered pursuant to
purchase orders. In our Answer to Willow Creek's Amended Complaint and our
Responses to Willow Creek's First Set of Interrogatories, Requests for
Admissions and Request for Production of Documents, we allege that the materials
delivered by Willow Creek were defective, lacked quality control and were below
acceptable standards in the industry. In addition, we allege that the costs of
repairing and replacing the defective materials, the costs during down time for
such repair and replacement and other related costs are in excess of $120,000,
which we believe should be offset against Willow Creek's claim for damages.
Although we believe that our documentation on this matter is sufficient to
support our claims, we are unable at this time to predict the exact outcome of
the matter. The case is in the final stages of discovery. Willow Creek is no
longer an operating entity.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our current directors, executive officers and director designees are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Steven L. Sunyich 46 President, Chief Executive Officer and Chairman of the Board
Derek K. Ellis 31 Chief Financial Officer and Treasurer
Stephen M. Nelson 51 Chief Operating Officer
Ronald C. Johnson 50 Executive Vice President of Sales and Marketing
Gregory L. Hrncir 33 General Counsel and Secretary
Lawrence S. Schroeder 51 Director
Dr. Alan C. Ashton 58 Director Designee
S. Leslie Flegel 61 Director Designee
John J. Prehn 39 Director Designee
</TABLE>
Upon the completion of this offering, our board will consist of five
members, each of whom will serve in that capacity for a one-year term or until a
successor has been elected and qualified, subject to earlier resignation,
removal or death. The number of directors comprising our board may be increased
or decreased by resolution adopted by the affirmative vote of a majority of the
board. Messrs. Ashton, Flegel and Prehn have agreed to join the board at the
first meeting of the board following completion of this offering. We presently
expect that Messrs. Ashton and Flegel will be appointed to the compensation and
audit committees upon joining the board.
Each of the executive officers is a full-time employee of eRoomSystem
Technologies. Non-employee directors of eRoomSystem Technologies devote such
time to the affairs of eRoomSystem Technologies as is necessary and appropriate.
Set forth below are descriptions of the backgrounds of the executive officers,
directors, director designees and key employees of eRoom:
STEVEN L. SUNYICH has served as our president, chief executive officer and
chairman since August 1999. Mr. Sunyich has also served as our president, chief
executive officer and chairman of RoomSystems and its predecessors since 1993,
as president and chief executive officer of RSi BRE since its inception in
September 1999, and as our president, chief executive officer and chairman of
eRoomSystem SPE since its inception in May 2000. Since 1983, Mr. Sunyich has
been involved with the credit card and lodging industries as a developer,
inventor and engineer of high-tech products. Mr. Sunyich developed and patented
our automated credit card draft capture technology.
DEREK K. ELLIS has served as our chief financial officer and treasurer
since August 1999. Mr. Ellis has also served as chief financial officer and
treasurer of RoomSystems since 1997, as chief financial officer, treasurer and
as a director of RSi BRE since its inception in September 1999, and chief
financial officer, treasurer and as a director of eRoomSystem SPE since its
inception in May 2000. From 1995 to 1997, Mr. Ellis served as the Director of
Finance for IVY International Communications, Inc., Provo, Utah, formerly a
division of Novell/Word Perfect. Mr. Ellis received his Bachelor of Science in
Finance from the University of Utah.
STEPHEN M. NELSON has served as chief operating officer of eRoomSystem
Technologies and RoomSystems since March 2000. Prior to joining us, Mr. Nelson
spent nine years with TELS Corporation where he served as its president and
chief operating officer from 1996 to 1999, its executive vice president from
1994 to 1996, and its chief financial officer from 1990 to 1994. Mr. Nelson also
served as a member of its board of directors from 1991 to 2000. He received his
Bachelor of Science in Accounting from the University of Utah in 1974. Mr.
Nelson is a certified public accountant and a member of the AICPA, UACPA,
Institute of Management Accountants and American Management Association.
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RONALD C. JOHNSON has served as our executive vice president of sales and
marketing since August 1999 and as executive vice president of sales and
marketing of RoomSystems since 1998. From 1997 to 1998, Mr. Johnson served as
vice president of Choose the Right Stuff, a Salt Lake City, Utah marketing
company. From 1996 to 1997, Mr. Johnson served as National Sales Manager for
Franklin Quest Institute of Fitness, St. George, Utah. From 1989 to 1996, Mr.
Johnson served as an account executive for Franklin Quest, currently known as
Franklin Covey, Salt Lake City, Utah. Mr. Johnson received his Bachelor of
Science in Biology from Texas Wesleyan College in 1972 and attended the MBA
program at the University of Utah.
GREGORY L. HRNCIR has served as our general counsel and secretary since
September 1999. Mr. Hrncir has also served as general counsel and secretary of
RoomSystems and RSi BRE since September 1999 and as general counsel and
secretary of eRoomSystem SPE since May 2000. In 1999, Mr. Hrncir served as
general counsel for PayStation America, Inc., an e-commerce company located in
Los Angeles, California. From 1994 to 1998, Mr. Hrncir served in private
practice in Los Angeles, California specializing in corporate and securities
matters, and represented us from 1996 to 1998. Mr. Hrncir received his Bachelor
of Science from Arizona State University and his Juris Doctor from Whittier
College School of Law. He is a member of the Arizona and California State bars.
LAWRENCE S. SCHROEDER has served as a director since August 1999. Mr.
Schroeder has also served as a director of RoomSystems since 1998. Since 1992,
Mr. Schroeder has been a private consultant to the hospitality, sports and other
related industries. Mr. Schroeder is also a Director of River Valley
Productions, Kansas City, Missouri, and a Director of Responsive Marketing &
Communications, Chicago, Illinois. Mr. Schroeder received his Bachelor of
Science in Business Administration from Huron College.
S. LESLIE FLEGEL has agreed to serve as a director of eRoomSystem
Technologies following completion of this offering. Mr. Flegel has been the
Chairman of the board of directors and chief executive officer of The Source
Information Management Company, St. Louis, Missouri, since its inception in
March 1995. For more than 14 years, Mr. Flegel was the principal owner and chief
executive officer of Display Information Systems Company, a predecessor of The
Source. Mr. Flegel received his Bachelor of Arts from the University of Missouri
at Columbia.
DR. ALAN C. ASHTON has agreed to serve as a director of eRoomSystem
Technologies following completion of this offering. Dr. Ashton is the co-founder
of WordPerfect Corporation, Orem, Utah. Dr. Ashton received a Bachelor's Degree
in Mathematics and a Ph.D. in Computer Science from the University of Utah. Dr.
Ashton is a former professor of Computer Science at the University of Utah and
Brigham Young University. Dr. Ashton has served on the board of directors of
Novell, Inc., Geneva Steel and Utah Valley State College.
JOHN J. PREHN has agreed to serve as a director of eRoomSystem Technologies
following completion of this offering. Since 1997, Mr. Prehn has served as
managing director of Amresco, Inc. Prior to 1997, Mr. Prehn co-founded and
managed Commercial Lending Corporation, the company he sold to Amresco, Inc.
From 1989 to 1996, Mr. Prehn co-founded Peteco, Inc., a company that purchased,
packaged and sold securitized assets. Mr. Prehn received his Bachelor of Science
in Business Administration from the University of California at Berkeley.
OTHER KEY EMPLOYEES
RONALD C. WARD has served as vice president of research and development of
RoomSystems and its predecessors since 1993. Mr. Ward has spent the last 35
years in analog and digital circuitry design. From 1991 to 1995, Mr. Ward served
as Senior Staff Engineer with Dynatec Video Group. Mr. Ward has developed over
40 products in the analog and digital industry and currently holds three
patents.
DOUGLAS SEASTRAND has served as vice president of software development of
RoomSystems since October 1999. Prior to joining us, Mr. Seastrand was an
Engineering Specialist with Bechtel Nevada, Las Vegas, Nevada. From 1997 to
1999, Mr. Seastrand served as lead technical engineer for EG&G/Special Projects,
Las Vegas, Nevada. From 1995 to 1997, Mr. Seastrand served as president of Prime
Services, Inc., Las Vegas, Nevada. Mr. Seastrand received his Bachelor of
Science in Computer Science from the University of Nevada at Las Vegas and is
currently a University Regent of the University and Community College System of
Nevada.
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SHAWN S. SUNYICH has served as vice president of field operations of
RoomSystems and its predecessors since 1993. Mr. Sunyich is experienced in the
design and implementation of our products and is responsible for the
installation and maintenance of our products at each property, as well as
support and data management. Mr. Sunyich received his Associates Degree in
Computer Science from Certified Careers Institute. Mr. Sunyich is the son of
Steven L. Sunyich.
STEVEN A. MOULTON has served as vice president of manufacturing of
RoomSystems and its predecessors since 1994. Previously, Mr. Moulton worked with
Rogers Corporation and ComTel, Inc. overseeing product development and
manufacturing. Mr. Moulton received a Bachelor of Arts from Weber State College
and a Master of Business Administration from Brigham Young University.
G. DOUGLAS SCOLLIN has served as vice president of corporate accounts of
RoomSystems since October 1999. Mr. Scollin is a founder and, from 1994 to 1999,
served as president of Lodgstix, Wichita, Kansas, a vendor of hotel property
management systems. Mr. Scollin received his Bachelor of Science in Business
Administration from the University of Florida.
FRANK L. HICKS, JR. has served as general manager of RoomSystems since
1996. Prior to 1996, Mr. Hicks spent 17 years with Evans & Sutherland as a
contracts negotiator and financial administrator. Mr. Hicks received a Bachelor
of Arts degree from the Ohio Christian College, a Masters in Business
Administration from Florida State Christian College and a Juris Doctor from the
Blackstone School of Law.
COMPOSITION OF OUR BOARD
Our Bylaws authorize not less than two and no more than nine directors.
Directors hold office for a term of one year. Executive officers are elected by
and serve at the discretion of our board. After this offering, we will maintain
at least two independent directors on our board at all times.
COMMITTEES OF OUR BOARD
The board has approved an audit committee and a compensation committee to
be formed upon the completion of this offering. The audit committee will have
the responsibility of recommending the firm that will serve as our independent
public accountants, reviewing the scope and results of the audit and services
provided by our independent public accountants and meeting with our financial
staff to review accounting procedures and policies. The compensation committee
will have the responsibility of reviewing our financial records to determine
overall compensation and benefits for executive officers and to establish and
administer the policies which govern employee salaries and benefit plans.
DIRECTOR COMPENSATION
Non-employee directors of eRoomSystem Technologies will receive an
attendance fee of $500 per meeting attended. Pursuant to the 2000 Stock Option
and Incentive Plan, or the 2000 Option Plan, to the extent not previously
granted under a separate plan or option, non-employee directors of eRoomSystem
Technologies will receive stock options to purchase 5,000 shares of common stock
following the completion of this offering. In addition, non-employee directors
will receive additional stock options to purchase 5,000 shares of common stock
at each annual meeting conducted after 2000. Dr. Ashton was issued his options
pursuant to a stock option agreement, Mr. Flegel was issued his options pursuant
to the 2000 Option Plan and Mr. Prehn will be issued his options pursuant to the
2000 Option Plan. Directors who are employees of eRoomSystem Technologies or our
subsidiaries do not receive compensation for their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the completion of this offering, compensation of executive
officers was established by Steven L. Sunyich, chief executive officer,
president and Chairman of the Board. Following this offering, compensation of
executive officers will be established by the board pursuant to recommendations
from the board's compensation committee. No member of our compensation committee
will serve as a member of a board of directors or
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compensation committee of any entity that has one or more executive officers
serving as a member of our board or compensation committee.
There are no family relationships among any of our directors, executive
officers or key employees other than between Steven L. Sunyich and Shawn S.
Sunyich, who are father and son.
STOCK OPTION PLAN
The 2000 Option Plan was adopted by the board on February 3, 2000, approved
by the stockholders on March 29, 2000 and amended and restated by the board on
June 6, 2000. The plan became effective on February 3, 2000. The plan provides
us with the vehicle to grant to employees, officers, directors and consultants
stock options and bonuses in the form of stock and options. Under the plan, we
can grant awards for the purchase of up to two million shares of common stock in
the aggregate, including "incentive stock options" within the meaning of Section
422 of the United States Internal Revenue Code of 1986 and non-qualified stock
options. To date, we have issued options to purchase 1,417,250 shares of common
stock under the 2000 Stock Option Plan. The compensation committee of our board
has authority to determine the persons to whom awards will be granted, the
nature of the awards, the number of shares to be covered by each grant, the
terms of the grant and with respect to options, whether the options granted are
intended to be incentive stock options, the duration and rate of exercise of
each option, the option price per share, the manner of exercise and the time,
manner and form of payment upon exercise of an option.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth summary information concerning the total
remuneration paid or accrued by eRoomSystem Technologies, to or on behalf of our
chief executive officer whose total salary, bonus and other compensation
exceeded $100,000 during the fiscal year ended December 31, 1999. In accordance
with the rules of the Securities and Exchange Commission, or the Commission, the
compensation described in this table does not include perquisites and other
personal benefits received by the executive officer named in the table below
which does not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for this executive officer.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ------- ------------ --------- ----------------
<S> <C> <C> <C> <C>
Steven L. Sunyich, 1999 $ 156,058 -- --
President, chief executive 1998 $ 73,308 -- $ 4,000
officer and chairman 1997 $ 28,517 -- $ 49,000
</TABLE>
The amounts paid to Mr. Sunyich other than salary were pursuant to a consulting
agreement. Pursuant to this consulting agreement, Mr. Sunyich received $49,000
in 1997 and $4,000 in 1998.
OPTION GRANTS TO EXECUTIVE OFFICERS DURING THE YEAR ENDED DECEMBER 31, 1999
AND SUBSEQUENT TO DECEMBER 31, 1999
We did not grant any options to our executive officers during the fiscal
year ended December 31, 1999. Subsequently, we granted to Mr. Sunyich options to
purchase 158,750 shares of common stock at $4.00 per share, 61,125 shares of
common stock at $8.80 and 116,800 shares of common stock at $9.60 per share. We
have also granted to our other executive officers an aggregate of options to
purchase 160,000 shares of common stock at $4.00, 25,000 shares of common stock
at $6.00, 95,875 shares of common stock at $8.80 and 99,202 shares of common
stock at $9.60 per share. The exercise price for all of the options may, in some
cases, be paid by delivery of other shares. The deemed fair value for the date
of grant has been adjusted solely for financial accounting purposes.
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<PAGE>
EMPLOYMENT AGREEMENTS
On June 6, 2000, we entered into an Amended and Restated Executive
Employment Agreement with Steven L. Sunyich that will expire on December 31,
2002 and is subject to annual review and/or adjustment. Under this employment
agreement, Mr. Sunyich is to serve as our president, chief executive officer and
chairman at an annual base salary of $155,000. Upon the successful completion of
our initial public offering, Mr. Sunyich would be entitled to an increase in
annual salary of $30,000. In the event the employment of Mr. Sunyich is
terminated for reasons other than for cause, permanent disability or death, Mr.
Sunyich would be entitled to cash compensation equal to his base salary for the
period remaining under his employment agreement, or one year, whichever is
greater. Pursuant to this employment agreement, Mr. Sunyich has agreed not to
disclose confidential information regarding our technology and business
operations, and further has agreed not to compete with us during the term of his
employment and for a period of one year thereafter.
INSURANCE
We maintain directors and officers liability insurance of $2,000,000 on
behalf of our officers and directors insuring them against liability that they
may incur in such capacities or arising out of such status. In addition, we have
purchased a key man insurance policy for Steven L. Sunyich in the amount of
$2,000,000.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Sections 78.7502 and 78.751 of the Nevada Revised Statutes provide for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. Article XII of our articles of incorporation provides for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by Sections 78.7502 and 78.751 of
the Nevada Revised Statutes.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our articles of incorporation, bylaws, Nevada law or
otherwise, we have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities, other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding, is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
In addition to the indemnification of officers and directors under the
Nevada Revised Statutes, we entered into indemnification agreements with Dr.
Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000.
Pursuant to these indemnification agreements, we agreed to hold harmless and
indemnify each of them against any and all expenses incurred by them as a result
of their positions as directors of eRoomSystem Technologies. In addition, we
agreed to advance expenses incurred by each of them upon receipt of a written
request for such advancement containing an unsecured undertaking by each of them
to repay such amounts to the extent that they are held to not be entitled to
indemnification from eRoomSystem Technologies. The advancement of expenses
specifically excludes amounts for judgments, penalties, fines and settlements.
Messrs. Ashton and Prehn each possess the right to indemnification if, in civil
proceedings, they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of eRoomSystem
Technologies, and, in criminal proceedings, they had no reasonable cause to
believe that his conduct was unlawful. In addition, eRoomSystem Technologies may
elect to not indemnify Messrs. Ashton and Prehn if either a majority of the
directors not involved in the relevant proceeding or independent legal counsel,
in a written opinion, determine that they have not met the relevant standards
for indemnification.
On September 28, 1999, we entered into an indemnification agreement with
Donnelly Prehn which indemnifies Mr. Prehn for actions which may be taken by him
as a director on behalf of RSi BRE. Pursuant to this indemnification agreement,
eRoomSystem Technologies and RSi BRE, jointly and severally, agreed to hold
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harmless and indemnify Mr. Prehn against any and all expenses incurred by him as
a result of his position as a director of RSi BRE. In addition, we agreed to
advance expenses incurred by Mr. Prehn upon receipt of a written request for
such advancement containing an unsecured undertaking by Mr. Prehn to repay such
amounts to the extent that Mr. Prehn is held not to be entitled to
indemnification from eRoomSystem Technologies. Mr. Prehn's rights to
indemnification are only available if damages have not already been paid
directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem
Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is
adjudged by a court of competent jurisdiction to have engaged in intentional
misconduct or a knowing violation of the law, if he received an improper
personal benefit, or if a court of competent jurisdiction renders a final
decision that such indemnification is unlawful.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director of officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS INVOLVING ASH CAPITAL
On August 17, 1999, eRoomSystem Technologies and Ash Capital entered into
an Agreement of Understanding with respect to the purchase by Ash Capital of
333,334 shares of Series B convertible preferred stock at a price of $3.00 per
share. This agreement provides Ash Capital with representation on our board and
options to purchase 70,313 shares of common stock at $4.80 per share and 56,250
shares of common stock at $8.80 per share. The Agreement of Understanding was
later amended by an agreement which provided additional obligations of
eRoomSystem Technologies with respect to the purchase of an aggregate of 683,336
shares of Series B convertible preferred stock as follows: Ash Capital - 333,334
shares; C&W/RSI Partners - 133,334 shares; SKM Investments, LLC - 133,334
shares; and Thunder Mountain Properties LC - 83,334 shares. Pursuant to this
amendment, eRoomSystem Technologies agreed to deliver monthly and annual
financial statements, make adjustments for business combinations and
capital-related transactions, and issue additional shares of preferred stock to
the extent that eRoomSystem Technologies sells shares of common stock, or its
equivalents, for less than $3.00 per share. In addition, the shares of Series B
convertible preferred stock purchased by these investors possess the same rights
as other shares of Series B convertible preferred stock.
On February 15, 2000, we received a $500,000 loan from Ash Capital. Dr.
Alan C. Ashton is a director designee of eRoomSystem Technologies and owns 100%
of Ash Capital. This loan is evidenced by a promissory note bearing simple
interest at the rate of 10% per annum, payable on June 30, 2000 and secured by
our assets. Ash Capital was issued a warrant to purchase 18,750 shares of common
stock exercisable at $4.80 per share through the second anniversary date of the
close of this offering. The primary purpose of this loan was to fund
approximately 900 Refreshment Centers to be installed in several hotel
properties in the United States. The Ash Capital loan has been repaid in part
from the sale of these Refreshment Centers and will be paid in full from the net
proceeds of this offering.
TRANSACTIONS INVOLVING RSG INVESTMENTS
On July 17, 1998, eRoomSystem Technologies entered into an agreement with
RSG Investments through which RSG Investments loaned us $1.5 million. RSG
Investments is a privately-held company in which John J. Prehn, one of our
director designees, is a co-manager and member. Mr. Prehn is also the managing
director of the equipment financier. At the time of these agreements, neither
RSG Investments nor the equipment financier were affiliated with us.
The purpose of the $1.5 million loan was to fund the production of
approximately 2,270 Refreshment Centers. As an inducement, we issued the
principals of RSG Investments warrants to purchase 46,875 shares of common stock
and agreed to pay interest at the rate of 15% per annum. Our obligation was
secured by Refreshment Centers, our other assets and shares of common stock held
by the officers, directors and consultants. Under this agreement, we were to
"repurchase" the Refreshment Centers within 75 days, or by September 30, 1998.
If we failed to "repurchase" the Refreshment Centers by such date, warrants to
purchase 9,375 shares of common stock
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would accrue every 30 days through January 30, 1999. We failed to "repurchase"
the Refreshment Centers by September 30, 1998 and remained in default through
January 30, 1999, although we obtained several extensions from RSG Investments.
As our obligation remained unsatisfied, we entered into a settlement with RSG
Investments in the form of an Equipment Transfer Agreement dated September 28,
1999.
Pursuant to the Equipment Transfer Agreement, we formed a bankruptcy-remote
entity, RSi BRE, placed a representative of RSG Investments on the board of
directors of RSi BRE, transferred ownership of 2,270 Refreshment Centers to RSi
BRE, and granted RSG Investments the right to receive $0.57 per Refreshment
Center per day of the revenue realized from the 2,270 Refreshment Centers. As
part of the settlement, the RSi BRE board of directors was to consist of three
individuals, a representative of eRoomSystem Technologies, a representative of
RSG Investments and a third independent director. In addition, we paid $250,000
to RSG Investments, converted $500,000 of our obligation into 166,667 shares of
Series B convertible preferred stock and executed a promissory note in the
principal amount of $750,000 bearing an interest rate of 10% per annum. Pursuant
to this settlement, RSG Investments terminated the security interest granted
under the original obligation and received a security interest in all of the
assets of RSi BRE. In addition, RSG Investments surrendered all warrants to
purchase shares of common stock eRoomSystem Technologies previously issued to
it.
Pursuant to the terms of this promissory note, we transferred approximately
800 additional Refreshment Centers to RSi BRE. We are obligated to satisfy this
promissory note in full on May 1, 2000, which has been extended to June 30,
2000. In the event we do not repay this promissory note in full by June 30,
2000, RSG Investments will be entitled to receive all revenues realized from the
additional Refreshment Centers after the first $0.11 per room per day, which is
reserved for taxes and service and maintenance. Upon payment of the promissory
note in full, the additional Refreshment Centers will be returned to eRoomSystem
Technologies. In the event that we do not repay the promissory note by the
earlier of December 31, 2000 or 30 days after the effective date of the
registration statement for this offering, we will be in default under the
promissory note and a penalty interest of 18% per annum will apply.
OTHER TRANSACTIONS WITH RELATED PARTIES
In October 1996, in consideration for the sale of patents to eRoomSystem
Technologies, we agreed to pay $125,000 and issue 65,625 shares of common stock
to Steven L. Sunyich. In fiscal year 1999, Mr. Sunyich converted the remaining
principal balance of $70,750 into 23,583 shares of Series B convertible
preferred stock.
In 1997, Kelley Family Trust and Toleman Family Trust, both of which are
controlled by Steven L. Sunyich, our president, chief executive officer and
chairman, purchased 84,375 and 118,125 shares of common stock, respectively, at
a price of $4.67 per share, evidenced by demand promissory notes bearing simple
interest at the rate of 7% per annum. On October 1, 1999, the board called the
demand promissory notes of Kelley Family Trust and Toleman Family Trust. The
demand promissory notes were defaulted upon and the shares of common stock were
returned to us and retired.
In 1997, Derek K. Ellis, our chief financial officer, purchased 120,375
shares of common stock at a price of $4.67 per share, evidenced by a demand
promissory note bearing simple interest at the rate of 7% per annum. On October
1, 1999, the board called the demand promissory note of Mr. Ellis. The demand
promissory note was defaulted upon and the shares of common stock were returned
to us and retired.
In 1997, Gregory L. Hrncir, our general counsel and secretary, purchased
50,625 shares of common stock through DM Trust at a price of $4.67 per share,
evidenced by a demand promissory note bearing simple interest at the rate of 7%
per annum. On October 1, 1999, the board called the demand promissory notes of
DM Trust. The demand promissory note was defaulted upon and the shares of common
stock were returned to us and retired.
In 1998, Derek K. Ellis, our chief financial officer, loaned $10,545 to us
evidenced by a promissory note. On September 1, 1999, we entered into an
agreement with Mr. Ellis whereby we agreed to convert the outstanding
indebtedness due on this promissory note into shares of Series B convertible
preferred stock. As a result, we issued 3,742 shares of Series B convertible
preferred stock and 2,990 shares of our common stock to Mr. Ellis.
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Steven L. Sunyich, our president, chief executive officer and chairman,
loaned the sum of $205,209 to us, as evidenced by a promissory note dated
January 1, 1999. In addition, William R. Shupe, a former executive officer and
former consultant, or the former consultant, loaned the sum of $83,411 to us on
January 1, 1999. On September 1, 1999, we entered into agreements whereby we
agreed to convert the outstanding indebtedness due on these promissory notes. As
a result, we issued 72,434 shares of Series B convertible preferred stock and
51,979 shares of our common stock to Mr. Sunyich and 29,808 shares of Series B
convertible preferred stock and 25,374 shares of our common stock to the former
consultant.
The funds loaned by Mr. Sunyich and the former consultant were originally
loaned to them by Riggs Family Partnership, an entity owned and controlled by
the former consultant. Upon inquiry, we were advised that the loans by Riggs
Family Partnership had been obtained from the proceeds of what may have been an
unregistered offering of our common stock by Riggs Family Partnership and the
former consultant. Through this offering, Riggs Family Partnership sold shares
of our common stock held by two stockholders of eRoomSystem Technologies. We
have been advised that, from April 1998 through March 1999, Riggs Family
Partnership sold approximately 112,500 shares of our common stock to
approximately 36 investors in exchange for approximately $1.3 million. Further,
in December 1999, Riggs Family Partnership notified eRoomSystem Technologies of
its intention to transfer to these investors approximately 60,000 additional
shares of our common stock held by Riggs Family Partnership to offset the effect
of our one-for-two reverse stock split. We have not been able to determine
whether this unregistered offering was conducted by Riggs Family Partnership
with the benefit of a state or federal exemption from registration. As a result,
Riggs Family Partnership and the former consultant may be subject to an
examination by administrative agencies with respect to its offers and sales of
our common stock or may be subject to demand for rescission by the purchasers of
our common stock. Despite the possible exposure of Riggs Family Partnership and
the former consultant to liability, we did not have any control over Riggs
Family Partnership or the former consultant and did not participate in the
actual offer and sale of our common stock to these purchasers.
On May 30, 1999, the SBD Limited Partnership, an entity controlled by Mr.
Sunyich, executed a promissory note in favor of eRoomSystem Technologies in the
original principal amount of $1,590,000 in consideration for the issuance of
198,750 shares of our common stock. The purpose of the issuance was to assist
eRoomSystem Technologies in complying with the stock pledge requirements
mandated by the terms of the $1,500,000 loan from RSG Investments. On September
30, 1999, as a result of a settlement agreement with RSG Investments, the
198,750 shares of common stock were returned to the SBD Limited Partnership.
Immediately thereafter, the SBD Limited Partnership surrendered the 198,750
shares of common stock to eRoomSystem Technologies in exchange for the
cancellation of the promissory note. The shares of common stock were booked as
treasury stock and have been retired.
On December 7, 1999 and February 14, 2000, Mr. Sunyich formally
assigned to eRoomSystem Technologies Patent No. 4,939,352 and Patent Nos.
4,857,714 and 4,883,948, respectively. These patents relate to credit card point
of sale technology. Each of the patent assignments have been filed with the
United States Patent and Trademark Office. The assignments finalized the sale of
such patents by Mr. Sunyich to us. In exchange, we issued 65,625 shares and a
promissory note in the principal amount of $125,000 to Mr. Sunyich. After paying
down the promissory note to approximately $70,000, we converted the remaining
outstanding principal and interest into 23,524 shares of Series B convertible
preferred stock.
The terms of each of the affiliate transactions were as favorable to the
issuer or its affiliates as those generally available from unaffiliated third
parties. We lacked sufficient disinterested independent directors to ratify the
affiliate transactions at the time the transactions were initiated. All future
material affiliated transactions and loans will be made or entered into on terms
that are no less favorable to us than those that can be obtained from
unaffiliated third parties. All future material affiliated transactions and
loans, and any forgiveness of loans, must be approved by a majority of our
independent directors who do not have an interest in the transactions and who
had access, at our expense, to our legal counsel or independent legal counsel.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of June 7, 2000 and as adjusted to reflect the sale of the shares of common
stock in this offering by:
- each person or entity known by us to own beneficially more than
five percent of our common stock;
- our chief executive officer, our directors and our director
designees, individually; and
- all of our executive officers, directors and director designees,
as a group.
The beneficial ownership is calculated based on 2,308,506 shares of our
common stock outstanding as of June 7, 2000 and 6,194,434 shares outstanding
immediately following the completion of this offering. The shares of common
stock outstanding immediately following the completion of this offering reflect
the 1,800,000 shares of common stock to be sold, and 400,000, 1,541,985 and
143,940 shares of common stock as a result of the conversion of Series A, Series
B and Series C convertible preferred stock, respectively, upon the completion of
this offering. The conversion of preferred stock into common stock was
calculated upon the assumption that the initial public offering price will be
$9.00 per share.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Below, the column titled "Number of Shares Beneficially Owned"
includes all shares listed in the column titled "Shares Issuable Upon Exercise
of Stock Options or Warrants." Unless otherwise indicated, each person or entity
named in the table has sole voting power and investment power, or shares voting
and investment power with his or her spouse, with respect to all shares of
capital stock listed as owned by such person. Shares issuable upon the exercise
of options that are currently exercisable or become exercisable within sixty
days of June 7, 2000 are considered outstanding for the purpose of calculating
the percentage of outstanding shares of our common stock held by the individual,
but not for the purpose of calculating the percentage of outstanding shares of
our common stock held by another individual.
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Unless otherwise indicated, the address of the following stockholders is
c/o eRoomSystem Technologies, Inc., 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada 89109.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ---------------------------------
NAME OF EXECUTIVE OFFICER, DIRECTOR BENEFICIALLY PRIOR TO THE AFTER THE
AND DIRECTOR DESIGNEES OWNED OFFERING(1) OFFERING
------------------------------------ ---------------- --------------- ------------
<S> <C> <C> <C>
Steven L. Sunyich(2) 779,835 25.3% 11.9%
Lawrence S. Schroeder(3) 45,000 1.9% 0.7%
Dr. Alan C. Ashton(4) 392,227 5.9% 6.2%
S. Leslie Flegel(5) 122,576 4.7% 1.9%
John J. Prehn(6) 123,457 0.0% 2.0%
All of our executive officers, directors and director 1,865,873 41.0% 25.8%
designees as a group (9 persons)
GREATER THAN FIVE PERCENT STOCKHOLDER
-------------------------------------
Pacific Acquisition Group II, LLC
23501 Park Sorrento, Suite 213-B 149,333 6.5% 2.4%
Calabasas, California 91302
</TABLE>
---------------
(1) The percentage of shares beneficially owned prior to the offering
has been calculated by using each person's beneficial ownership less shares
issuable upon conversion of our convertible preferred stock. We have excluded
these shares since these shares are only issuable upon the consummation of our
offering.
(2) Reflects beneficial ownership of 57,500 shares of common stock,
270,563 shares of common stock held by trusts for which Mr. Sunyich acts as
trustee and his family members are beneficiaries, 107,747 shares of common stock
as a result of the conversion of Series B convertible preferred stock upon the
completion of this offering, and options to purchase an aggregate of 344,025
shares of common stock. The options held by Mr. Sunyich are immediately
exercisable.
(3) Reflects beneficial ownership of an option to purchase 45,000
shares of common stock. The option held by Mr. Schroeder is immediately
exercisable.
(4) Ash Capital, controlled by Dr. Ashton, beneficially owns options
to purchase 145,313 shares of common stock and 246,914 shares of common stock as
a result of the conversion of Series B convertible preferred stock upon the
completion of this offering. The options held by Ash Capital are immediately
exercisable.
(5) Mr. Flegel's beneficial ownership consists of options to purchase
112,500 shares of common stock, a warrant to purchase 2,500 shares of common
stock and 7,576 shares of common stock as a result of the conversion of Series C
convertible preferred stock upon the completion of this offering. The options
and warrants held by Mr. Flegel are immediately exercisable.
(6) Mr. Prehn's beneficial ownership consists of 123,457 shares of
common stock held in the name of RSG Investments as a result of the conversion
of 166,667 shares of Series B convertible preferred stock upon completion of
this offering. Mr. Prehn is a co-manager and member of RSG Investments.
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DESCRIPTION OF CAPITAL STOCK
eRoomSystem's authorized capital stock consists of 50,000,000 shares of
common stock, $0.001 par value; 5,000,000 shares of preferred stock,$0.001 par
value; 500,000 shares of Series A convertible preferred stock, $0.001 par value;
2,500,000 shares of Series B convertible preferred stock, $0.001 par value; and
2,000,000 shares of Series C convertible preferred stock, $0.001 par value. Our
current authorized capital was effected through an amendment and restatement of
our articles of incorporation on March 29, 2000.
On September 28, 1999, our stockholders approved a reverse split of our
common stock, including all common stock underlying our outstanding options and
warrants, at the rate of one share for every two shares outstanding. Due to
contractual anti-dilution rights which have since been terminated, 1,471,000
shares of our common stock were excluded from one-for-two reverse stock split.
This reverse stock split did not affect our Series A and Series B convertible
preferred stock and has been retroactively reflected in this prospectus.
On March 29, 2000, our stockholders approved a reverse split of our common
stock, including all common stock underlying our outstanding options and
warrants, at a rate of three shares for each four shares outstanding. Our
three-for-four reverse stock split did not affect our Series A, Series B and
Series C convertible preferred stock and has been retroactively reflected in
this prospectus.
As of June 7, 2000, and after giving effect to the one-for-two reverse
stock split and the three-for-four reverse stock split of our common stock,
there were outstanding 2,317,247 shares of common stock, 360,000 shares of
Series A convertible preferred stock, 2,081,680 shares of Series B convertible
preferred stock and 219,227 shares of Series C convertible preferred stock. As
set forth below, there are outstanding options and warrants to purchase
2,502,815 shares of common stock as of June 7, 2000. We have reserved 2,000,000
shares of common stock for issuance pursuant to our 2000 Option Plan.
COMMON STOCK
As of June 7, 2000, our outstanding shares of common stock were held by
approximately 400 stockholders. Holders of common stock are entitled to one vote
per share on all matters submitted to a vote of the shareholders. We do not
allow cumulative voting of any kind, and are not required to do so under Nevada
law. Subject to preferences that may be applicable to any then outstanding
preferred stock, the holders of common stock will be entitled to receive
dividends, if any, as may be declared from time to time by the board out of
legally available funds. Upon liquidation, dissolution, or winding up of
eRoomSystem Technologies, the holders of common stock will be entitled to a pro
rata share of our assets that are legally available for distribution after
payment of all debts and other liabilities and subject to the prior rights of
any preferred stock then outstanding. Holders of our common stock have no
preemptive, subscription, redemption, or conversion rights.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of undesignated preferred
stock. None of the undesignated preferred stock is issued or outstanding, and we
have no present plans to issue shares of undesignated preferred stock. Although
our board is empowered to issue one or more series of undesignated preferred
stock with such rights, preferences, restrictions and privileges as may be fixed
by our board, without further action by our stockholders, we will not offer any
preferred stock to any officer, director or 5% stockholder except on the same
terms it is offered to all other existing or new stockholders, or unless the
issuance of any preferred stock is approved by a majority of our independent
directors who did not have an interest in the transactions and who have access,
at our expense, to our legal counsel or independent legal counsel. The issuance
of the undesignated preferred stock could adversely affect the rights, including
voting rights, of the holders of our common stock and could impede an attempted
takeover of us.
SERIES A CONVERTIBLE PREFERRED STOCK
The rights of holders of common stock are subject to, and are adversely
affected by, the rights of holders of Series A convertible preferred stock. We
have 360,000 shares of Series A convertible preferred stock issued and
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outstanding out of 500,000 shares authorized. Series A convertible preferred
stock is held by approximately 60 persons. Series A convertible preferred stock
is subject to the following rights and preferences:
CONVERSION RIGHTS. Shares of Series A convertible preferred stock
automatically convert into eRoomSystem Technologies common stock immediately
following the close of this offering. The Series A convertible preferred stock
shall be converted into common stock on a 1:1 basis, provided that the price per
share of the common stock in this offering is $10.00. If the price per share is
less than $10.00, the conversion rate shall be $10.00 divided by the actual
price per share.
DIVIDENDS. Holders of Series A convertible preferred stock are cumulating
an 8% annual dividend from November 14, 1998, payable quarterly in arrears out
of legally available funds, subject to our ability to pay such dividends as
limited by Nevada corporate law. To date, we have not paid dividends to holders
of Series A convertible preferred stock.
LIQUIDATION RIGHTS. In the event of a liquidation, dissolution or winding
up of eRoomSystem Technologies, holders of Series A convertible preferred stock
will be entitled to receive, out of legally available assets, a liquidation
preference of $10.00 per share, plus an amount equal to any unpaid dividends to
the payment date, before any payment or distribution is made to the holders of
common stock or any series or class of our stock hereafter issued that ranks
junior as to liquidation rights of the Series A convertible preferred stock.
VOTING RIGHTS. Holders of Series A convertible preferred stock may not vote
on any matter, excluding matters affecting the rights of such shareholders or as
required by law. In connection with any such vote, each outstanding share of
Series A convertible preferred stock will be entitled to one vote.
SERIES B CONVERTIBLE PREFERRED STOCK
We have issued and outstanding 2,081,680 shares of Series B convertible
preferred stock out of 2,500,000 shares authorized. Series B convertible
preferred stock is held by approximately 100 persons. On April 12, 2000, the
Series B convertible preferred stockholders approved an amendment to the Series
B Certificate designating the rights, preferences and privileges thereof as
follows:
CONVERSION RIGHTS. Series B convertible preferred stock is automatically
convertible upon the close of this offering into our common stock. The number of
shares of common stock resulting from the conversion is determined through the
following formula:
2,081,680 shares of Series x $3.00 = Shares of common
B convertible preferred ------------------------------ stock
stock 45% of initial public offering
price
For example, if the initial public offering price is $9.00 per share, the
outstanding shares of Series B convertible preferred stock shall be converted
into 1,541,985 shares of common stock upon consummation of this offering.
In the event we do not close this offering by September 28, 2000, holders
of Series B convertible preferred stock shall have the option to convert each
share of their Series B convertible preferred stock into 1.5 shares of common
stock. Holders of Series B convertible preferred stock are subject to a
"lock-up" restricting resale of the underlying shares of common stock for a
period of nine months following closing of this offering.
DIVIDENDS. Holders of Series B convertible preferred stock are entitled to
an annual cumulative dividend of 6%, payable in the form of common stock at the
rate of $3.00 per share, and subject to our ability to pay such dividends as
limited by Nevada corporate law.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding
up of eRoomSystem Technologies, holders of Series B convertible preferred stock
will be entitled to receive, out of legally available assets, a liquidation
preference of $10.00 per share, plus an amount equal to any unpaid dividends to
the payment date, before any payment or distribution is made to the holders of
common stock or any series or class of the our stock hereafter issued that ranks
junior to the liquidation rights of Series B convertible preferred stock.
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VOTING RIGHTS. Holders of Series B convertible preferred stock may not vote
on any matter, excluding matters affecting the rights of such shareholders or as
required by law. In connection with any such vote, each outstanding share of
Series B convertible preferred stock will be entitled to one vote. In addition,
if we have not completed this offering by September 28, 2000, holders of Series
B convertible preferred stock shall be accorded voting rights. Each share of
Series B convertible preferred stock shall be entitled to one vote.
SERIES C CONVERTIBLE PREFERRED STOCK
We have issued and outstanding 219,227 shares of Series C convertible
preferred stock out of 2,000,000 shares authorized. Series C convertible
preferred stock is held by 13 persons. The shares of Series C convertible
preferred stock are subject to the following rights and preferences:
CONVERSION RIGHTS. Series C convertible preferred stock is automatically
convertible upon the close of this offering into our common stock. The number of
shares of common stock resulting from the conversion is determined through the
following formula:
219,227 shares of Series C x $3.25 = Shares of common
convertible preferred stock ------------------------------ stock
55% of initial public offering
price
For example, if the initial public offering price is $9.00 per share, the
outstanding shares of Series C convertible preferred stock shall be converted
into 143,943 shares of common stock upon consummation of this offering.
In the event we do not close this offering by January 31, 2001, shares of
Series C convertible preferred stock shall be converted into shares of common
stock at a rate of $3.30 per share instead of 55% of the initial public offering
price.
LOCK-UP. Series C convertible preferred stock is subject to a "lock-up"
restricting the resale of the shares of common stock, issuable upon conversion,
for a period of one year following the close of this offering, or for an
additional period if mandated by Nasdaq.
DIVIDENDS. Series C convertible preferred stock includes a 7% cumulative
annual dividend, payable in cash, and is subject to our ability to pay such
dividends as limited by Nevada law and payable when declared by our board.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding
up of eRoomSystem Technologies, holders of Series C convertible preferred stock
will be entitled to receive, out of legally available assets, a liquidation
preference of $10.00 per share, plus an amount equal to any unpaid dividends to
the payment date, before any payment or distribution is made to the holders of
common stock or any series or class of our capital stock hereafter issued that
ranks junior to the liquidation rights of the Series C convertible preferred
stock.
VOTING RIGHTS. Holders of Series C convertible preferred stock may not vote
on any matter, excluding matters affecting the rights of such stockholders or as
required by law. In connection with any such vote, each outstanding share of
Series C convertible preferred stock shall be entitled to one vote.
OPTIONS AND WARRANTS
As of June 7, 2000, there are options and warrants outstanding to purchase
2,502,815 shares of common stock at exercise prices ranging from $1.33 to $16.00
per share with a weighted average exercise price per share of $5.79. These
options and warrants are exercisable at various times through the third
anniversary date of this offering. We will not grant any options or warrants to
purchase common stock at an exercise price of less than 85% of the fair market
value of our common stock on the date of grant.
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REGISTRATION RIGHTS
In conjunction with the offering of Series B convertible preferred stock,
we granted registration and participation rights with respect to our common
stock pursuant to an agreement with Ash Capital and three other investors dated
September 30, 1999. These stockholders may make a demand to have the shares of
common stock underlying their shares of Series B convertible preferred stock, or
the Registrable Shares, or to participate in the registration of shares of
common stock. The right to demand or participate in the registration of shares
of common stock is suspended if such registration is prior to March 31, 2001, is
prior to nine months following the last closing of our initial public offering,
or is after eRoomSystem Technologies has effected two prior registrations
pursuant to the registration rights granted hereunder where each registration
has remained effective for at least 90 days. The costs related to registration
expenses, such as filing fees, legal expenses and printing expenses, will be
paid by us and the costs related to selling expenses, such as underwriting
discounts, selling commissions and stock transfer taxes, will be paid by the
holders of Registrable Shares. In the context of an underwritten offering, the
holders of Registrable Shares acknowledge that the managing underwriter may
limit the number of shares to be underwritten and require the pro rata reduction
in the shares to be registered. Further, the holders of Registrable Shares agree
that such shares will not be resold during a period beginning 15 days before the
effective date of the registration statement and continuing until the earlier of
the abandonment of the proposed public offering or 90 days after the last
closing in the public offering period.
In conjunction with our July 1996 through March 1997 notes offering, we
distributed offering documents that contained a statement that made reference to
demand and piggy-back registration rights for the shares of common stock
underlying the warrants granted in the offering. These purported registration
rights apply to 242,550 shares of common stock. We have not solicited or
obtained waivers from the holders of these registration rights with respect to
our initial public offering since we believe that sufficient grounds exist to
deny such rights.
Pursuant to our April 1997 through December 1997 units offering, we granted
registration rights to the purchasers of units where such purchasers possessed
the right to demand registration and piggy-back registration for the shares of
common stock purchased. These registration rights apply to 372,375 shares of
common stock. We have not solicited or obtained waivers from the holders of
these registration rights with respect to our initial public offering since the
shares were purchased over two years ago and are freely tradable pursuant to
Rule 144(k) of the Securities Act.
Pursuant to our January 1998 through March 1998 common stock offering, we
granted purchasers of common stock the right to piggy-back the registration of
their shares onto a future registration statement of eRoomSystem Technologies
for a public offering. The determination of whether the shares of common stock
purchased by these investors will be included in a future registration statement
will be dependent upon the underwriter or underwriters for the public offering,
as the underwriter or underwriters would have final discretion as to which
shares of common stock will be registered. We have not solicited or obtained
waivers from the holders of these registration rights with respect to our
initial public offering since the shares were purchased over two years ago and
are freely tradable pursuant to Rule 144(k) of the Securities Act.
Pursuant to an offshore subscription agreement dated as of April 13, 2000,
we granted registration rights for the 200,000 shares of common stock issued to
the selling stockholders in connection with the bridge loan. In this agreement,
we agreed to register the shares issued to the selling stockholders in
conjunction with this offering and have the registration statement declared
effective within 180 days of the closing of the bridge loan. The selling
stockholders are restricted from selling their shares of common stock until 180
days after the closing of this offering, or for a longer period as required by
the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market
not to exceed one year. Due to this lock-up restriction, the 200,000 shares of
common stock issued to the selling stockholders have been registered pursuant to
the registration statement for this offering, but have not been included as part
of this prospectus.
2000 REVERSE STOCK SPLIT
On March 29, 2000, our board and a majority of our stockholders approved by
written consent our three-for-four reverse stock split. This reverse stock split
affects all shares of common stock outstanding and underlying our options and
warrants, but does not affect the Series A, Series B and Series C convertible
preferred stock.
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NEVADA LAW, OUR ARTICLES OF INCORPORATION AND BYLAWS
Some of the provisions of our articles of incorporation and bylaws may have
the effect of discouraging some types of transactions that involve an actual or
threatened change of control of eRoomSystem Technologies, which in turn could
limit your ability to sell your shares at a premium. Some of these provisions
are summarized below.
SIZE OF BOARD AND ELECTION OF DIRECTORS. Our articles of incorporation and
bylaws, when read together, provide for a minimum of two and a maximum of nine
persons to serve on the board. However, the number of directors may be increased
or decreased by a resolution adopted by the affirmative vote of a majority of
the board. Removal of a director requires two-thirds vote of the outstanding
shares of our common stock.
STOCKHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide for advance
notice requirements for stockholder nominations and proposals at annual meetings
of our stockholders. Stockholders may nominate directors or submit other
proposals only upon written notice to eRoomSystem Technologies not less than 120
days nor more than 150 days prior to the anniversary of the date of the notice
to stockholders of the previous year's annual meeting. A stockholder's notice
also must contain additional information, as specified in the bylaws. The board
may reject proposals that are not made in accordance with the procedures
contained in the bylaws or that are not properly the subject of stockholder
action.
CALLING SPECIAL STOCKHOLDER MEETINGS; STOCKHOLDER ACTION WITHOUT A MEETING.
Matters to be acted upon by the stockholders at special meetings are limited to
those specified in the notice of the meeting. A special meeting of stockholders
may be called by the board, the Chairman or the president of eRoomSystem
Technologies by resolution of the board or at the request in writing of
stockholders holding at least 10% of the outstanding shares entitled to vote at
the special meeting. As allowed by Nevada law, the bylaws provide that any
action by written consent of stockholders in lieu of a meeting must be signed by
the holders of at least a majority of the voting power.
PREFERRED STOCK. We are authorized to issue 5,000,000 shares of
undesignated preferred stock. None of the undesignated preferred stock is issued
or outstanding, and we have no present plans to issue shares of undesignated
preferred stock. Our board is empowered to issue one or more series of
undesignated preferred stock with such rights, preferences, restrictions and
privileges as may be fixed by our board, without further action by our
stockholders. The issuance of the undesignated preferred stock could adversely
affect the rights, including voting rights, of the holders of our common stock
and could impede an attempted takeover of us.
NEVADA ANTI-TAKEOVER STATUTES. Nevada law provides that an acquiring person
who acquires a controlling interest in a corporation may only exercise voting
rights on any control shares if those voting rights are conferred by a majority
vote of the corporation's disinterested stockholders at a special meeting held
upon the request of the acquiring person. If the acquiring person is accorded
full voting rights and acquires control shares with at least a majority of all
the voting power, any of our stockholders, who did not vote in favor of
authorizing voting rights for the control shares, are entitled to payment for
the fair value of his shares. A "controlling interest" is an interest that is
sufficient to enable the acquiring person to exercise at least one-fifth of the
voting power of the corporation in the election of directors. "Control shares"
are outstanding voting shares that an acquiring person or associated persons
acquire or offer to acquire in an acquisition and those shares acquired during
the 90-day period before the person involved became an acquiring person.
In addition, Nevada law restricts the ability of a corporation to engage in
any combination with an interested stockholder for three years from when the
interested stockholder acquires shares that cause the stockholder to become an
interested stockholder, unless the combination or the purchase of shares by the
interested stockholder is approved by the board before the stockholder became an
interested stockholder. If the combination was not previously approved, the
interested stockholder may only effect a combination after the three-year period
if the stockholder receives approval from a majority of the disinterested shares
or the offer meets the fair price criteria.
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An "interested stockholder" is a person who is:
- the beneficial owner, directly or indirectly, of 10% or more of
the voting power of the outstanding voting shares of a
corporation; or
- an affiliate or associate of a corporation and, at any time within
three years immediately before the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding shares of a corporation.
Our articles of incorporation and bylaws do not exclude us from these
restrictions.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage some types of transactions that may involve actual or
threatened change of control of our company. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the potential restructuring or sale of all or a part of our
company. However, these provisions could discourage potential acquisition
proposals and could delay or prevent a change in control of our company. They
may also have the effect of preventing changes in our management.
TRANSFER AGENT
Our transfer agent is American Stock Transfer and Trust Company. Its
address is 40 Wall Street, New York, New York 10005, and its telephone number is
(718) 921-8360.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 6,194,434 shares of common
stock outstanding. Of these shares, the 1,800,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriter's over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors and/or 10%
stockholders.
Of the remaining 4,394,434 shares outstanding, 200,000 shares of common
stock issued in conjunction with our bridge loan will be registered in
conjunction with this offering. Since these selling stockholders are subject to
a lock-up of their shares of 180 days, or such additional period as required by
the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market
not to exceed one year, the shares have not been included as part of this
prospectus.
The balance of 4,194,434 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144 or 144(k) promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and selected stockholders will enter into lock-up
agreements in connection with this offering generally providing that, without
first obtaining the written consent of the underwriter representative:
- they will not offer or sell any of our common stock owned by them
during the first 18 months following the closing of this offering;
- they will not offer or sell more than 10% of our common stock
owned by them in any of the next two consecutive calendar quarters;
and
- they will not offer or sell more than 25% of our common stock owned
by them in any calendar quarter thereafter.
During such periods, and for an additional period of two years thereafter, any
public sale of our common stock by such stockholders will be effected through
the facilities of the underwriter and such sellers will comply with the volume
limitations of Rule 144(e) even though Rule 144(k) may be available to sellers.
Taking into account the lock-up agreements, and assuming the underwriter
representative does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times:
- Beginning on the date of this prospectus, all shares sold in this
offering and 1,437,083 shares pursuant to Rule 144(k) will be
immediately available for sale in the public market, excluding
shares subject to lock-up arrangements.
- Beginning 90 days after the date of this prospectus, 95,430 shares
will be eligible for sale subject to volume limitations, as
explained below, pursuant to Rule 144.
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In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then
outstanding which will equal approximately 61,944 shares
immediately after the offering; or
- the average weekly trading volume of the common stock during the
four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell these
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 90 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 2000 Stock Option Plan will
also be freely tradable in the public market. However, shares held by affiliates
will be subject to lock-up agreements and the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resaleable under Rule 701. As of June 7, 2000, there were outstanding options
and warrants for the purchase of 2,502,815 shares of common stock, of which
2,422,482 shares were vested and exercisable.
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UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Donald & Co. Securities Inc., or Donald, is acting as the representative
of the underwriters. The underwriting agreement provides for the purchase of a
specific number of shares of common stock by each of the underwriters. The
underwriters' obligations are several, which means that each underwriter is
required to purchase a specified number of shares, but is not responsible for
the commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Donald & Co. Securities Inc. .............
Moness, Crespi, Hardt & Co., Inc. ........
Win Capital...............................
TOTAL 1,800,000
========================
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus if any
shares are purchased, other than those shares covered by the over-allotment
option described below. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The initial public offering price was determined through negotiations
between the underwriters and us and may not be representative of the price that
will prevail in the open market. Since there has not been a public market for
our common stock prior to this offering, the price of our common stock may be
highly volatile as a result of its response to a variety of factors. Some of
these factors include actual or anticipated fluctuations in our annual and
quarterly operating results, our ability to execute our business plan and meet
our projected growth, additions or departures of key personnel, changes in
financial estimates by securities analysts, and general economic, industry and
market conditions.
The representative has advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to securities dealers at such price less a concession of
$________ per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $_______ per share to other dealers. The
representatives will not change the offering price and other selling terms to
public purchasers prior to the completion of this offering.
We have granted the representatives an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the representatives to purchase a maximum of 270,000 additional shares
from us to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
the public will be $18,630,000, the total proceeds to us will be $16,999,875 and
our net proceeds, after paying the underwriting discount and other expenses
related to this offering will be approximately $16.2 million.
The following table provides information regarding the amount of the
discount to be received by the underwriters.
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
---------- ------------------------- ---------------------------
$ $ $
-60-
<PAGE>
We will pay all of the total expenses of the offering, which we estimate
will be approximately $__________, or $__________ if the over-allotment is
exercised. In addition, we will pay to Donald $162,000 for its expenses,
$186,300 if the over-allotment is exercised, of which we have paid $25,000.
We have agreed to indemnify the underwriters against specific liabilities,
including liabilities under the Securities Act.
Our officers and directors have agreed that they will not, without the
prior written consent of Donald, directly or indirectly:
- sell any of our common stock owned by them during the first 18 months
following the closing of this offering;
- offer or sell more than 10% of our common stock owned by them in any of
the next two consecutive calendar quarters; and
- offer or sell more than 25% of our common stock owned by them in any
calendar quarter thereafter.
During these periods and for an additional period of two years, any public sale
of our securities by these stockholders will be effected through the facilities
of Donald and these stockholders will comply with the volume limitations of Rule
144(c) even though Rule 144(k) may be available to the stockholders.
We and our principal stockholders, officers and directors will grant to
Donald a one year right of first refusal to have Donald sell securities under
future public and private offerings of any non bank debt or equity securities of
eRoomSystem Technologies or our subsidiaries, by us, our subsidiaries, our
affiliates, and/or principal stockholders, officers and directors, except for
issuances or sales to employees pursuant to our stock option plan.
In addition, for a two year period we will not sell securities to raise
money or issue any options or warrants below the then current market price
without Donald's consent.
We and Donald will enter into a financial consulting agreement providing
for Donald, or its designee, to act as financial consultant to us for a 12 month
period for a fee of $72,000, payable at a rate of $6,000 per month.
We have granted Donald for a period ending on the third anniversary of the
closing of this offering, the right to have Donald's designee present at
meetings of the board and each of its committees subject to our right to exclude
such designee under limited circumstances. The designee will be entitled to the
same notices and communications sent by us as we gave to our directors and will
attend directors' and committees' meetings, but will not be entitled to vote at
such meetings. Such designee will also be entitled to receive the same
compensation payable to directors as members of the board and its committees and
all reasonable expenses in attending such meetings. As of the date of this
prospectus no designee has been selected.
In connection with this offering, we have agreed to sell to Donald, for
nominal consideration, warrants to purchase up to an aggregate of 180,000 shares
of common stock exercisable initially at 120% of the initial public offering
price per share for a period of four years beginning one year from the date
hereof. These warrants contain antidilution provisions providing for adjustment
of the exercise price upon:
- the issuance of common stock, or securities exercisable or convertible
into common stock, at a price less than the exercise price; and
- any recapitalization, reclassification, stock dividend, stock split,
stock combination or similar transaction.
-61-
<PAGE>
In addition, the warrants grant to the holders rights commencing one year from
the date of this prospectus to have common stock issued upon exercise of the
warrants registered under the Securities Act. These rights include the right to
require us to register these shares for a four year period and the right to
include these shares for a six year period in a registration statement filed by
us.
Rules of the Commission may limit the ability of the underwriters to bid
for or purchase shares before the distribution of the shares is completed.
However, the underwriters may engage in the following activities in accordance
with the following rules:
- Stabilizing transactions -- The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of
shares, so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions -- The underwriters
may create a short position in the shares by selling more shares than are
set forth on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
- Penalty bids -- If the representative purchases shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq SmallCap Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
Donald received a fee as a placement agent with respect to a portion of
shares of Series B convertible preferred stock sold from March 1999 through
October 1999.
In March and April 2000, Donald received a fee for acting as our private
placement agent with respect to the sale of units consisting of Series C
convertible preferred stock, convertible subordinated promissory notes and
warrants to purchase common stock and facilitating the bridge loan.
-62-
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Kummer Kaempfer Bonner & Renshaw, Las Vegas, Nevada.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Parker Duryee Rosoff & Haft, New York, New York.
EXPERTS
The consolidated financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Hansen, Barnett &
Maxwell, Salt Lake City, Utah, independent certified public accountants, as
indicated in their report, and are included in this prospectus in reliance upon
the authority of said firm in accounting and auditing.
CHANGE IN ACCOUNTANTS
In September 1999, we engaged the firm of Arthur Andersen LLP to audit our
financial statements for the fiscal years ended December 31, 1998 and 1999. On
March 31, 2000, we received a letter in which Arthur Andersen resigned as our
independent auditors due to its determination that its independence had been
impaired. Arthur Andersen did not issue a report for our financial statements
for the last two fiscal years. The resignation of Arthur Andersen was not based
upon a disagreement on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure while Arthur
Andersen was engaged by us. On April 4, 2000, our board approved the retention
of Hansen, Barnett & Maxwell as our independent auditors.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form SB-2
under the Securities Act with respect to the common stock offered in this
prospectus. This prospectus, filed as part of the registration statement, does
not contain all of the information set forth in the registration statement and
its exhibits, portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information about us and the common
stock, we refer you to the registration statement and to its exhibits.
Statements in this prospectus about the contents of any contract, agreement or
other document are not necessarily complete and, in each instance, we refer you
to the copy of such contract, agreement or document filed as an exhibit to the
registration statement, and each such statement being qualified in all respects
by reference to the document to which it refers. Anyone may inspect the
registration statement and its exhibits without charge at the public reference
facilities the Commission maintains at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of
these materials from the Commission upon the payment of the fees prescribed by
the Commission. You may also inspect these reports and other information without
charge at a website maintained by the Commission. The address of this site is
http://www.sec.gov. You may also obtain information on the operation of the
public reference facilities of the Commission at 1-800-732-0330.
Upon completion of this offering, we will become subject to the
informational requirements of the Securities Exchange Act of 1934 and will be
required to file reports, proxy statements and other information with the
Commission. You will be able to inspect and copy these reports, proxy statements
and other information at the public reference facilities maintained by the
Commission and at the Commission's regional offices at the addresses noted
above. You also will be able to obtain copies of this material from the Public
Reference Section of the Commission as described above, or inspect them without
charge at the Commission's website. We have applied for quotation of our common
stock on the Nasdaq SmallCap Market. If we receive approval for quotation on the
Nasdaq SmallCap Market, then you will be able to inspect reports, proxy and
information statements and other information concerning us at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
-63-
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants..............................................F-2
Consolidated Balance Sheets.....................................................................F-3
Consolidated Statements of Operations...........................................................F-5
Consolidated Statements of Stockholders' Deficit................................................F-6
Consolidated Statements of Cash Flows..........................................................F-10
Notes to Consolidated Financial Statements.....................................................F-13
</TABLE>
F-1
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Salt Lake City, Utah 84111-2693
Associates, Inc. www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
eRoomSystem Technologies, Inc.
We have audited the accompanying consolidated balance sheets of eRoomSystem
Technologies, Inc. (a Nevada corporation) and subsidiary as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eRoomSystem
Technologies, Inc. and subsidiary as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
(excluding non-cash compensation expense (income)) and as of December 31, 1999
had a working capital deficit of $2,650,616, a stockholders' deficit of $23,852,
and was in default under certain debt agreements. During the years ended
December 31, 1998 and 1999, the Company's operations used $2,931,871 and
$2,304,807 of cash, respectively. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 13, 2000, except for the third paragraph
of Note 1, as to which the date is June 2, 2000
F-2
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
March 31,
1998 1999 2000
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 1,850 $ 113,252 $ 14,575
Accounts receivable, net of allowance for doubtful
accounts of $3,900, $15,000 and $15,000 (unaudited),
respectively ............................................... 35,655 40,213 13,287
Inventories .................................................. 1,488,354 697,033 999,000
Prepaid expenses and other ................................... 1,250 6,250 38,698
------------ ------------ ------------
Total Current Assets ............................ 1,527,109 856,748 1,065,560
------------ ------------ ------------
Refreshment Centers in Service, net of accumulated
depreciation of $3,895, $3,858 and $5,031 (unaudited),
respectively ................................................. 362,266 169,791 132,579
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Production equipment ......................................... 138,908 138,908 167,384
Computer equipment ........................................... 130,951 171,666 173,925
Vehicles and other ........................................... 76,857 76,857 46,379
------------ ------------ ------------
346,716 387,431 387,688
------------ ------------ ------------
Less accumulated depreciation and amortization ............... (203,381) (264,946) (269,334)
------------ ------------ ------------
Net Property and Equipment ...................... 143,335 122,485 118,354
INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY ........... -- 2,535,976 2,572,419
------------ ------------ ------------
OTHER ASSETS:
Patents and license rights, net of accumulated
amortization of $155,211, $222,710 and $239,585
(unaudited), respectively ................................ 317,279 249,780 232,905
Deferred offering and financing costs, net of
accumulated amortization of $749,457, $0 and $0
(unaudited), respectively ................................ 884 88,000 465,834
Deposits and other ......................................... 169,416 327,851 454,472
------------ ------------ ------------
Total Other Assets .............................. 487,579 665,631 1,153,211
------------ ------------ ------------
Total Assets .................................................... $ 2,520,289 $ 4,350,631 $ 5,042,123
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
March 31,
2000 Pro
December 31, Forma
---------------------------------- Stockholders'
Deficit
1998 1999 March 31, 2000 (Note 2)
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable and current portion of long-term
debt, net of discount of $0, $0 and $30,490,
respectively ..................................... $ 2,872,570 $ 1,560,458 $ 2,114,542
Current portion of capital lease obligations ....... 13,212 22,061 24,506
Accounts payable ................................... 1,186,995 987,013 942,407
Accrued liabilities ................................ 240,475 332,835 464,243
Accrued interest ................................... 293,024 290,117 425,864
Customer deposits .................................. 51,010 93,470 136,858
Deferred revenue ................................... 63,875 58,868 30,660
Notes payable to stockholder ....................... 145,750 -- --
Preferred stock dividends payable .................. 18,541 162,542 198,443
--------------- --------------- ---------------
Total Current Liabilities ...................... 4,885,452 3,507,364 4,337,523
--------------- --------------- ---------------
LONG-TERM DEBT, net of current portion ................ 11,719 812,022 947,215
--------------- --------------- ---------------
CAPITAL LEASE OBLIGATIONS, net of current portion ..... 51,223 55,097 47,198
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 5 and 9)
STOCKHOLDERS' DEFICIT:
Series A convertible preferred stock, $0.001
par value; 500,000 shares authorized;
360,000 shares outstanding at December 31,
1998 and 1999 and March 31, 2000 and none
pro forma; liquidation preference $3,798,443
at December 31, 1999 and March 31, 2000 and
none pro forma ................................... 1,332,953 1,332,953 1,332,953 --
Series B convertible preferred stock, $0.001
par value; 2,500,000 shares authorized,
2,081,680 shares outstanding at December 31,
1999 and March 31, 2000 and none pro forma;
liquidation preference $20,816,800 at
December 31, 2000 and March 31, 2000 and
none pro forma ................................... -- 6,171,196 6,482,592 --
Series C convertible preferred stock, $0.001
par value; 2,000,000 shares authorized,
161,535 shares outstanding at March 31,
2000; liquidation preference of $1,615,350
at March 31, 2000 and none pro forma ............. -- -- 456,407 --
Undesignated preferred stock, $0.001 par
value; 5,000,000 shares authorized; no
shares outstanding and none pro forma ............ -- -- -- --
Common stock, $0.001 par value; 50,000,000
shares authorized; 3,531,311, 2,217,291 and
2,108,506 shares outstanding, respectively,
and 4,156,553 shares pro forma ................... 3,532 2,218 2,109 4,157
Additional paid-in capital ......................... 13,524,736 7,112,734 6,783,026 19,967,188
Warrants and options outstanding ................... 1,043,362 728,538 1,454,309 1,454,309
Notes receivable from stockholders ................. (4,073,941) (840,000) (615,000) (615,000)
Accumulated deficit ................................ (14,258,747) (14,531,491) (16,186,209) (21,100,467)
--------------- --------------- --------------- ---------------
Total Stockholders' Deficit .................... (2,428,105) (23,852) (289,813) (289,813)
--------------- --------------- --------------- ===============
Total Liabilities and Stockholders' Deficit ........... $ 2,520,289 $ 4,350,631 $ 5,042,123
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
---------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- ---------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Product sales.................................. $ 916,650 $ 144,282 $ -- $ --
Revenue sharing arrangements................... 46,524 213,654 64,341 9,162
Maintenance fees............................... 48,288 182,581 49,567 39,937
--------------- ---------------- ---------------- ---------------
Total Revenue.............................. 1,011,462 540,517 113,908 49,099
--------------- ---------------- ---------------- ---------------
COST OF REVENUE:
Product sales.................................. 711,355 118,010 -- --
Revenue sharing arrangements................... 21,104 165,995 39,409 7,073
Maintenance.................................... 60,797 78,518 5,260 7,020
--------------- ---------------- ---------------- ---------------
Total Cost of Revenue...................... 793,256 362,523 44,669 14,093
--------------- ---------------- ---------------- ---------------
GROSS MARGIN...................................... 218,206 177,994 69,239 35,006
--------------- ---------------- ---------------- ---------------
OPERATING EXPENSES:
Selling, general and administrative (exclusive
of non-cash compensation expense (income) of
$4,858,105 and $(3,901,696), $(4,854,150)
and $491,825, respectively................... 2,058,150 2,387,811 422,442 520,344
Research and development....................... 284,532 271,231 73,231 49,788
Non-cash compensation expense (Income)......... 4,858,105 (3,901,696) (4,854,150) 491,825
--------------- ---------------- ---------------- ---------------
Total Operating Expenses (Income).......... 7,200,787 (1,242,654) (4,358,477) 1,061,957
---------------
---------------- ---------------- ---------------
INCOME (LOSS) FROM OPERATIONS..................... (6,982,581) 1,420,648 4,427,716 (1,026,951)
--------------- ---------------- ---------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense............................... (1,922,638) (1,444,532) (341,429) (303,650)
Equity in income of unconsolidated, wholly
owned subsidiary............................. -- 147,615 -- 88,296
Interest and other income...................... 312,573 210,794 67,336 2,336
--------------- ---------------- ---------------- ---------------
Other Expense, Net......................... (1,610,065) (1,086,123) (274,093) (213,018)
--------------- ---------------- ---------------- ---------------
Income (Loss) Before Extraordinary Loss on
Extinguishment of Debt......................... (8,592,646) 334,525 4,153,623 (1,239,969)
Extraordinary Loss on Extinguishment of Debt, net
of income tax benefit of $0.................... (407,000) -- -- --
Net Income (Loss)................................. (8,999,646) 334,525 4,153,623 (1,239,969)
Dividends Related to Convertible Preferred Stock.. (18,541) (607,269) (35,507) (414,749)
--------------- ---------------- ---------------- ---------------
Net Income (Loss) Attributable to Common
Stockholders................................... $ (9,018,187) $ (272,744) $ 4,118,116 $ (1,654,718)
=============== ================ ================ ===============
Basic and Diluted Extraordinary Loss Per Common
Share.......................................... $ (0.13) $ -- $ -- $ --
=============== ================ ================ ===============
Basic and Diluted Net Loss Per Common Share....... $ (2.98) $ (0.08) $ 1.16 $ (0.75)
=============== ================ ================ ===============
Basic and Diluted Weighted Average Common Shares
Outstanding.................................... 3,028,982 3,220,709 3,545,103 2,196,996
=============== ================ ================ ===============
Basic and Diluted Supplemental Pro Forma Net Loss
Per Common Share (Unaudited)................... $ (1.07) $ (1.56)
================ ===============
Basic and Diluted Supplemental Pro Forma Weighted
Average Common Shares Outstanding (Unaudited).. 5,162,695 4,245,043
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock Additional Warrants And
------------------------ ------------------------- Paid-in Options
Shares Amount Shares Amount Capital Outstanding
----------- ------------ ------------ ------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997.............. -- $ -- 3,285,733 $ 3,286 $ 6,910,699 $ 225,904
Issuance of Series A convertible
preferred stock upon conversion of
1996 Notes at $5.00 per share, net
and issuance of common stock and
warrants to placement agent........... 360,000 1,332,953 13,125 13 139,987 17,479
Issuance of common stock in connection
with conversion of 1996 Notes into
Series A convertible preferred stock.. -- -- 38,156 38 406,962 --
Issuance of common stock for cash at
$10.67 per share, net and issuance of
warrants to placement agent........... -- -- 40,688 41 371,644 18,358
Issuance of common stock in connection
with conversion of 60-day convertible
notes and 1996 notes.................. -- -- 84,661 85 841,179 --
Stock dividend issued to placement
agent in connection with
anti-dilution rights.................. -- -- 68,948 69 115 --
Issuance of warrants in connection with
financing transactions................ -- -- -- -- -- 777,666
Compensation expense related to
variable award stock options.......... -- -- -- -- 4,854,150 --
Issuance of stock options to a
consultant for services............... -- -- -- -- -- 3,955
Accrual of interest on notes receivable
from stockholders..................... -- -- -- -- -- --
Series A convertible preferred stock
dividend accrual...................... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
----------- ------------ ------------ ------------ ---------------- -----------------
Balance, December 31, 1998.............. 360,000 $1,332,953 3,531,311 $ 3,532 $ 13,524,736 $ 1,043,362
=========== ============ ============ ============ ================ =================
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable From Accumulated
Shareholders Deficit Total
---------------- ---------------- ------------
<S> <C> <C> <C>
$ (3,799,250) $(5,240,376) $(1,899,737)
Balance, December 31, 1997..............
Issuance of Series A convertible
preferred stock upon conversion of
1996 Notes at $5.00 per share, net
and issuance of common stock and -- -- 1,490,432
warrants to placement agent...........
Issuance of common stock in connection
with conversion of 1996 Notes into -- -- 407,000
Series A convertible preferred stock..
Issuance of common stock for cash at
$10.67 per share, net and issuance of -- -- 390,043
warrants to placement agent
Issuance of common stock in connection
with conversion of 60-day convertible -- -- 841,264
notes and 1996 notes...................
Stock dividend issued to placement
agent in connection with -- (184) --
anti-dilution rights..................
Issuance of warrants in connection with -- -- 777,666
financing transactions................
Compensation expense related to -- -- 4,854,150
variable award stock options..........
Issuance of stock options to a -- -- 3,955
consultant for services...............
Accrual of interest on notes receivable (274,691) -- (274,691)
from stockholders.....................
Series A convertible preferred stock -- (18,541) (18,541)
dividend accrual......................
-- (8,999,646) (8,999,646)
Net loss................................ ---------------- ---------------- ------------
$ (4,073,941) $(14,258,747) $(2,428,105)
Balance, December 31, 1998.............. ================ ================ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock
------------------------- ------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ............... 360,000 $ 1,332,953 -- $ -- 3,531,311 $ 3,532
Issuance of Series B convertible
preferred stock for cash and
conversion of notes at $3.00 per
share, net ............................. -- -- 2,081,680 5,849,826 -- --
Issuance of common stock to entity
controlled by the Company's
president in exchange for note
receivable ............................. -- -- -- -- 198,750 199
Return of common stock from entity
controlled by the Company's president .. -- -- -- -- (198,750) (199)
Issuance of common stock for interest
in connection with conversion of
notes payable to stockholders at
$3.20 per share ........................ -- -- -- -- 83,500 84
Issuance of common stock for interest
in connection with 90-day
convertible notes at $3.20 per share ... -- -- -- -- 41,410 41
Issuance of common stock for services
at $3.20 per share and issuance of
stock options .......................... -- -- -- -- 3,134 3
Compensation benefit related to
variable award stock options ........... -- -- -- -- -- --
Issuance of warrants in connection
with troubled debt restructuring ....... -- -- -- -- -- --
Return of warrants in connection with
troubled debt restructuring ............ -- -- -- -- -- --
Accrual of interest on notes
receivable from stockholders ........... -- -- -- -- -- --
Series A convertible preferred stock
dividend accrual ....................... -- -- -- -- -- --
Series B convertible preferred stock
dividend accrual payable in the form
of common stock ........................ -- -- -- -- 28,936 29
</TABLE>
<TABLE>
<CAPTION>
Warrants Notes
Additional And Receivable
Paid-in Options From Accumulated
Capital Outstanding Shareholders Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ............... $ 13,524,736 $ 1,043,362 $ (4,073,941) $(14,258,747) $ (2,428,105)
Issuance of Series B convertible
preferred stock for cash and
conversion of notes at $3.00 per
share, net ............................. -- -- -- -- 5,849,826
Issuance of common stock to entity
controlled by the Company's
president in exchange for note
receivable ............................. 1,589,801 -- (1,590,000) -- --
Return of common stock from entity
controlled by the Company's president .. (1,589,801) -- 1,590,000 -- --
Issuance of common stock for interest
in connection with conversion of
notes payable to stockholders at
$3.20 per share ........................ 264,398 -- -- -- 264,482
Issuance of common stock for interest
in connection with 90-day
convertible notes at $3.20 per share ... 121,566 -- -- -- 121,607
Issuance of common stock for services
at $3.20 per share and issuance of
stock options .......................... 5,962 99,040 -- -- 105,005
Compensation benefit related to
variable award stock options ........... (4,006,700) -- -- -- (4,006,700)
Issuance of warrants in connection
with troubled debt restructuring ....... -- 92,830 -- -- 92,830
Return of warrants in connection with
troubled debt restructuring ............ -- (506,694) -- -- (506,694)
Accrual of interest on notes
receivable from stockholders ........... -- -- (235,951) -- (235,951)
Series A convertible preferred stock
dividend accrual ....................... -- -- -- (144,000) (144,000)
Series B convertible preferred stock
dividend accrual payable in the form
of common stock ........................ 141,870 -- -- (141,899) --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock
------------------------- ------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series B convertible preferred stock
beneficial conversion dividend ......... -- -- -- 321,370 -- --
Return of common stock as payment of
shareholder notes receivable ........... -- -- -- -- (1,471,000) (1,471)
Reserve for shareholder notes
receivable ............................. -- -- -- -- -- --
Net income ............................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ............... 360,000 $ 1,332,953 2,081,680 $ 6,171,196 2,217,291 $ 2,218
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Warrants Notes
Additional And Receivable
Paid-in Options From Accumulated
Capital Outstanding Shareholders Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Series B convertible preferred stock
beneficial conversion dividend ......... -- -- -- (321,370) --
Return of common stock as payment of
shareholder notes receivable ........... (2,939,098) -- 2,940,569 -- --
Reserve for shareholder notes
receivable ............................. -- -- 529,323 -- 529,323
Net income ............................... -- -- -- 334,525 334,525
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ............... $ 7,112,734 $ 728,538 $ (840,000) $(14,531,491) $ (23,852)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 .................. 360,000 $ 1,332,953 2,081,680 $ 6,171,196
Issuance of common stock in connection
with 90-day convertible notes at
$3.20 per share (unaudited) .............. -- -- -- --
Issuance of common stock in connection
with shareholder note payable at
$3.20 per share (unaudited) .............. -- -- -- --
Series B convertible preferred stock
dividend accrual payable in the form
of common stock, net (unaudited) ......... -- -- -- --
Series B convertible preferred stock
beneficial conversion dividend
(unaudited) .............................. -- -- -- 311,396
Return of common stock as a result of a
default on a note receivable from
shareholder (unaudited) .................. -- -- -- --
Issuance of Series C convertible
preferred stock for cash at $2.83
per share (unaudited) .................... -- -- -- --
Issuance of options and warrants to
employees and non employees
(unaudited) .............................. -- -- -- --
Issuance of warrants for financing
activities (unaudited) ................... -- -- -- --
Issuance of warrants related to
advertising agreement (unaudited) ........ -- -- -- --
Series A convertible preferred stock
dividend accrual (unaudited) ............. -- -- -- --
Net loss (unaudited) ........................ -- -- -- --
------------ ------------ ------------ ------------
Balance, March 31, 2000 (Unaudited) ......... 360,000 $ 1,332,953 2,081,680 $ 6,482,592
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Series C Convertible
Preferred Stock Common Stock
--------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 .................. -- $ -- 2,217,291 $ 2,218
Issuance of common stock in connection
with 90-day convertible notes at
$3.20 per share (unaudited) .............. -- -- 7,991 8
Issuance of common stock in connection
with shareholder note payable at
$3.20 per share (unaudited) .............. -- -- 1,365 1
Series B convertible preferred stock
dividend accrual payable in the form
of common stock, net (unaudited) ......... -- -- 22,484 22
Series B convertible preferred stock
beneficial conversion dividend
(unaudited) .............................. -- -- -- --
Return of common stock as a result of a
default on a note receivable from
shareholder (unaudited) .................. -- -- (140,625) (140)
Issuance of Series C convertible
preferred stock for cash at $2.83
per share (unaudited) .................... 161,535 456,407 -- --
Issuance of options and warrants to
employees and non employees
(unaudited) .............................. -- -- -- --
Issuance of warrants for financing
activities (unaudited) ................... -- -- -- --
Issuance of warrants related to
advertising agreement (unaudited) ........ -- -- -- --
Series A convertible preferred stock
dividend accrual (unaudited) ............. -- -- -- --
Net loss (unaudited) ........................ -- -- -- --
------------ ------------ ------------ ------------
Balance, March 31, 2000 (Unaudited) ......... 161,535 $ 456,407 2,108,506 $ 2,109
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Additional Warrants and
Paid- In Options
Capital Outstanding
--------------- ---------------
<S> <C> <C>
Balance, December 31, 1999 ....................................... $ 7,112,734 $ 728,538
Issuance of common stock in connection with 90-day convertible
notes at $3.20 per share (unaudited) .......................... 25,555 --
Issuance of common stock in connection with shareholder note
payable at $3.20 per share (unaudited) ........................ 4,373 --
Series B convertible preferred stock dividend accrual payable
in the form of common stock, net (unaudited) .................. 67,430 --
Series B convertible preferred stock beneficial conversion
dividend (unaudited) .......................................... -- --
Return of common stock as a result of a default on a note
receivable from shareholder (unaudited) ....................... (449,860) --
Issuance of Series C convertible preferred stock for cash at
$2.83 per share (unaudited) ................................... 22,794 51,082
Issuance of options and warrants to employees and non employees
(unaudited) ................................................... -- 491,825
Issuance of warrants for financing activities (unaudited) ........ -- 135,152
Issuance of warrants related to advertising agreement
(unaudited) ................................................... -- 47,712
Series A convertible preferred stock dividend accrual
(unaudited) ................................................... -- --
Net loss (unaudited) ............................................. -- --
--------------- ---------------
Balance, March 31, 2000 (Unaudited) .............................. $ 6,783,026 $ 1,454,309
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
From Accumulated
Shareholders Deficit Total
--------------- ---------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1999 ....................................... $ (840,000) $ (14,531,491) $ (23,852)
Issuance of common stock in connection with 90-day convertible
notes at $3.20 per share (unaudited) .......................... -- -- 25,563
Issuance of common stock in connection with shareholder note
payable at $3.20 per share (unaudited) ........................ -- -- 4,374
Series B convertible preferred stock dividend accrual payable
in the form of common stock, net (unaudited) .................. -- (67,452) --
Series B convertible preferred stock beneficial conversion
dividend (unaudited) .......................................... -- (311,396) --
Return of common stock as a result of a default on a note
receivable from shareholder (unaudited) ....................... 450,000 -- --
Issuance of Series C convertible preferred stock for cash at
$2.83 per share (unaudited) ................................... (225,000) -- 305,283
Issuance of options and warrants to employees and non employees
(unaudited) ................................................... -- -- 491,825
Issuance of warrants for financing activities (unaudited) ........ -- -- 135,152
Issuance of warrants related to advertising agreement
(unaudited) ................................................... -- -- 47,712
Series A convertible preferred stock dividend accrual
(unaudited) ................................................... -- (35,901) (35,901)
Net loss (unaudited) ............................................. -- (1,239,969) (1,239,969)
--------------- ---------------- --------------
Balance, March 31, 2000 (Unaudited) .............................. $ (615,000) $ (16,186,209) $ (289,813)
=============== ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
----------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income (loss).............................. $ (8,999,646) $ 334,525 $ 4,153,623 $ (1,239,969)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................ 134,617 292,877 63,276 39,979
Amortization of deferred offering and
financing costs and accretion of debt
discount................................... 605,236 35,997 -- --
Interest accrued on notes receivable from
stockholders............................... (274,691) (235,951) (65,576) --
Non-cash compensation expense (income)....... 4,858,105 (3,901,693) (4,854,150) 491,825
Extraordinary loss related to debt
extinguishment............................. 407,000 -- -- --
Interest expense paid by issuance of common
stock, warrants, and stock options......... 777,666 92,830 203,111 77,649
Reserve against stockholders notes receivable -- 529,323 -- --
Amortization of deferred compensation........ 41,019 -- 12,431 --
Undistributed equity in income of
unconsolidated subsidiary.................. -- (46,242) -- 8,419
Changes in operating assets and liabilities,
net of transfers to unconsolidated
subsidiary:
Accounts receivable.......................... 182,643 (4,558) (94,698) 26,926
Inventories.................................. (808,192) 613,898 1,144,813 (294,404)
Prepaid expenses, deposits and other......... (108,099) (163,435) (30,818) (125,281)
Accounts payable............................. 241,016 (97,692) 234,165 24,392
Accrued liabilities.......................... 106,412 207,861 201,288 267,155
Other liabilities............................ (94,957) 37,453 28,848 15,180
---------------- ----------------- ---------------- --------------
Net Cash Provided By (Used In) Operating
Activities............................... (2,931,871) (2,304,807) 996,313 (708,129)
---------------- ----------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to refreshment centers in service.... (246,161) (1,711,105) (1,350,679) --
Purchase of property and equipment............. (50,599) (12,239) -- (2,259)
Cash investment in wholly owned,
unconsolidated subsidiary.................... -- (572,544) -- (44,862)
---------------- ----------------- ---------------- --------------
Net Cash Used In Investing Activities...... (296,760) (2,295,888) (1,350,679) (47,121)
---------------- ----------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings....................... 2,265,058 477,669 362,000 583,304
Principal payments on notes payable............ (127,971) (400,789) (1,804) (1,984)
Proceeds from issuance of notes payable to
officers and stockholders.................... -- 299,195 -- --
Principal payments on notes payable to
stockholder and officer...................... (12,500) -- -- --
Principal payments on capital lease
obligations.................................. (9,190) (15,753) (3,771) (5,454)
Other offering and financing costs paid........ (204,843) (88,000) -- (276,470)
Proceeds from issuance of common stock......... 390,043 -- -- --
Proceeds from issuance of preferred stock and
warrants..................................... 600,275 4,439,775 -- 357,177
---------------- ----------------- ---------------- --------------
Net Cash Provided By Financing Activities.. 2,900,872 4,712,097 356,425 656,573
---------------- ----------------- ---------------- --------------
Net Increase (Decrease) In Cash.................... (327,759) 111,402 2,059 (98,677)
Cash At Beginning of Year.......................... 329,609 1,850 1,850 113,252
---------------- ----------------- ---------------- --------------
Cash At End Of Year................................ $ 1,850 $ 113,252 $ 3,909 $ 14,575
================ ================= ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
----------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................... 296,935 130,640 4,489 3,649
Non-cash investing and financing activities
Issuance of common stock in payment of debt
offering costs............................. 84,000 -- -- --
Accrual of preferred stock dividends......... 18,542 607,269 35,506 414,749
Issuance of common stock as payment of debt
obligations................................ 1,261,521 368,088 -- --
Issuance of preferred stock as payment of
debt obligations........................... 1,040,000 1,410,051 -- --
Accrued interest, accounts payable and
warrants converted to debt................. -- 608,984 98,169 56,063
Cancellation of stockholder notes receivable
and related accrued interest in exchange
for return of 1,471,000 shares of common
stock...................................... -- 2,940,569 -- --
Property and equipment acquired by capital
lease...................................... -- 28,476 -- --
Retirement of common stock................... -- -- -- 450,000
Issuance of warrants for advertising
agreement.................................. -- -- -- 135,152
Note receivable for Series C preferred
offering................................... -- -- -- 225,000
Sale of assets for settlement of accounts
payable to related parties................. -- -- -- 12,935
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
eROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED
MARCH 31, 2000 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
eRoomSystem Technologies, Inc., a Nevada corporation ("eRoomSystem
Technologies"), is the successor to RoomSystems, Inc. ("RSI"). RSI was
originally incorporated as InnSyst! Corporation, a North Carolina
corporation, on March 17, 1993 and on April 17, 1996, was
reincorporated as a Nevada corporation.
**
On April 29, 1996, RSI and RoomSystems Finance Corporation ("RSF")
entered into a Reorganization Plan and Merger Agreement whereby RSF
became a wholly owned subsidiary of RSI (see Note 3). On October 15,
1997, the operations of RSF were effectively transferred to RSI and RSF
was dissolved. On August 31, 1999, RoomSystems International
Corporation ("RSIC") was incorporated in Nevada as a wholly owned
subsidiary of RSI.
As of December 31, 1999, RSI, RSIC and their shareholders entered into
an Agreement and Plan of Reorganization wherein RSI became a wholly
owned subsidiary of RSIC. On March 29, 2000 and corrected on May 30,
2000, RSIC changed its name to eRoomSystem Technologies, Inc.
These reorganizations have been accounted for as reorganizations of
entities under common control with the assets and liabilities reflected
at carry-over basis in a manner similar to pooling-of-interests
accounting. The accompanying consolidated financial statements have
been restated to reflect the equivalent eRoomSystem Technologies shares
for all periods presented.
On September 29, 1999, eRoomSystem Technologies formed a new
bankruptcy-remote entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned
subsidiary (see Note 4).
The accompanying consolidated financial statements include the accounts
of eRoomSystem Technologies, and its wholly owned subsidiary RSI, after
elimination of intercompany accounts and transactions. RSi BRE has not
been consolidated in the accompanying financial statements since the
Company does not have the ability to control RSi BRE's operations.
eRoomSystem Technologies and RSI are collectively referred to as
"eRoomSystem Technologies" or the "Company." RSi BRE has been accounted
for under the equity method of accounting.
NATURE OF OPERATIONS AND RELATED RISKS
The Company designs, assembles and markets a complete line of
fully-automated Refreshment Centers and eRoomSafes traditionally
installed in hotels. The Refreshment Centers and eRoomSafes use
proprietary software and patented credit card technology that integrate
with the data collection computer in each hotel.
The Company has suffered recurring net losses (exclusive of non-cash
compensation expense (income)) and as of December 31, 1999, had a
working capital deficit of $2,650,616, a stockholders' deficit of
$23,852, and was in default under certain debt agreements. During the
years ended December 31, 1998 and 1999, the Company's operations used
$2,931,871 and $2,304,807 of cash, respectively. Additionally, at
December 31, 1999 the Company was past due on accounts payable with
several vendors which could affect the Company's ability to procure
inventory and services for its operations. As of March 31, 2000, the
Company had a working capital deficit of $3,271,963 and a stockholders'
deficit of $289,813. During the three months ended March 31, 2000, the
Company's operations used $708,129 of cash. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. The Company needs to obtain additional financing to fund
payment of past due and current debt obligations and to provide working
capital for operations. Management is attempting to raise additional
equity capital through a public
F-13
<PAGE>
offering of common stock and a private offering of preferred stock and
debt, and to arrange debt financing for product sales. The financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
The Company is subject to certain risk factors frequently encountered
by companies lacking adequate capital and which are in the early stages
of developing a business line that may impact its ability to become a
profitable enterprise. These risk factors include, among others:
a. The Company's business model is capital intensive and will
require significant additional equity or debt financing. This
additional funding may not be available in sufficient amounts
or on acceptable terms to the Company, or at all.
b. The Company faces competition from companies that have
substantially greater capital resources, research and
development, manufacturing and marketing resources than the
Company.
c. The Company's ability to implement its strategy is dependent
upon its ability to retain key employees, ability to attract
and retain additional qualified personnel and its ability to
manage expansion effectively.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company's Board of Directors has authorized the filing of a
registration statement with the United States Securities and Exchange
Commission to register shares of its common stock in connection with a
proposed initial public offering ("IPO"). If the IPO is consummated
under the terms presently anticipated, 360,000 outstanding shares of
Series A convertible preferred stock, 2,081,680 outstanding shares of
Series B convertible preferred stock and 161,535 outstanding shares of
Series C convertible preferred stock as of March 31, 2000 will be
automatically converted into 2,048,047 shares of common stock upon the
closing of the IPO. In connection with the Series A preferred stock
conversion, the Company will record a dividend of $1,800,000 related to
the contingent beneficial conversion feature (see Note 10). The Series
B convertible preferred stock beneficial conversion feature totaled
$3,747,024, as adjusted (see Note 10), and is being recognized over the
period from the date of issuance and from the date of modification of
the Series B convertible preferred stock through September 28, 2000,
which is the earliest date at which the Series B convertible preferred
stockholders have the unmitigated option to convert their shares.
During the year ended December 31, 1999, the Company recorded a
dividend of $321,370 to the Series B stockholders related to the
beneficial conversion feature. During the three month period ended
March 31, 2000, the Company recorded a dividend of $311,396 to the
Series B stockholders related to the beneficial conversion feature. The
remaining portion of the Series B convertible preferred stock
beneficial conversion feature, as adjusted, will be recognized as a
dividend to the holders of Series B convertible preferred stock during
the period commencing April 1, 2000 and ending September 28, 2000. The
effect of the conversion of the preferred stock outstanding at March
31, 2000 and the related beneficial conversion features have been
reflected as unaudited pro forma stockholders' equity in the
accompanying consolidated balance sheet.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
F-14
<PAGE>
INVENTORIES
Inventories include direct materials, direct labor and manufacturing
overhead costs and are stated at the lower of cost (using the first-in,
first-out method) or market value. Inventories consist of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------------- March 31,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Finished goods.................................. $ 997,248 $ 284,382 $ 323,435
Work-in process................................. 115,561 160,764 141,984
Parts and raw materials......................... 375,545 251,887 533,581
--------------- --------------- --------------
$1,488,354 $ 697,033 $ 999,000
=============== =============== ==============
</TABLE>
Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values. Due to
competitive pressures and technical innovation, it is possible that
estimates of the net realizable value could change in the near term.
REFRESHMENT CENTERS IN SERVICE AND PROPERTY AND EQUIPMENT
Refreshment Centers (including eRoomSafes, if applicable) and property
and equipment are stated at cost, less accumulated depreciation and
amortization. Major additions and improvements are capitalized, while
minor repairs and maintenance costs are expensed when incurred.
Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets, after
taking into consideration residual values for Refreshment Centers,
which are as follows:
Refreshment Centers in service................... 7 years
Production equipment............................. 3 - 5 years
Computer and office equipment.................... 3 - 7 years
Vehicles......................................... 7 years
Depreciation and amortization expense related to Refreshment Centers in
service and property and equipment was $84,028 and $277,030 for the
years ended December 31, 1998 and 1999, respectively, and $23,104 for
the period ended March 31, 2000.
On retirement or disposition of property and equipment, the cost and
related accumulated depreciation and amortization are removed from the
accounts and any resulting gain or loss is recognized in the statement
of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated
financial statements for cash, accounts receivable and accounts payable
approximate fair values because of the immediate or short-term
maturities of these financial instruments. The carrying amounts of the
Company's debt obligations approximate fair value based on current
interest rates available to the Company.
CAPITALIZED SOFTWARE COSTS
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" development costs incurred in the research and
development of new software products to be sold, leased or otherwise
marketed are expensed as incurred until technological feasibility in
the form of a working model has been established. Internally generated
capitalizable software development costs have not been material for the
years ended December 31, 1998 and 1999 or the period ended March
F-15
<PAGE>
31, 2000. The Company has charged its software development costs to
research and development expense in the accompanying consolidated
statements of operations.
PATENTS AND LICENSE RIGHTS
Patents and license rights consist of patents and licenses purchased
from a related party (see Note 6). These costs are being amortized on a
straight-line basis over the estimated life of the related patents or
licenses of 7 years. Management evaluates the recoverability of these
costs on a periodic basis, based on revenues from the products related
to the technology, existing or expected revenue trends and projected
cash flows.
DEFERRED OFFERING AND FINANCING COSTS
The Company capitalizes direct costs associated with the acquisition of
debt financing. These costs are amortized over the life of the related
debt as additional interest expense. If the underlying debt is repaid
or extinguished prior to the scheduled maturity, the costs are removed
from the accounts and considered in the determination of the gain or
loss from extinguishment. Certain debt has been converted to equity and
the related unamortized debt financing costs have been recorded as
equity offering costs. The Company also capitalizes direct costs
associated with the acquisition of equity financing which are netted
against the actual equity proceeds.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances
have occurred which indicate possible impairment. The Company uses an
estimate of future undiscounted net cash flows from the related asset
or group of assets over their remaining life in measuring whether the
assets are recoverable. As of December 31, 1999 and March 31, 2000, the
Company does not consider any of its long-lived assets to be impaired.
REVENUE RECOGNITION
The Company generates revenues from either the sale of Refreshment
Centers and eRoomSafes or from leases of Refreshment Centers and
eRoomSafes under revenue sharing agreements. Under the revenue sharing
agreements, the Company receives a portion of the sales generated by
the units and under certain agreements is guaranteed a minimum daily
revenue amount. The Company also generates revenues from maintenance
services.
Revenue from the sale of Refreshment Centers and eRoomSafes is
recognized upon completion of installation and acceptance by the
customer. The revenue sharing agreements are accounted for as operating
leases with revenues being recognized as earned over the lease period.
Maintenance revenues are recognized as the services are performed or
pro rata over the service period. The maintenance services are not
integral to the functionality of the Refreshment Centers and are at the
option of the customer. In connection with the revenue sharing
agreements, a portion of the revenues received by the Company are
classified as maintenance fees based upon vendor-specific objective
evidence of fair value. The Company defers revenue paid in advance
relating to future services and products not yet installed and accepted
by the customer.
INCOME TAXES
The Company recognizes an asset or liability for the deferred tax
consequences of all temporary differences between the tax bases of
assets or liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are
recovered or settled. These deferred tax assets or liabilities are
measured using the enacted tax rates that
F-16
<PAGE>
will be in effect when the differences are expected to reverse.
Deferred tax assets are reviewed periodically for recoverability and
valuation allowances are provided, as necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
new accounting and reporting standards for companies to report
information about derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This statement is effective
for financial statements issued for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect this
statement to have a material impact on the Company's results of
operations, financial position or liquidity.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of
APB Opinion No. 25." Interpretation No. 44 provides definitive guidance
regarding accounting for stock-based compensation to non-employee
directors. Interpretation 44 allows non-employee directors to be
treated as "employees" for purposes of applying APB Opinion No. 25. The
Company has retroactively applied this interpretation for all issuances
to non-employee directors during the year ended December 31, 1999 and
the three months ended March 31, 2000.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"), and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS 128 and SAB
98, basic net loss per common share ("Basic EPS") is computed by
dividing net loss available to common stockholders by the weighted
average number of common shares and the dilutive potential common share
equivalents then outstanding. Potential common share equivalents
consist of shares issuable upon the exercise of stock options, warrants
and shares issuable upon the conversion of Series A, Series B, and
Series C convertible preferred stock.
As of December 31, 1998 and 1999 and March 31, 2000, there were 360,000
shares of Series A convertible preferred stock outstanding, as of
December 31, 1999 and March 31, 2000 there were 2,081,680 shares of
Series B convertible preferred stock outstanding, respectively, as of
March 31, 2000 there were 161,535 shares of Series C convertible
preferred stock outstanding, and as of December 31, 1998 and 1999 and
March 31, 2000, there were options and warrants outstanding to purchase
598,030, 866,508 and 2,490,317 shares of common stock, respectively,
that were not included in the computation of diluted net loss per
common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
3. MERGER WITH RSF AND RELATED AGREEMENTS
RSF was incorporated in April 1995 by eRoomSystem Technologies'
president and one of the Company's legal advisors, both of whom are
stockholders of the Company, for the purpose of arranging financing for
the sale or lease of Refreshment Centers. The separate legal entity was
a requirement of PFC Group, Inc. ("PFC"), an unrelated lender under the
Assignment Agreement discussed below.
In May 1995, RSI and RSF entered into a Master Sale and Assignment
Agreement (the "Assignment Agreement") with PFC. Under the Assignment
Agreement, Refreshment Centers were manufactured by RSI and sold to
RSF. RSF entered into revenue sharing agreements with certain hotels
and obtained financing from PFC to purchase the units from RSI. RSI
entered into installation, maintenance and license agreements with the
hotels and provided the related services. Title to the Refreshment
Centers was transferred to PFC; however, RSF had an option to
repurchase the units at the end of the lease for ten percent of the net
book value of the equipment, as defined.
F-17
<PAGE>
In January 1996, RSF entered into a stock purchase and sale agreement
with PFC in which RSF acquired the residual value of the Refreshment
Centers sold to PFC under the Assignment Agreement in exchange for
shares of RSF's common stock. On April 29, 1996, RSI and RSF entered
into a Reorganization Plan and Merger Agreement whereby RSF became a
wholly owned subsidiary of RSI.
4. RSG INVESTMENT TRANSACTIONS AND SETTLEMENT
On July 17, 1998, the Company entered into an Equipment Purchase and
Sale Agreement (the "Equipment Agreement") with RSG Investments, LLC
("RSG"), an unrelated lender. Under the terms of the Equipment
Agreement, RSG paid $1.5 million for the production of approximately
2,270 Refreshment Centers (the "RSG Units") to be installed in six
hotel properties in the United States under revenue sharing agreements.
Pursuant to the Equipment Agreement, title to the RSG units transferred
to RSG and the Company was to repurchase the RSG Units within 75 days,
or by September 30, 1998. The repurchase price was based upon the $1.5
million bearing interest at 15 percent per annum and was secured by
common stock of the Company pledged by certain officers, directors and
consultants to the Company and the assets of the Company. Due to the
Company's obligation to repurchase the RSG Units, this transaction was
treated as a collateralized borrowing in the accompanying December 31,
1998 consolidated balance sheet.
As an inducement for RSG to enter into the Equipment Agreement, the
Company issued to the principals of RSG warrants to purchase 46,875
shares of common stock at $12.80 per share. These warrants were valued
by the Company at the time of issuance at $253,347 using the
Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 5.5 percent, expected dividend yield of 0
percent, volatility of 58.2 percent, and expected life of 4.9 years. In
the event that the Company did not meet the obligation to repurchase
the units, additional warrants to purchase 9,375 shares of the
Company's common stock at $12.80 per share accrued to RSG every thirty
days through January 28, 1999, whereupon the Equipment Agreement would
be in default.
During the years ended December 31, 1998 and 1999, the Company issued
additional warrants to purchase 37,500 and 9,375 shares of common
stock, respectively, in connection with the Equipment Agreement. These
additional warrants were valued by the Company at the time of issuance
at $202,597 and $50,750, respectively, using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate
of 5.5 percent, expected dividend yield of 0 percent, volatility of
58.2 percent, and expected life of 4.9 years. All of the warrants
issued to RSG were exercisable for a period of three years subsequent
to the Company's IPO.
On January 28, 1999, the Company was unable to meet the terms of the
repurchase obligation and the Equipment Agreement was in default. RSG
granted the Company several extensions to meet the terms under the
Equipment Agreement, the last of which was signed on May 19, 1999. RSG
placed certain conditions on the Company, the failure to meet any of
the conditions would result in RSG`s foreclosure on the pledged common
stock and the assets of the Company.
On September 28, 1999, the Company and RSG entered into a settlement
agreement in the form of the Equipment Transfer Agreement (the
"Transfer Agreement"), which provided for the following:
- eRoomSystem Technologies formed a new bankruptcy-remote
entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned
subsidiary. The ownership of the RSG Units and the related
revenue sharing agreements were transferred to RSi BRE. RSG
is to receive $0.57 per unit per day of the revenue realized
from the revenue sharing agreements covering 2,270 of the
RSG Units over the remaining life of their seven year
revenue sharing agreements. However, the $0.57 per unit per
day is paid only after $0.11 per unit per day has been paid
to eRoomSystem Technologies to cover taxes and maintenance.
To the extent that at least $0.68 per unit per day in
revenue is not realized from the RSG Units, the Company has
no obligation to pay the difference to RSG. Rather, RSG is
subject to the risk that revenues generated from the RSG
Units are not at least $0.68 per unit per day. To the extent
that the revenue per unit per day exceeds $0.68, the
incremental amount is paid to eRoomSystem Technologies.
F-18
<PAGE>
- RSG converted one-third of the principal amount of the loan,
or $500,000, into 166,667 shares, at $3.00 per share, of
Series B convertible preferred stock.
- eRoomSystem Technologies paid $250,000 to RSG upon the
execution of the Transfer Agreement and executed a
promissory note in the amount of $750,000 bearing 10 percent
interest to be repaid on the earlier of May 1, 2000 (which
has since been extended to June 30, 2000) or 30 days after
the completion of the Company's IPO. This note is secured by
the assets of the Company.
- eRoomSystem Technologies transferred $750,000 of cash and
other assets into RSi BRE to pay for the manufacture and
installation of at least an additional 750 Refreshment
Centers. If eRoomSystem Technologies fails to pay the
$750,000 note to RSG prior to December 31, 2000, the
$750,000 note will be forgiven and in exchange RSG will
receive $0.57 per unit per day from the additional 750 units
over the remaining term of their seven year revenue sharing
agreements. This obligation is under the same terms as the
$0.57 per unit per day payments discussed above.
- RSG terminated the pledge of the common stock of the
stockholders and the assets of the Company.
- RSG remitted to the Company all payments received under the
revenue sharing agreements for the RSG Units.
- RSG forgave the interest due on the repurchase obligation up
to August 1, 1999.
- RSG returned to eRoomSystem Technologies the warrants to
purchase 93,750 shares of the Company's common stock, and
the warrants which accrued during the period commencing
September 30, 1998 through January 28, 1999.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings," the Company has accounted for this
transaction as a troubled debt restructuring. Accordingly, no gain or
loss has been recognized from this transaction. Rather, the Company
combined all liabilities to RSG at the time of the Transfer Agreement
including the principal amount of the repurchase obligation of
$1,500,000, accrued interest of $298,849 and the value of the warrants
of $506,694. The total liability of $2,305,543 was reduced by the
$250,000 of cash paid and the $500,000 of Series B convertible
preferred stock that was issued to RSG. The remaining liability is
being amortized by the Company over the remaining life of the
underlying revenue sharing agreements using an estimated effective
interest rate of approximately 41 percent. This estimated effective
interest rate could fluctuate in future periods depending upon the
level and timing of revenues generated from the RSG units and the
timing of the remaining $750,000 payment due to RSG.
The board of directors of RSi BRE is comprised of one appointee from
the Company, one appointee from RSG and one independent appointee. All
operating decisions, including disbursements, of RSi BRE require
unanimous consent of RSi BRE's board of directors. As a result, the
Company does not control RSi BRE. In accordance with EITF 96-16,
"Investor's Accounting for an Investee When the Investor has a Majority
of the Voting Interest But the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights", the Company has determined that
RSi BRE does not qualify for consolidation in the Company's financial
statements. Rather, the Company's investment in RSi BRE is reflected as
an "Investment in Wholly Owned, Unconsolidated Subsidiary" in the
accompanying December 31, 1999 consolidated balance sheet and is being
accounted for under the equity method of accounting. At December 31,
1999 and March 31, 2000, the assets and liabilities of RSi BRE
consisted of the following:
F-19
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 March 31, 2000
---------------- -----------------
<S> <C> <C>
Cash......................................................... $ 189,659 $ 48,946
Accounts receivable.......................................... 66,507 142,068
Inventory.................................................... 414,860 --
Refreshment centers in service............................... 2,097,363 2,712,727
Accumulated depreciation..................................... (217,797) (298,876)
Accrued liabilities.......................................... (4,616) (15,689)
Customer deposits............................................ (10,000) (16,757)
---------------- -----------------
Net Assets................................................... $ 2,535,976 $ 2,572,419
================ =================
</TABLE>
For the period from its inception (September 29, 1999) to December 31,
1999 and for the three months ended March 31, 2000, the revenues and
expenses of RSi BRE consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999 March 31, 2000
---------------- -----------------
<S> <C> <C>
Revenue sharing agreement revenues........................... $ 212,919 $ 181,115
Depreciation................................................. (53,947) (81,080)
Other operating expenses..................................... (16,654) (13,030)
Interest income.............................................. 5,297 1,291
---------------- -----------------
Net Income................................................... $ 147,615 $ 88,296
================ =================
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
1996 PRIVATE DEBT OFFERING
During the period from September through December 31, 1996, the Company
raised $1,310,000 of debt funding through a best efforts private
placement of promissory notes (the "1996 Notes"). An additional
$160,000 was raised through March 1997. The 1996 Notes bore interest at
12 percent per annum paid quarterly and matured one year from the date
of issuance. In the event the Company did not repay all principal and
accrued interest at the end of the one-year term, the 1996 Notes were
extended for an additional year and the interest rate increased to 15
percent per annum. If the 1996 Notes were extended for the additional
year, all outstanding principal was to be amortized on a monthly basis
over the second year. The 1996 Notes are secured by the assets of the
Company.
The investors in the 1996 Notes were also issued 242,550 warrants to
purchase shares of common stock of eRoomSystem Technologies at $2.67
per share which are exercisable for a period of the earlier of the five
years from the date of issuance or three years subsequent to the
closing of the Company's IPO. The warrants issued in connection with
the debt were valued by the Company at the time of issuance at $148,764
using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 5.4 percent, expected dividend
yield of 0 percent, volatility of 22.2 percent, and expected life of
3.3 years. The value of the warrants was recorded as warrants
outstanding and the related debt was recorded net of the value of the
warrants. The difference between the face amount of the debt and the
recorded value was accreted to interest expense over the extended term
of the debt. In addition, the Company agreed to pay the placement agent
a 12 percent selling commission and issued the agent and brokers 86,250
warrants to purchase common stock at $2.67 per share which are
exercisable for a period of the earlier of five years from the date of
issuance or three years subsequent to the Company's IPO. The value of
the these warrants of $52,900 was determined using the Black-Scholes
option pricing model with the assumptions disclosed above. The
commissions paid of $157,200 were recorded as deferred debt offering
costs and were amortized to interest expense over the extended term of
the debt.
F-20
<PAGE>
During late 1997 and early 1998, the Company defaulted on all of the
1996 Notes. To avoid foreclosure on the assets of the Company by the
holders of 1996 Notes, the Company agreed to issue each of the holders
of the 1996 Notes the following:
- On a monthly basis commencing on the maturity date of each
note and continuing until the date of pay off or conversion
into equity securities, a warrant to purchase 99 shares of
common stock at $2.67 per share for every $20,000 of
outstanding principal which are exercisable for a period of
two years subsequent to the closing of the Company's IPO.
During the years ended December 31, 1998 and 1999 and for
the three months ended March 31, 2000, the Company issued
warrants to purchase 38,089, 19,233 and 4,290 shares of
common stock, respectively, which were valued (utilizing the
Black-Sholes option pricing model with the following
weighted average assumptions for the years ended December
31, 1998 and 1999 and for the three months ended March 31,
2000, respectively: risk free interest rates at 5.4, 5.7 and
6.7 percent, expected dividend yield of 0 percent,
volatility at 49.0, 96.5 and 95.0 percent, and expected
lives at 2.8, 3.0 and 2.3 years, respectively) at amounts
ranging from $8.32 to $8.69, $1.63 to $4.99 and $1.05 per
share, respectively. These amounts were recorded as
additional interest expense on the debt.
- 188 shares of common stock for every $20,000 of outstanding
principal, or a total of 13,781 shares of common stock which
were valued at $10.67 per share at their date of issuance in
1998.
- An additional 469 shares of common stock for every $20,000
of outstanding principal converted into Series A convertible
preferred stock. During 1998, holders of $1,040,000 of
outstanding principal elected to convert their 1996 Notes
into 208,000 shares of Series A convertible preferred stock
at an agreed upon value of $5.00 per share. In connection
with this conversion, the Company issued 24,375 shares of
common stock which were valued at $10.67 per share.
The total value of $407,000 related to the issuance of the 13,781
common shares issued to avoid foreclosure and the 24,375 common shares
issued to induce the conversion to Series A convertible preferred stock
has been recognized as an extraordinary loss from debt extinguishment
in the accompanying December 31, 1998 statement of operations.
In connection with the above mentioned conversion of the 1996 Notes
into Series A convertible preferred stock, the Company issued 13,125
shares of common stock to the original placement agent for assisting in
the conversion. These shares were valued at $10.67 per share and have
been treated as a cost of the conversion of the 1996 Notes into Series
A convertible preferred.
In May 1999, the remaining holders of the 1996 Notes were offered the
right to convert their notes into Series B convertible preferred stock
at the rate of $3.00 per share. Notes consisting of $300,000 of
outstanding principal and $58,124 of accrued interest were converted
into 119,374 shares of Series B convertible preferred stock.
As of December 31, 1999, the remaining 1996 Notes in the amount of
$130,000 are in default and are continuing to accrue warrants on a
monthly basis.
1997 PRIVATE DEBT AND EQUITY OFFERING
In April 1997, the Company began a private placement offering of
promissory notes (the "1997 Notes") and shares of common stock. The
offering (as amended) consisted of 198.6 units at $10,000 per unit,
each unit consisting of 938 shares of common stock and a $5,000
promissory note. The 1997 Notes bear interest at 15 percent, payable
quarterly, were due in one year and are secured by the assets of the
Company.
In connection with the private placement offerings, the Company agreed
to issue common stock to a placement agent (the "Merchant Banker") such
that the Merchant Banker would own 5.9 percent of the issued and
outstanding capital stock of the Company immediately preceding the
filing of a registration statement relating to an IPO of the Company's
securities.
F-21
<PAGE>
In May 1998, the Company entered into an agreement with the Merchant Banker
which eliminated its anti-dilution rights in exchange for the issuance of
68,948 shares of common stock and the forgiveness of $50,014 in receivables
from the Merchant Banker. The additional shares issued have been reflected
as a stock dividend inasmuch as no additional services were provided by the
Merchant Banker.
In September 1998, holders of the 1997 Notes were offered the right to
convert the 1997 notes and accrued interest into common stock at a rate of
$10.67 per share. Note holders consisting of $115,000 in outstanding
principal and $9,428 of accrued interest elected to convert their 1997
Notes into 11,665 shares of common stock at that time. The Company incurred
$11,082 of offering costs associated with this conversion which was
recorded as an offset to additional paid-in capital.
In May 1999, remaining holders of the 1997 Notes were offered the right to
convert the notes and accrued interest into Series B convertible preferred
stock at the rate of $3.00 per share. 1997 Note holders consisting of
$425,051 in outstanding principal and $96,882 of accrued interest elected
to convert their 1997 Notes into 173,976 shares of Series B convertible
preferred stock at that time. In addition, the Company paid $5,000 in cash
to one investor.
As of December 31, 1999, the remaining 1997 Notes in the amount of $431,750
are in default.
1998 CONVERTIBLE 60 DAY NOTES OFFERING
In May 1998, the Company issued $561,520 of 10 percent convertible
promissory notes, with a term of sixty days. These notes were convertible
at maturity into common stock at a price of $10.67 per share. These
convertible promissory notes were secured by the assets of the Company. In
October 1998, the Company converted $561,520 of outstanding principal and
$17,632 of accrued interest into 54,296 shares of common stock. In
connection with this conversion, the Company agreed to issue 7,875 shares
of common stock as a finders fee. These shares were valued at $10.67 per
share and recorded as deferred offering costs and amortized to interest
expense over the term of the notes. In addition, the Company incurred
$45,462 of offering costs associated with this conversion which was
recorded as an offset to additional paid-in capital.
1998 PROMISSORY NOTE
During 1998, the Company issued a $100,000 short-term promissory note to an
investor which was subsequently converted into 9,375 shares of common stock
at a price of $10.67 per share. In addition, this investor was granted an
additional 1,500 shares of common stock as an inducement to convert the
promissory note, which was valued at $10.67 per share and recorded as
additional interest expense in 1998.
1999 PRIVATE DEBT OFFERING
From February through May 1999, the Company offered 15 percent promissory
notes with a term of ninety days (the "1999 Notes"). Interest was payable
at maturity. Additionally, the 1999 Notes provided for the holders to
receive 37.5 shares of common stock every thirty days for each $1,000 of
principal outstanding. The Company received $350,000 from the issuance of
the 1999 Notes. The 1999 Notes are secured by the assets of the Company.
During 1999, the Company paid off $134,885 of the 1999 Notes with cash and
converted $180,000 of the 1999 Notes and 7,479 shares of accrued but
unissued common stock (which were valued at $4.00 per share) into 81,909
shares of Series B convertible preferred stock. In addition, during 1999
the Company accrued and issued 41,410 shares of common stock that were not
converted into Series B convertible preferred stock. As of December 31,
1999, $35,115 of these notes remain outstanding and are in default.
2000 NOTE PAYABLE TO STOCKHOLDER
On February 15, 2000, the Company received a $500,000 loan from a company,
wholly owned by a stockholder and nominee to the board of directors. The
loan is evidenced by a promissory note, bears
F-22
<PAGE>
interest at the rate of 10 percent per annum, matures on May 31, 2000
(subsequently extended to June 30, 2000) and is secured by the assets of
the Company. In addition, the Company issued a warrant for the purchase of
18,750 shares of common stock, which is exercisable at $4.80 per share for
two years subsequent to the closing of the IPO. The warrants issued were
valued at $25,938 based upon their fair value measured using the
Black-Scholes option pricing model with the following assumptions: 6.7
risk-free interest rate, 70.45 percent volatility and a 2.30 year estimated
life. The Company charged the value of the warrants to interest expense.
2000 CONVERTIBLE PROMISSORY NOTES
During March and April 2000, convertible promissory notes were issued in
connection with the Series C convertible preferred stock offering. See
Note 10.
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------- March 31,
1998 1999 2000
------------- -------------- -------------
<S> <C> <C> <C>
1996 Notes secured by assets of the Company, in
default as of December 31, 1998 and 1999,
interest at 15 % per annum and accruing
warrants to purchase common stock on a monthly
basis (see description above)................... $ 429,725 $ 130,000 $ 130,000
1997 Notes secured by assets of the Company, in
default as of December 31, 1998 and 1999,
interest of 15 % per annum (see description
above).......................................... 870,500 431,750 431,750
1999 Notes secured by assets of the Company, in
default as of December 31, 1999, interest at
15% per annum and accruing shares of common
stock on a monthly basis (see description above) -- 35,115 35,115
Note payable to RSG net of discount of $35,136 and
$0 as of December 31, 1998 and 1999,
respectively, secured by assets of the Company,
imputed interest at 41 % per annum, (see Note 4) 1,464,864 1,555,544 1,555,544
Note payable to a corporation for services
performed, in default as of December 31, 1999,
interest at 22 % per annum, unsecured........... -- 102,290 158,354
Note payable to an individual, in default as of
December 31, 1998 and 1999, interest at 15 %
per annum, unsecured............................ 100,000 100,000 100,000
Note payable to a bank, interest at 10 % per
annum, due in monthly installments through June
2002, secured by vehicle........................ 13,740 10,290 9,372
Note payable to a bank, interest at 9.25% per
annum, due in monthly installments through
April 2000, secured by a vehicle................ 5,460 1,429 362
Note payable to an individual, interest at 15 %
per annum, unsecured............................ -- 6,062 6,062
Convertible promissory note, bearing interest at
7 % per annum, shown net of $30,490 discount
and $9,312 in deferred loan costs as of March
31, 2000 (see description above)................ -- -- 135,198
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------- March 31,
1998 1999 2000
------------- -------------- -------------
<S> <C> <C> <C>
Note payable to a company, interest at 10% per
annum, matures June 30, 2000, secured by the
assets of the Company, in addition, the Company
issued a warrant for the purchase of 18,750
shares of common stock (see description above).. -- -- 500,000
------------- -------------- -------------
Total notes payable and long-term debt............. 2,884,289 2,372,480 3,061,757
Less: Current portion.............................. (2,872,570) (1,560,458) (2,114,542)
------------- -------------- -------------
$ 11,719 $ 812,022 $ 947,215
============= ============== =============
</TABLE>
None of the notes in default have been extended. Moreover, holders of the
notes in default have not taken any action to foreclose on the notes. In
addition, subsequent to March 31, 2000, the Company made a principal
payment of $230,000 on the note in the original principal amount of
$500,000.
Future maturities of notes payable and long-term debt as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000................................................ $ 1,560,458
2001................................................ 4,210
2002................................................ 32,043
2003................................................ 109,871
2004................................................ 163,711
Thereafter........................................... 502,187
---------------
Total............................................... $ 2,372,480
</TABLE>
6. NOTES PAYABLE TO STOCKHOLDERS
In March 1996, the Company's president, who is also a principal
stockholder, agreed to purchase 187,500 shares of RSI's common stock from a
stockholder for $500,000. As payment for the shares, the president signed a
$250,000 note payable obligation to the selling stockholder, which bore
interest at 7 percent and was due on March 14, 1998, and signed another
$250,000 promissory note payable to the selling stockholder, which bore
interest at 7 percent and was due on demand. In October 1996, the Company
agreed to assume the president's rights and obligations under the
agreements and repurchased the shares as treasury shares as per the terms
of the original agreement with no additional compensation or consideration
paid to the president. In March 1998, the Company and the stockholder
agreed to rescind and to return the 187,500 shares of stock to the original
stockholder. Accordingly, no loss was recognized on this transaction.
In October 1996, in connection with the Company's acquisition of certain
patents and license rights from the Company's president, the Company agreed
to pay the president $125,000 as well as issue the president 65,625 shares
of common stock. The $125,000 obligation was originally due March 1, 1997
without interest. During 1997, 1998 and 1999, the Company paid $41,750,
$12,500 and $0, respectively, in cash towards the principal on this
obligation. In December, 1999, the Company's president agreed to convert
the remaining principal balance of $70,750 into 23,583 shares of Series B
preferred stock at $3.00 per share.
During the years ended December 31, 1998 and 1999, the Company's president
loaned the Company $75,000 and $130,209, respectively. Additionally, during
the year ended December 31, 1999, the
F-24
<PAGE>
Company's chief financial officer, who is a stockholder, and another
stockholder loaned the Company $10,545 and $83,441, respectively. These
loans were evidenced by promissory notes which bore interest at 10 percent.
In addition, the note holders were also to receive 100 shares of common
stock per month for every $1,000 of principal outstanding. In connection
with these agreements, the Company accrued and issued 83,500 shares of
common stock which were valued at $3.20 per share. During September 1999,
all amounts outstanding on these notes were converted into 105,984 shares
of Series B convertible preferred stock at a rate of $3.00 per share.
7. LEASES
CAPITALIZED LEASE OBLIGATIONS
Certain equipment is leased under capital lease agreements. The following
is a summary of assets held under capital lease agreements:
<TABLE>
<CAPTION>
December 31,
--------------------------------- March 31,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Property and equipment.......................... $ 75,126 $ 103,602 $ 28,476
Less: Accumulated amortization.................. (29,320) (62,701) (5,537)
--------------- --------------- --------------
$ 45,806 $ 40,901 $ 22,939
=============== =============== ==============
</TABLE>
The following is a schedule of future minimum lease payments under capital
lease agreement together with the present value of the net minimum lease
payments at December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000................................................ $ 35,728
2001................................................ 35,728
2002................................................ 27,776
---------------
Total net minimum lease payments....................... 99,232
Less: Amount representing interest.................... (22,074)
---------------
Present value of net minimum lease payments............ 77,158
Less: Current portion................................. (22,061)
---------------
Total............................................... $ 55,097
===============
</TABLE>
OPERATING LEASES AS LESSOR
The Company accounts for its revenue sharing agreements as operating
leases. As of December 31, 1999 and March 31, 2000, the Company had only
one revenue sharing agreement for which the customer was contractually
obligated to pay minimum monthly payments. Agreements with all other
customers provide for an allocation of revenues to the Company with no
minimum monthly payment. Accordingly, the Company is unable to estimate
future amounts to be received under these agreements.
Future minimum payments to be received under the contract that provides for
minimum monthly amounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000................................................ $ 132,457
2001................................................ 132,457
2002................................................ 132,457
2003................................................ 132,457
2004................................................ 132,457
F-25
<PAGE>
Thereafter.............................................. 264,914
---------------
Total............................................... $ 927,199
===============
</TABLE>
OPERATING LEASES AS LESSEE
The Company leases its operating facilities and certain equipment under
noncancellable operating leases. Rent expense for the years ended December
31, 1998 and 1999 and the three months ended March 31, 2000 was $100,098,
$115,245 and $30,895, respectively. As of December 31, 1999 minimum rental
payments under noncancellable operating leases were as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
2000................................................ $ 132,886
2001................................................ 119,836
2002................................................ 104,030
---------------
Total............................................... $ 356,752
===============
</TABLE>
8. INCOME TAXES
The Company paid no federal or state income taxes.
The significant components of the Company's deferred income tax assets as
of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------------- -----------------
<S> <C> <C>
Deferred Income Tax Assets:
Net operating loss carryforwards.......................... $ 2,582,603 $ 3,798,062
Reserves and accrued liabilities.......................... 123,795 84,192
---------------- -----------------
Total deferred income tax assets.................... 2,706,398 3,882,254
Valuation allowance....................................... (2,661,384) (3,846,240)
---------------- -----------------
Net deferred tax asset.............................. 45,014 36,014
---------------- -----------------
Deferred Income Tax Liability:
Tax depreciation in excess of book........................ (45,014) (36,014)
---------------- -----------------
Total deferred income tax liabilities............... (45,014) (36,014)
---------------- -----------------
---------------- -----------------
Net deferred income taxes........................... $ -- $ --
================ =================
</TABLE>
The amount of and ultimate realization of the deferred income tax assets is
dependent, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be
determined. The Company has established a valuation allowance against its
deferred income tax assets. Management believes that, based on a number of
factors, the available objective evidence creates sufficient uncertainty
regarding the realizability of these deferred income tax assets to warrant
the valuation allowance.
The following is a reconciliation of the amount of tax benefit that would
result from applying the federal statutory rate to pretax (loss)/income
with the benefit from income taxes:
<TABLE>
<CAPTION>
March 31,
December 31, 2000
--------------------------------- --------------
1998 1999
--------------- --------------- --------------
<S> <C> <C> <C>
Benefit at statutory rate (34%)................. $ (3,059,880) $ 113,739 $ (445,489)
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Non-deductible stock based compensation......... 1,651,756 (1,362,278) 134,407
Other non-deductible expenses................... 177,711 68,069 22,293
Change in valuation allowance................... 1,112,422 1,184,856 271,611
State tax benefit, net of federal tax benefit... 117,991 (4,386) 17,178
--------------- --------------- --------------
Net Benefit From Income Taxes.............. $ -- $ -- $ --
=============== =============== ==============
</TABLE>
The following summarizes the tax net operating loss carryforwards and their
respective expiration dates as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2008................................................ $ 44,043
2010................................................ 930,194
2011................................................ 2,188,074
2017................................................ 820,111
2018................................................ 3,191,461
2019................................................ 2,846,950
---------------
Total net operating loss carryforwards.............. $ 10,020,833
===============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
In March 1999, a vendor of the Company filed a lawsuit that alleges breach
of contract and seeks payment in the amount of approximately $125,000 from
the Company related to purchases of materials from the vendor. The Company
has responded to the lawsuit, and management believes that the materials
delivered by the vendor were defective. In addition, the Company's costs
resulting from the defective materials are in excess of $120,000. Although
the Company, after consultation with legal counsel, believes that their
defenses have merit, they are unable to predict the outcome of this matter.
The Company is the subject of certain legal matters, which it considers
incidental to its business activities. It is the opinion of management,
after discussion with legal counsel, that the ultimate disposition of these
legal matters will not have a material impact on the consolidated financial
condition or results of operations of the Company.
EMPLOYMENT AGREEMENTS
During 1999, the Company entered into employment agreements with certain of
its officers and key employees. The agreements are for periods of 24 to 36
months with an option to extend the terms for up to an additional 12 months
upon mutual agreement of the Company and the officer/employee. Upon the
successful completion of certain events (including an IPO of the Company's
common stock), the officers/employees are to receive increases in their
base salaries at percentages ranging up to 28 percent. In the event of
termination of employment without cause, the officer/employee is entitled
to cash compensation equal to their base salary for the lesser of the
remainder of their employment agreement or a period of one to twelve months
(depending on the officer/employee). Additionally, upon termination (with
or without cause), the agreements allow certain of the officers to require
repurchase of the officer's common stock by the Company at a price equal to
200 percent of its fair market value at the date of termination. The
agreements also prevent the officers/employees from competing with the
Company for up to one year from the date of termination of their
employment.
ADVERTISING AGREEMENT
On March 24, 2000, the Company entered into a letter of agreement with an
advertising agency. Under the terms of the agreement, the advertising
agency is to assist the Company in the development and
F-27
<PAGE>
implementation of the Company's creative design related to its advertising,
marketing and promotion. The agreement lasts for a term of one year and
provides for the agency to be compensated as follows: months one through
four - on March 29, 2000, the Company issued the agency a warrant to
purchase 125,000 shares of common stock at $4.80 per share, and months five
through twelve the Company is to pay the agency $43,687 per month in cash.
In addition, the Company also agreed to pay all outside expenses incurred
by the agency on behalf of the Company which is estimated to be $450,000.
The warrants issued were valued at $135,152 based upon their fair value
measured using the Black-Scholes option pricing model with the following
assumptions: 6.7 percent risk-free interest rate, 0 percent expected
dividend yield, 83.41percent volatility, and a 1.76 year estimated life.
The Company changed $101,364 of the value of the warrants to deferred
offering costs relating to the proposed IPO and $33,788 were charged to
prepaid expense.
REGISTRATION RIGHTS
In 1999, in connection with certain of its debt and equity offerings and
the conversion of certain debt to equity, the Company has granted
stockholders of 407,906 shares of common stock, warrants to purchase
242,550 shares of common stock and 683,333 shares of Series B convertible
preferred stock the right, subject to applicable terms and conditions, to
require the Company to register their common shares on a best efforts basis
(or equivalent common shares upon the exercise of the warrants or
conversion of the preferred stock) under the Securities Act for offer to
sell to the public. Additionally, the Company has also granted certain
stock and warrant holders the right to join in any registration of
securities of the Company (subject to certain exceptions). The Company is
obligated to pay all offering expenses related to offerings requested by
the stock and warrant holders under these agreements. The stockholders are
obligated to pay all selling expenses.
FINANCING AGREEMENT
During 1999, the Company entered into a program agreement with a finance
company to provide funding for Refreshment Centers which the Company places
with customers under revenue sharing agreements. Under the terms of the
program agreement, the finance company will fund the Company's product
costs for each Refreshment Center that has been in service for 90 days
subject to the hotel meeting certain requirements. The Company is obligated
to repay the financing over seven years, with a formula-based variable
interest rate. As part of the financing, eRoomSystem Technologies will form
a new entity, eRoomSystem SPE, Inc. eRoomSystem SPE will be a Nevada
corporation as a wholly owned subsidiary. eRoomSystem SPE will own all of
the Refreshment Centers funded by the finance company as well as the
revenue sharing agreements. The finance company will take a senior security
interest in the Refreshment Centers financed under the program agreement.
As of December 31, 1999, no Refreshment Centers have been funded under the
program agreement.
10. STOCKHOLDERS' EQUITY
AMENDMENT TO ARTICLES OF INCORPORATION
On February 2, 2000, with stockholder approval, the Company filed articles
of amendment to its articles of incorporation. The amended articles of
incorporation authorize the Company to issue 500,000 shares of $0.001 par
value Series A preferred stock, 2,500,000 shares of $0.001 par Series B
preferred stock and 2,000,000 shares of $0.001 par value Series C preferred
stock and 20,000,000 shares of $0.001 par common stock. The Company's board
of directors is authorized, without stockholder approval, to designate and
determine the preferences, limitations and relative rights granted to or
imposed upon each share of preferred stock which are not fixed by the
amended articles of incorporation.
On March 29, 2000, and corrected on May 30, 2000, the Company filed an
amendment and restatement of the Company's Articles of Incorporation, as
amended and restated on February 2, 2000. The amended and restated articles
of incorporation: (i) changed the Company's name to "eRoomSystem
Technologies, Inc."; (ii) increased the Company's authorized capital stock
to 60,000,000 shares; (iii) increased the authorized
F-28
<PAGE>
number of shares of the Company's common stock from 20,000,000 million
shares to 50,000,000 million shares; and (iv) authorized 5,000,000 million
shares of undesignated preferred stock at $0.001 par value.
REVERSE STOCK SPLITS
On September 28, 1999, the Company's board of directors approved a
one-for-two reverse stock split related to its outstanding common stock and
common stock options and warrants. However, in connection with their
employment agreements, officers which held 996,000 shares of common stock
and a former consultant which held 475,000 shares of common stock were
excluded from the effect of this reverse stock split. On March 29, 2000,
the Company's board of directors approved a three-for-four shares reverse
stock split related to its common stock and common stock options and
warrants. Additionally, in connection with the sale of the Series A and B
convertible preferred stock, the holders of Series A and B convertible
preferred stock were excluded from the effect of these reverse stock
splits. The 1999 and 2000 stock splits have been retroactively reflected in
the accompanying consolidated financial statements for all periods
presented.
STOCK ISSUANCES FOR SERVICES
During the year ended December 31, 1999, the Company issued shares of
common stock to officers, key employees and outside parties for services
provided and as bonuses. The shares issued have been valued by the
Company's Board of Directors at estimated fair values based on other
issuances of shares for cash and on the terms of related transactions.
During 1999, the Company issued 1,864 shares of its common stock to certain
officers and key employees and recorded $5,965 of related compensation
expense, respectively. The shares issued in 1999 were valued at $3.20 per
share.
1997 STOCK OPTION EXERCISE
During the year ended December 31, 1997, certain option and warrant holders
exercised options and warrants to purchase 1,733,500 shares of common stock
in exchange for partial recourse notes receivable of $3,799,250. The notes
were due on demand, bore interest at 7 percent per annum and the principal
and accrued interest could be paid by surrendering shares of common stock
to the Company. During the years ended December 31, 1998 and 1999, the
Company accrued $274,691 and $235,951, respectively, of interest related to
these notes receivable.
The notes issued in connection with the exercise of these options were only
partial recourse to the stockholders and were accounted for as variable
awards in accordance with EITF Issue 95-16, "Accounting for Stock
Compensation Arrangements with Employer Loan Features Under APB No. 25".
The compensation expense related to employees has been measured using the
intrinsic value of the option, which was zero at the date the options and
warrants were exercised. The compensation expense related to non-employees
has been measured using the Black-Scholes option pricing model at each
reporting date with the following assumptions for 1998 and 1999,
respectively: risk-free rates at 5.4 and 6.3 percent, expected dividend
yield of 0 percent, volatility at 58.24 and 100.6 percent, and expected
lives at 3.5 and 2.5 years, respectively. Compensation cost shall be
adjusted for increases or decreases in the value of the option in
subsequent periods until the note is settled. However, compensation cost
will not be adjusted below the original intrinsic value. During the year
ended December 31, 1998, the Company recognized compensation expense of
$4,854,150 related to these variable awards. As a result of a decline in
the value of the Company's common stock during the year ended December 31,
1999, the Company reversed compensation expense totaling $4,006,700 related
to these awards.
On the original exercise date by employees, there was no intrinsic value
because the exercise price and the underlying fair value of the common
stock were both $1.75 per share on a pre-split basis. None of the options
and warrants included in the variable compensation expense calculation were
subject to the subsequent reverse stock splits. Reverse stock splits
subsequent to the original issuance therefore increased the intrinsic value
of the stock options and warrants. Because the intrinsic value on the date
of issuance was zero, the entire amount of compensation expense recognized
in 1997 and 1998 was subject to reversal in 1999 in accordance with
Interpretation No. 28 to APB Opinion 25.
F-29
<PAGE>
In connection with their employment/consulting agreements, certain
stockholders had been exempted from the effects of the reverse stock split
discussed above. During the year ended December 31, 1999, the Company
demanded payment on notes receivable with principal balances totaling
$3,143,000. Holders of 1,471,000 shares of common stock with a principal
obligation totaling $2,574,250 and accrued interest of $366,319 surrendered
their shares to the Company as satisfaction of the obligation. Since these
officers and former consultant immediately returned all of these shares to
the Company, no compensation was recognized in connection with the
exclusion of these shares from the reverse stock split. However, as of
December 31, 1999, a holder of 121,875 shares of common stock with a
principal balance of $568,750 and accrued interest of $50,938 had filed for
bankruptcy protection. As a result, the Company is currently negotiating
with the bankruptcy trustee for the return of the shares. However, the fair
value of the shares is less than the principal and accrued interest on the
note receivable. Accordingly, as of December 31, 1999 the Company has
recorded a reserve of $229,688 against the note receivable to reflect it at
the fair value of the underlying collateral.
As of December 31, 1999, a note receivable from the exercise of 140,625
stock options with a principal balance of $656,250 and accrued interest of
$93,385 remained outstanding for which the Company had not yet demanded
repayment. As a result of the decline in the value of the underlying
collateral and because the Company does not believe it will receive payment
beyond the return of the underlying common stock, the Company recorded a
reserve of $299,635 to reflect the note receivable at the fair value of the
underlying collateral. At March 31, 2000, the Company cancelled a note
receivable from a stockholder which was used to purchase shares of common
stock. The value of the note receivable was $656,250. As consideration for
the cancellation of the note receivable, 140,625 shares of common stock
were returned to the Company by the stockholder and retired.
1998 STOCK TRANSACTIONS
In January 1998, the Company sold 35,532 shares of common stock in a
private placement at $10.67 per share. The Company received cash proceeds
of $335,042, net of $43,958 in offering costs. The placement agent of the
offering received a cash commission of 12.5 percent and warrants to
purchase 4,264 shares of common stock, exercisable at $12.80 per share
which are exercisable for a period of three years. The Company has valued
these warrants at $4.31 per share using the Black-Scholes option pricing
model with the following assumptions: risk free rate of 5.4 percent,
expected dividend yield of 0 percent, volatility of 58.2 percent and an
expected life of 3.3 years.
During the year ended December 31, 1998, the Company sold an additional
5,156 shares of common stock to an investor at $10.67 per share.
1998 SERIES A CONVERTIBLE PREFERRED STOCK OFFERING
In January 1998, the Company issued 360,000 shares of Series A convertible
preferred stock at a price of $5.00 per share. The Company received
$600,275 in net cash proceeds (net of offering costs of $159,725) and
issued 152,000 shares of Series A convertible preferred stock. In addition,
the Company issued 208,000 shares of Series A convertible preferred stock
relating to the conversion of $1,040,000 of 1996 Notes. The placement agent
received a cash commission of 13 percent, due diligence and non-accountable
expense allowances (for a total of $149,843), 13,125 shares of common stock
(valued at $10.67 per share) and warrants to purchase 6,840 shares of
common stock exercisable at $16.00 per share which are exercisable for a
period of two years subsequent to the Company's IPO. The Company has valued
these warrants at $2.56 per share using a Black-Scholes option pricing
model with the following assumptions: risk free rate of 5.6 percent,
expected dividend yield of 0 percent, volatility of 58.2 and an expected
life of 2.1 years.
The Series A convertible preferred stock is automatically converted into
shares of common stock upon the consummation of an IPO on a one-to-one
basis if the IPO price is at lease $10.00 per share. If the initial public
offering price is less than $10.00 per share, the conversion rate for the
shares of Series A convertible preferred stock will be $10.00 divided by
the IPO price. On November 14, 1998, holders of Series A convertible
preferred stock commenced cumulating an 8% annual dividend. The annual
dividend requirement applicable to Series A preferred shares outstanding at
December 31, 1999 is $144,000, or
F-30
<PAGE>
$0.40 per share. Due to certain provisions of the Series A convertible
preferred stock, the Company's one-for-two reverse stock split declared on
September 28, 1999 did not affect the number of shares of Series A
convertible preferred stock outstanding. No dividends have been paid to
date to holders of Series A convertible preferred stock. As of December 31,
1998 and 1999, holders of Series A convertible preferred stock were owed
dividends of $18,542 and $162,542, respectively.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" the Company will record (upon conversion of the Series A
convertible preferred stock) a dividend to the Series A convertible
preferred stockholders of $1,800,000. This dividend represents the
contingent beneficial conversion feature of the Series A convertible
preferred stock which accrues to the Series A convertible preferred
stockholders at the date of conversion.
In the event of a liquidation, dissolution or winding up of eRoomSystem
Technologies, holders of the Series A preferred stock will be entitled to
receive, out of legally available assets, a liquidation preference of
$10.00 per share, plus an amount equal to any unpaid dividends to the
payment date, before any payment or distribution is made to holders of
common stock or any series or class of stock there after issued that rank
junior as to the liquidation rights of the Series A preferred stock. The
holders of the Series A shares may not note on any matter, excluding
matters affecting the rights of such stockholders or as required by law. In
connection with such note, each share of Series A preferred stock will be
entitled to one note.
1999 SERIES B CONVERTIBLE PREFERRED STOCK OFFERING
In May through September 1999, the Company issued 2,081,680 shares of
Series B convertible preferred stock at a price of $3.00 per share. The
Company received $3,584,256 in net cash proceeds (net of cash offering
costs of $480,885) and issued 1,355,047 shares of Series B convertible
preferred stock. In addition, the Company issued 726,633 shares of Series B
convertible preferred stock relating to the conversion of $2,265,599 of
promissory notes and unpaid salaries of certain officers and as part of the
settlement with RSG Investments (Note 4). The placement agent received a
cash commission of 9 percent on shares which they placed and a
non-refundable expense allowance of 2.5 percent.
Effective January 1, 2000 and in connection with the Series B convertible
preferred stock offering, the Company agreed to pay an individual a
finder's fee of $51,250 plus interest at 10 percent, which is payable from
proceeds of the Company's IPO and to issue an option to purchase 1,125
shares of common stock at an exercise price of $4.80 per share. In the
event the Company does not complete an IPO by June 15, 2000, the Company is
obligated to issue additional options to purchase 1,125 shares of common
stock per month until September 30, 2000, at which time an additional 1,125
options are to be issued and the finder's fee and accrued interest are due
and payable in full. The Company has accounted for the finders fee and the
fair value of the initial 1,125 options as a cost of the Series B
convertible preferred stock offering.
Pursuant to the terms of the Series B convertible preferred stock, the
shares are automatically converted into shares of common stock upon the
consummation of an IPO or a business combination where controlling interest
of the Company is acquired. Before the modification as explained below, the
conversion was at the lower of (i) $3.00 per share or (ii) 50 percent of
the IPO price per share. On April 12, 2000, the certificate of designation
for the Series B preferred stock was amended to modify the conversion rate
to be determined by dividing $3.00 by 45 percent of the IPO price per
share. In the event the Company does not close its IPO by September 28,
2000, each holder of Series B preferred stock shall have the option to
convert their Series B stock into the Company's common stock or remain a
Series B preferred stockholder after that date. Upon election, each Series
B share converts into 1.5 shares of common stock. The holders of the Series
B preferred stock are entitled to an annual cumulative dividend of six
percent, payable in common stock. The annual dividend requirement
applicable to Series B convertible preferred stock outstanding at December
31, 1999 is $374,702, or $0.18 per share. As of December 31, 1999, and
March 31, 2000, the Company had accrued common stock dividends of 28,936
and 22,484 shares with a value of $141,899 and $67,452, respectively
related to the Series B convertible preferred stock.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," the Company determined that the holders of the Series B
F-31
<PAGE>
convertible preferred stock had received a beneficial conversion feature at
the date of issuance. This beneficial conversion feature has been valued at
$1,249,008 and is being accrued as a dividend between the date of issuance
of the Series B convertible preferred stock and September 28, 2000, the
date which the Series B convertible preferred stockholders have the right
to convert their shares. By modifying the terms of the beneficial
conversion feature, when the value of the common stock was $3.20 per share,
the beneficial conversion feature was increased by $2,498,016. The increase
to the beneficial conversion feature is being accrued as a dividend from
April 12, 2000 through September 28, 2000. In the event of a successful IPO
prior to that date, the remaining unaccrued beneficial conversion feature
will be accrued and recognized at the effective date of the IPO. During the
year ended December 31, 1999 and the three months ended March 31, 2000, the
Company recorded a dividend of $321,370 and $311,396 to the Series B
convertible preferred stockholders related to the beneficial conversion
feature.
In the event of any liquidations, dissolution or winding up of the Company,
holders of Series B convertible preferred stock will be entitled to
receive, out of legally available assets, a liquidation preference of
$10.00 per share, plus an amount equal to any unpaid dividends to the
payment date, before any payment or distribution is made to holders of
common stock or any series or class there after issued that ranks junior to
the liquidation rights of the Series B convertible preferred stock. The
holders of Series B convertible preferred stock may not vote on any matter,
excluding matters affecting the rights of such stockholders or as required
by law. In connection with any such vote, each outstanding share of Series
B convertible preferred stock will be entitled to one vote. In addition, if
the Company has not completed an IPO by September 28, 2000, holders of
Series B convertible preferred stock will be accorded voting rights. In
such event, each share of Series B convertible preferred stock will be
entitled to one vote.
1999 COMMON STOCK ISSUANCE
On May 30, 1999, the Company sold 198,750 shares of common stock to an
entity controlled by the Company's president in exchange for a promissory
note in the amount of $1,590,000. The purpose of the stock sale was to
assist the Company in complying with certain stock pledge requirements set
forth in the Equipment Agreement with RSG (see Note 4). On September 28,
1999 as a result of the Transfer Agreement with RSG, the 198,750 shares of
common stock were returned to the Company in exchange for the cancellation
of the promissory note. The shares have been reflected as issued and
retired in the accompanying statement of stockholders' deficit for the year
ended 1999.
2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING
During March and April 2000, the Company issued $237,500 of 7% secured,
subordinated, convertible promissory notes, 219,227 shares of 7% Series C
convertible preferred stock and warrants to purchase 47,500 shares of
common stock at $6.60 per share in a private placement offering. The
Company received $869,250 in net proceeds (net of offering costs of
$80,750). The gross proceeds consisted of $650,000 in cash and $300,000 in
irrevocable subscription agreements. The 7% Series C convertible preferred
stock was issued at $3.25 per share and will be automatically converted
into common stock upon the close of an initial public offering at the rate
determined by $3.25 divided by 55 percent of the IPO price per share,
provided the IPO closes by January 31, 2001, otherwise at $3.30 per share.
The promissory notes bear interest at 7 percent per annum, payable
semi-annually and mature on December 31, 2001. The notes may be converted
at the option of the holders into common stock at 85 percent of the IPO
price per share, commencing 30 days following the closing of the IPO. The
total proceeds from the offering were allocated to the financial
instruments issued based upon their relative fair values, and resulted in
allocating $232,260 to the promissory notes before offering costs of
$22,270, $35,625 to the beneficial debt conversion feature, $541,384 to the
7% Series C convertible preferred stock and $82,301 to the warrants. Based
upon the estimated market value of the common stock of $3.20 per share at
the date of the offering, there was no beneficial conversion feature
associated with the 7% Series C convertible preferred stock.
In the event of any liquidation, holders of the Series C convertible
preferred stock will be entitled to receive, out of legally available
assets, a liquidation preference of $10.00 per share plus an amount equal
to any unpaid dividends to the payment date before any payment or
distribution is made to the holders of common stock or any series or class
of the Company's capital stock that ranks junior to the liquidation
F-32
<PAGE>
rights of the Series C convertible preferred stock. The holders of the
Series C convertible preferred stock may not vote on any matter, excluding
matters affecting the rights of such stockholders or as required by law. In
connection with any such vote, each outstanding share of Series C
convertible preferred stock shall be entitled to one vote.
As of March 31, 2000, the Company issued 161,535 shares of 7% Series C
convertible preferred stock and warrants to purchase 35,000 shares of
common stock at $6.60 per share in a private placement offering. The
Company received $659,625 in net proceeds (net of offering costs of
$40,375).
The proceeds from the offering were allocated to the financial instruments
issued based upon their relative fair values and resulted in allocating
$152,136 to the promissory notes before offering costs of $9,312, $26,250
to the beneficial debt conversion feature, $456,407 to the 7% Series C
convertible preferred stock and $51,082 to the warrants. Based upon the
estimated market value of the common stock of $3.20 per share at the date
of the offering, there was no beneficial conversion feature associated with
the 7% Series C convertible preferred stock.
While the allocated value of the warrants was less than their fair value of
$58,759, the fair value was measured using the Black-Scholes option pricing
model with the following assumptions: risk free interest rate of 5.0
percent, expected dividend yield of 0 percent, volatility of 100 percent,
and expected lives of 3.25 years. The debt issuance costs will be amortized
through December 31, 2001, the discount on the promissory notes of $30,490
will be amortized as interest expense through December 31, 2001.
OTHER ISSUANCES OF COMMON STOCK AND WARRANTS
During the first quarter of 2000, the Company also issued 1,365 shares of
common stock to an employee who loaned money to the Company. Interest on
the loan accrued at 10% per annum. The shares were issued as a payment of
interest and the value of the shares issued was $4,374 or $3.20 per share.
Additionally, the Company issued 7,991 shares of common stock to the
holders of the 1999 Private Debt offering who are entitled to receive
shares for the payment of interest. The value of the shares issued as an
interest payment was $25,563 or $3.20 per share.
11. STOCK OPTIONS AND WARRANTS
STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors, officers
and employees under Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below
the fair value of the Company's common stock. The Company accounts for
options and warrants issued to non-employees in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) which requires
these options and warrants be accounted for at their fair value.
NON EMPLOYEE GRANTS
During the years ended December 31, 1998 and 1999 and the three months
ended March 31, 2000, the Company issued options to purchase 938, and
63,711 and 321,000 shares of common stock, respectively. The exercise price
ranged from $12.80, and $4.80 to $9.60, and $4.00 to $9.60 for the years
ended December 31, 1998 and 1999 and for the three months ended March 31,
2000, respectively. These options were valued in accordance with SFAS 123
(utilizing the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended 1998 and 1999 and the
three months ended March 31, 2000, respectively: risk free interest rate of
5.6, 6.2 and 6.7, expected dividend yield of 0 percent, volatility of 58.2,
100.6 and 86.05 percent, expected lives of 3.2, 2.6 and 3.3 years,
respectively) at amounts ranging from $1.58, $1.37 to $1.63 and $1.15 to
$1.98 per share, respectively.
F-33
<PAGE>
EMPLOYEE GRANTS
During 1998 and 1999 the Company granted options to purchase 9,375 and
269,909 shares of common stock, respectively. The exercise price ranged
from $11.33 and $4.80 to $8.80 per share, respectively. There was no
intrinsic value relating to these options and vested upon grant.
On February 3, 2000, the Board of Directors adopted, and on March 29,
2000, a majority of the shareholders' approved the creation of the 2000
Stock Option Plan ("2000 Plan") with 2,000,000 shares of common stock
reserved for issuance thereunder. The plan provides both the direct
award or sale of shares and for the grant of options to purchase
shares. A committee, designated by the board of directors, will
administer the plan and has the discretion to determine the employees,
directors, independent contractors and advisors who will receive
awards, the type of awards (stock, incentive stock options or
non-qualified stock options) to be granted, the term, vesting and
exercise prices. The exercise price for the options may be paid in
cash, in shares of the Company's common stock valued at fair market
value on the exercise date or through a same-day sale program without
any cash outlay by the optionee. In the event of a change in control
(as defined), all restrictions on all awards or sales of shares issued
under the plan will lapse and vesting on all unexercised options will
accelerate to the date of the change in control.
In February and March 2000, the Company issued options for the purchase
of 1,119,768 shares of common stock to certain officers and employees
of the Company pursuant to the 2000 Plan. With the exception of options
to purchase 74,917 shares of common stock, these options vested
immediately. The exercise prices range from $4.00 to $9.60 per share.
The options are exercisable through the third anniversary of the
closing of this offering.
SFAS 123 requires pro forma information regarding net income (loss) as
if the Company had accounted for its stock options granted to employees
subsequent to December 31, 1994 under the minimum fair value method of
the statement. The minimum fair value of the stock options was
estimated at the grant date by the Company using the Black-Scholes
option pricing model. The following weighted average assumptions were
used in the Black-Scholes model for the years ended 1998 and 1999 and
the three months ended March 31, 2000, respectively: weighted-average
risk-free interest rate of 5.5, 6.3 and 6.7 percent, a weighted average
dividend yield of 0 percent, volatility of 58.24, 100.6 and 85.44
percent, and a weighted-average expected lives of 3.8, 2.7 and 3.28
years, respectively. Following are the pro forma disclosures and the
related impact on the net income (losses):
<TABLE>
<CAPTION>
December 31,
--------------------------------- March 31,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Net loss attributable to common stockholders as
reported..................................... $ (9,018,187) $ (272,744) $ (1,654,718)
Net loss attributable to common stockholders
pro forma.................................... (9,063,746) (719,093) (3,205,670)
Basic and diluted net loss per common share as
reported..................................... (2.98) (0.09) (0.75)
Basic and diluted net loss per common share pro
forma........................................ (2.99) (0.22) (1.47)
</TABLE>
Due to the nature and timing of option grants, the resulting pro forma
compensation cost may not be indicative of future years.
OUTSTANDING STOCK OPTIONS AND WARRANTS
The Company has from time to time granted stock options and warrants to
employees, directors, consultants and in connection with financing
transactions (see Notes 4, 5 and 10). A summary of stock option and
warrant activity for the years ended December 31, 1998 and 1999 and the
three months ended March 31, 2000 is as follows:
F-34
<PAGE>
<TABLE>
<CAPTION>
Weighted
Options and Average
Warrants Price Range Exercise Price
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1997...................... $ 454,575 2.67 - 6.00 3.19
Granted.................................... 143,455 2.67 - 16.00 10.33
---------------
Balance, December 31, 1998...................... 598,030 2.67 - 16.00 5.00
Granted.................................... 362,228 1.33 - 9.60 5.56
Forfeited.................................. (93,750) 12.80 12.80
---------------
Balance, December 31, 1999...................... 866,508 2.67 - 16.00 4.39
Granted.................................... 1,623,809 1.00 - 9.60 6.53
---------------
Balance, March 31, 2000......................... 2,490,317 1.00 - 16.00 5.78
===============
</TABLE>
A summary of stock option and warrant grants with exercise prices less
than, equal to or greater than the estimated market value on the date
of grant during the years ended December 31, 1998 and 1999 and the
three months ended March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Fair
Options and Weighted Value of
Warrants Average Options and
Granted Exercise Price Warrants
--------------- --------------- ---------------
<S> <C> <C> <C>
Year Ended December 31, 1998:
Grants with exercise price less than
estimated market value..................... 105,416 2.67 8.46
Grants with exercise price greater than
estimated market value..................... 38,039 13.78 4.88
---------------
Year Ended December 31, 1999:
Grants with exercise price less than
estimated market value..................... 19,233 2.40 2.20
Grants with exercise price greater than
estimated market value..................... 342,995 5.66 1.82
---------------
Three Months Ended - March 31, 2000:
Grants with exercise price less than
estimated market value..................... 4,290 1.20 2.46
Grants with exercise price greater than
estimated market value..................... 1,619,519 6.49 1.44
</TABLE>
A summary of the options and warrants outstanding and exercisable as of
December 31, 1999 and March 31, 2000 follows:
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Weighted Average
Range of Exercise Number Remaining Weighted Average Weighted Average
Price Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 1.33 - 2.67 398,304 2.5 years $ 2.65 398,304 $ 2.65
2.68 - 5.33 366,914 2.6 years 4.76 366,914 4.76
5.34 -16.00 101,290 2.6 years 9.72 101,290 9.72
------------------ -------------------
866,508 866,508
================== ===================
</TABLE>
F-35
<PAGE>
MARCH 31, 2000
<TABLE>
<CAPTION>
Weighted Average
Range of Exercise Number Remaining Weighted Average Weighted Average
Price Outstanding Contractual Life Exercise Price Number Exercisable Exercise Price
--------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - 2.67 402,219 2.25 years $ 2.64 402,219 $ 2.64
2.68 - 5.33 1,204,056 2.78 years 4.45 1,204,056 4.45
5.34 -16.00 884,042 3.05 years 9.03 809,125 9.08
------------------ -------------------
2,490,317 2,415,400
================== ===================
</TABLE>
12. SEGMENT INFORMATION
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes
disclosures related to components of a company for which separate
financial information is available and evaluated regularly by a
company's chief operating decision makers in deciding how to allocate
resources and in assessing performance. It also requires segment
disclosures about products and services as well as geographic areas.
The Company has determined that it did not have any separately
reportable operating segments as of December 31, 1998 and 1999.
However, the Company does sell Refreshment Centers in geographic
locations outside of the United States. Revenues attributed to
individual countries based on the location of sales to unaffiliated
customers for the years ended December 31, 1998 and 1999 and for the
three months ended March 31, 2000 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------- March 31,
1998 1999 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Revenue:
United States................................ $ 769,062 $ 592,409 $ 49,099
Other Countries.............................. 242,400 -- --
--------------- --------------- --------------
Total Revenue................................ $ 1,011,462 $ 592,409 $ 49,099
=============== =============== ==============
</TABLE>
13. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's historical revenues and receivables have been derived
solely from the lodging industry. The Company offers credit terms on
the sale of its Refreshment Centers and in connection with its revenue
sharing contracts. The Company performs ongoing credit evaluations of
its customers' financial condition and does not require collateral from
its customers. The Company maintains an allowance for uncollectible
accounts receivable based upon the expected collectibility of all
accounts receivable.
During the year ended December 31, 1998, revenues from three customers
accounted for 40.8, 25.1 and 24 percent of total revenues.
During the year ended December 31, 1999, revenues from two customers
accounted for 26.7 and 16.0 percent of total revenues.
During the three months ended March 31, 2000, no single customer accounted for a
material amount of the Company's revenue. No other customer accounted for more
than 10 percent of total revenues in any year presented.
F-36
<PAGE>
14. SUBSEQUENT EVENTS
2000 STOCK OPTION PLAN
In February and March 2000, the Company issued options for the purchase of
1,068,206 shares of common stock to certain officers and employees of the
Company at prices ranging from $4.00 to $9.60 per share
NON-EMPLOYEE STOCK OPTION GRANTS
During the three months ended March 31, 2000, the Company issued options to
purchase 377,250 shares of common stock to various non employees at prices
ranging from $4.00 to $9.60.
NOTE PAYABLE TO STOCKHOLDER
In February 2000, the Company received a $500,000 loan from a company,
wholly owned by a stockholder and nominee to the board of directors. Also,
the Company issued a warrant for the purchase of 18,750 shares of common
stock.
CANCELLATION OF NOTE RECEIVABLE
At March 31, 2000, the Company cancelled a note receivable from a
stockholder which was used to purchase shares of common stock. The value of
the note receivable was $656,250. As consideration for the cancellation of
the note receivable, 140,625 shares of common stock were returned to the
Company by the stockholder and retired.
2000 SERIES C CONVERTIBLE PREFERRED STOCK
During March and April 2000, the Company issued $237,500 of 7% secured,
subordinated, convertible promissory notes, 219,227 shares of 7% Series C
convertible preferred stock and warrants to purchase 47,500 shares of
common stock at $6.60 per share in a private placement offering.
ADVERTISING AND MARKETING LETTER OF AGREEMENT
On March 24, 2000, the Company entered into a letter of agreement with an
advertising agency. The Company issued warrants to purchase 125,000 shares
of common stock as part of the agreement.
AMENDMENT TO SERIES B CONVERTIBLE PREFERRED STOCK DESIGNATION
The certificate of designation for the Series B convertible preferred stock
was amended on April 12, 2000 to modify the conversion rate to $3.00
divided by 45 percent of the IPO price per share.
ADDITIONAL WARRANTS ISSUED
During the first quarter of 2000, the Company issued 4,291 warrants to
purchase common stock in connection with the 1996 defaulted notes.
OTHER SUBSEQUENT EVENTS
On March 31, 2000, the Company issued 22,484 shares of common stock to
holders of the Series B convertible preferred stock. During the first
quarter of 2000, the Company issued 1,365 shares of common stock to an
employee who loaned money to the Company. Additionally, the Company issued
7,991 shares of common stock to the holders of the 1999 Private Debt
offering.
F-37
<PAGE>
2000 BRIDGE LOAN
On April 13, 2000, the Company issued a $1,500,000, 9% secured,
subordinated promissory note and 200,000 shares of common stock for
irrevocable subscription agreements in a private placement offering. The
Company received $1,472,500 (net of offering costs of $27,500) in net cash
proceeds. The promissory note bears interest at nine percent per annum,
payable semi-annually and matures on the earlier of the closing of the IPO
or October 13, 2000.
The proceeds from the offering were allocated to the financial instruments
issued based upon their relative fair values and resulted in allocating
$1,051,769 to the promissory note before offering costs of $19,643 and
$440,374 to the common stock.
F-38
<PAGE>
[INSIDE BACK COVER]
The graphics appearing here are the names and logos of a selected group of
the Registrant's customers and corporate accounts. Along the bottom of the
inside back cover, there is the following statement: "These companies are a
sampling of existing customers and corporate accounts. Their brands and product
names are trademarks or registered trademarks of their respective companies. Our
use of these trademarks or registered trademarks in this prospectus should not
be construed as an endorsement of our products or this offering."
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..........................
Risk Factors................................
Special Note Regarding Forward-Looking
Information...............................
Use of Proceeds.............................
Dividend Policy.............................
Capitalization..............................
Dilution....................................
Selected Financial Data.....................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................
Business....................................
Management..................................
Certain Relationships and Related
Transactions..............................
Principal Stockholders......................
Description of Capital Stock................
Shares Eligible for Future Sale.............
Underwriting................................
Legal Matters...............................
Experts.....................................
Change in Accountants.......................
Available Information.......................
Index to Consolidated Financial Statements..
</TABLE>
---------------
Through and including _________, 2000, all dealers effecting transactions
in these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to a dealer's obligation
to deliver a prospectus when acting as an underwriter and with respect to an
unsold allotment or subscription.
================================================================================
================================================================================
1,800,000 Shares of Common Stock
eROOMSYSTEM TECHNOLOGIES, INC.
[INSERT LOGO]
DONALD & CO. SECURITIES INC.
================================================================================
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 78.7502 and 78.751 of the Nevada Revised Statutes provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Article XII of our amended and restated articles of
incorporation (Exhibit 3.01 hereto) provides for indemnification of our
directors, officers, employees and other agents to the extent and under the
circumstances permitted by Sections 78.7502 and 78.751 of the Nevada Revised
Statutes.
In addition to the indemnification of officers and directors under the
Nevada Revised Statutes, we entered into indemnification agreements with Dr.
Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000.
Pursuant to these indemnification agreements, we agreed to hold harmless and
indemnify each of them against any and all expenses incurred by them as a result
of their positions as directors of eRoomSystem Technologies. In addition, we
agreed to advance expenses incurred by each of them upon receipt of a written
request for such advancement containing an unsecured undertaking by each of them
to repay such amounts to the extent that they are held to not be entitled to
indemnification from eRoomSystem Technologies. The advancement of expenses
specifically excludes amounts for judgments, penalties, fines and settlements.
Messrs. Ashton and Prehn each possess the right to indemnification if, in civil
proceedings, they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of eRoomSystem
Technologies, and, in criminal proceedings, they had no reasonable cause to
believe that his conduct was unlawful. In addition, eRoomSystem Technologies may
elect to not indemnify Messrs. Ashton and Prehn if either a majority of the
directors not involved in the relevant proceeding or independent legal counsel,
in a written opinion, determine that they have not met the relevant standards
for indemnification.
On September 28, 1999, we entered into an indemnification agreement with
Donnelly Prehn which indemnifies Mr. Prehn for actions to be taken by him as a
director on behalf of RSi BRE. Pursuant to this indemnification agreement,
eRoomSystem Technologies and RSi BRE, jointly and severally, agreed to hold
harmless and indemnify Mr. Prehn against any and all expenses incurred by him as
a result of his position as a director of eRoomSystem Technologies. In addition,
we agreed to advance expenses incurred by Mr. Prehn upon receipt of a written
request for such advancement containing an unsecured undertaking by Mr. Prehn to
repay such amounts to the extent that Mr. Prehn held to not be entitled to
indemnification from eRoomSystem Technologies. Mr. Prehn's rights to
indemnification are only available if damages have not already been paid
directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem
Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is
adjudged by a court of competent jurisdiction to have engaged in intentional
misconduct or a knowing violation of the law, if he received an improper
personal benefit, or if a court of competent jurisdiction renders a final
decisions that such indemnification is unlawful.
The Underwriting Agreement (Exhibit 1.01 hereto) provides for
indemnification by ourselves, our underwriters and the directors and officers of
the underwriters, for certain liabilities, including liabilities arising under
the Securities Act, and affords certain rights of contribution with respect
thereto.
Even though indemnification for liabilities arising under the Securities
Act may be provided to certain directors and officers pursuant to the foregoing
provisions, we have been informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Registrant in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
SEC registration fee $ 5,993
NASD filing fee 5,000
Nasdaq Small Cap listing fee 5,000
Printing and engraving costs 50,000
Legal fees and expenses 260,000
Accounting fees and expenses 420,000
Blue Sky fees and expenses 45,000
Transfer Agent and Registrar fees 10,000
Miscellaneous expenses 19,007
------------------------------------------- ----------------
TOTAL $ 820,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
From April 1997 through May 2000, we have granted or issued and sold the
following unregistered securities:
(1) On April 14, 1997, we commenced a private placement of up to
$1,800,000 of units, or the 1997 Units Offerng, consisting of promissory
notes and common stock, underwritten on a best-efforts basis by Spectrum
Securities, Inc., or Spectrum. Spectrum had an over-allotment option of 15%
or $270,000. We offered 180 units at price of $10,000 per unit, or 1997
Units. Each 1997 Unit consisted of 938 shares of common stock and a $5,000
15% secured promissory note, or 1997 Note. We received cash subscriptions
of $1,986,000 from the 1997 Units Offering and issued 372,375 shares of
common stock and 1997 Notes in the aggregate principal amount of $993,000.
Spectrum received a cash commission of 15% and 24,018 shares of common
stock for serving as placement agent. In addition, Pacific Acquisition
Group II, LLC was issued 139,846 shares of common stock for serving as our
merchant banker. This offering was exempt from registration in reliance on
Rule 506 of Regulation D of the Securities Act. The securities were issued
to independent third parties who were either accredited or sophisticated
non-accredited investors, either alone or with a purchaser representative.
Each of the investors received a private placement memorandum disclosing
information about the securities and our corporate, business and financial
matters.
(2) In May 1997, we received a loan in the original principal
amount of $100,000 from Frank Lyons. To evidence the transaction, we issued
a promissory note bearing an interest rate of 15% per annum and 7,125
shares of common stock to Mr. Lyons. We paid a cash finder's fee of 15% on
the transaction. The note is currently outstanding and in default with
$30,417 in accrued interest as of March 31, 2000. We intend to repay the
note and accrued interest from the net proceeds of this offering. This
issuance of securities was exempt from registration in reliance on Section
4(2) of the Securities Act. Mr. Lyons was an accredited investor.
(3) On January 9, 1998, we commenced a private placement, or
Series A convertible preferred stock offering, of up to 1,200,000 shares of
Series A convertible preferred stock at a price of $5.00 per share,
underwritten on a best-efforts basis by Capital Bay Securities, or CBS. We
received cash subscriptions of $760,000, and issued 152,000 shares of
Series A convertible preferred stock. CBS received 13% in the form of a
commission, due diligence and non-accountable expense allowances, and
warrants to purchase 6,840 shares of common stock exercisable at $16.00 per
share for serving as placement agent. Pursuant to the terms of the Series A
convertible preferred stock, the shares are automatically converted into
shares of common stock upon the closing of an initial public offering on a
one-to-one basis if the initial public offering price is at least $10.00
per share. If the initial public offering
II-2
<PAGE>
price is less than $10.00 per share, the conversion rate will be $10.00
divided by the initial public offering price. On the six-month anniversary
of the close of the Series A convertible preferred stock offering, or
November 14, 1998, holders of Series A convertible preferred stock started
to accrue an 8% annual dividend, payable in the form of cash. The reverse
stock split did not affect the number of shares of Series A convertible
preferred stock outstanding. No dividends have been paid to date to holders
of Series A convertible preferred stock. As of March 31, 2000, holders of
Series A convertible preferred stock were owed dividends of $198,444. We
intend to pay such dividends from the proceeds of this offering. This
offering was exempt from registration in reliance on Rule 506 of Regulation
D of the Securities Act. The securities were issued to independent third
parties and to existing stockholders, each of whom were accredited
investors. Each of the investors received a private placement memorandum
disclosing information about the securities and our corporate, business and
financial matters.
(4) On January 16, 1998, we commenced a private placement, or
the 1998 Common Stock Offering, of up to 60,938 shares of common stock, at
a price of $10.67 per share. The 1998 Common Stock Offering was
underwritten on a best-efforts basis by Spectrum. We received cash
subscriptions of $379,000, and issued 35,531 shares of common stock.
Spectrum received a cash commission of 12.5% and warrants to purchase 4,264
shares of common stock, exercisable at $12.80 per share, for serving as
placement agent. This offering was exempt from registration in reliance on
Rule 506 of Regulation D of the Securities Act. The securities were issued
to independent third parties and to existing stockholders, each of who were
accredited investors. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters.
(5) On January 23, 1998, we offered to convert our 1996 12%
secured promissory notes, or the 1996 Notes, into shares of Series A
convertible preferred stock. Pursuant to this offer, $1,040,000 of the
$1,470,000 1996 Notes were converted into 208,000 shares of Series A
convertible preferred stock. This offering was exempt in reliance on Rule
506 of Regulation D of the Securities Act. The investors were either
accredited or sophisticated non-accredited investors, either alone or with
a purchaser representative. Each of the investors received a private
placement memorandum disclosing information about the securities and our
corporate, business and financial matters.
(6) In January 1998, we issued 13,781 shares of common stock
to holders of the 1996 Notes, at a rate of 188 shares of common stock per
$20,000 in outstanding principal, to prevent the foreclosure of our assets
by holders of the 1996 Notes. This offering was exempt from registration in
reliance upon Section 4(2) of the Securities Act. The investors were either
accredited or sophisticated non-accredited investors, either alone or with
a purchaser representative.
(7) In April 1998, we issued a $100,000 short-term promissory
note to an existing stockholder which was subsequently converted into 9,375
shares of common stock at a price of $10.67 per share. In addition, this
investor was granted an additional 1,500 shares of common stock as an
inducement to convert the promissory note, which was valued at $10.67 per
share and recorded as additional interest expense in 1998. This offering
was exempt from registration in reliance upon Section 3(a)(9) and Section
4(2) of the Securities Act. The investor was an accredited investor.
(8) In May 1998, we offered 10% unsecured promissory notes, or
the 1998 Notes, with a term of sixty days and automatically convertible at
maturity into common stock at the rate of $10.67 per share. We received
cash subscriptions totaling $561,520 and issued 54,296 shares of common
stock to the holders of the 1998 Notes, which amount included $17,632 of
accrued interest. This offering was exempt from registration in reliance
upon Section 4(2) of the Securities Act. The securities were issued to
independent third parties and to existing stockholders, each of whom were
either accredited or sophisticated non-accredited investors, either alone
or with a purchaser representative.
(9) In October 1998, we offered to convert the 1997 Notes into shares
of common stock at a rate of $10.67 per share of common stock. As a result
of the conversion, we converted $115,000 in outstanding principal and
$24,568 in accrued interest into 26,169 shares of common stock. This
offering was exempt in reliance upon Section 3(a)(9) and Section 4(2) of
the Securities Act. The investors were
II-3
<PAGE>
accredited investors and sophisticated non-accredited investors, either
alone or with a purchaser representative.
(10) From February 1999 through May 1999, we offered 15%
unsecured promissory notes, or the 1999 Notes, with a term of ninety days
and interest accruing at the rate of 37.5 shares of common stock every
thirty days for every $1,000 of outstanding principal. We received $350,000
from the sale of 1999 Notes. $134,885 of the 1999 Notes have been paid off,
and $180,000 of the 1999 Notes have been converted into 81,909 shares of
Series B convertible preferred stock, which amount includes accrued
interest and shares of common stock. All of the outstanding 1999 Notes are
in default. As of March 31, 2000, we have issued 50,137 shares of common
stock as interest and have outstanding $35,115 in principal and $7,947 of
accrued interest on the 1999 Notes. We intend to repay the 1999 Notes from
the proceeds of this offering. This offering was exempt in reliance upon
Section 4(2) of the Securities Act. The securities were issued to
independent third parties who were either accredited or sophisticated
non-accredited investors, either alone or with a purchaser representative.
(11) From March 1999 through October 1999, we conducted a
private placement, or the 1999 Preferred Stock Offering, of up to
$4,000,000 of Series B convertible preferred stock at $3.00 per share. The
1999 Preferred Stock Offering was co-underwritten on a best-efforts basis
by Donald & Co. Securities Inc. and CBS. Donald & Co. and CBS received a
commission of 9% and a non-refundable expense allowance of 2.5%. Upon
completion of the 1999 Preferred Stock Offering, we issued 1,355,047 shares
of Series B convertible preferred stock in exchange for cash subscriptions
of $4,065,133 and 726,633 shares of Series B convertible preferred stock in
exchange for certain outstanding promissory notes and unpaid salaries to
certain officers and as part of the settlement with RSG Investments.
Pursuant to the terms of the Series B convertible preferred stock, the
shares are automatically converted into common stock upon the closing of an
initial public offering or a business combination where a controlling
interest of eRoomSystem Technologies is acquired. The conversion is at 45%
of the initial public offering price, or, if an initial public offering
does not close by September 28, 1999, at 1.5 shares of common stock per
share of Series B convertible preferred stock. The reverse stock split did
not affect the number of shares of Series B convertible preferred stock
outstanding. This offering was exempt in reliance on Rule 506 of Regulation
D of the Securities Act. The securities were issued to independent third
parties and to existing stockholders who were either accredited investors
or sophisticated non-accredited investors, either alone or with a purchaser
representative. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters.
(12) In May 1999, holders of 1997 Notes were offered the right
to convert their 1997 Notes and accrued interest into Series B convertible
preferred stock at the rate of $3.00 per share. Holders of 1997 Notes
consisting of $425,051 in outstanding principal, plus accrued interest,
converted into 175,562 shares of Series B convertible preferred stock. As
of March 31, 2000, 1997 Notes outstanding consisted of $431,750 in
principal and $159,480 of accrued interest. All of the outstanding 1997
Notes are in default. We intend to pay off the 1997 Notes from the net
proceeds of this offering. This offering was exempt from registration in
reliance on Section 3(a)(9) and Section 4(2) of the Securities Act. The
investors were either accredited or sophisticated non-accredited investors,
either alone or with a purchaser representative. Each of the investors
received a private placement memorandum disclosing information about the
conversion and our corporate, business and financial matters.
(13) On May 30, 1999, we issued 198,750 shares of our common
stock to the SBD Limited Partnership, an entity controlled by Steven L.
Sunyich, our president, chief executive officer and chairman, in exchange
for a promissory note in favor eRoomSystem Technologies in the original
principal amount of $1,590,000.00. The purpose of the issuance was to
assist eRoomSystem Technologies in complying with the stock pledge
requirements mandated by the terms of the $1,500,000 loan from RSG
Investments. On September 30, 1999, we entered into an Equipment Transfer
Agreement with RSG, and the 198,750 shares of common stock were returned to
the SBD Limited Partnership. In turn, the SBD Limited Partnership
surrendered the 198,750 shares of common stock to eRoomSystem Technologies
in exchange for the cancellation of the promissory note. The shares of
common stock were booked as treasury stock and have been retired. This
offering was exempt in reliance on Section 4(2) of the Securities Act. Mr.
Sunyich was an accredited investor.
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<PAGE>
(14) On September 1, 1999, we entered into promissory note
purchase agreements with Steven L. Sunyich, our chief executive officer and
Chairman of the Board, Derek Ellis, our chief financial officer, and a
former executive officer of and consultant to eRoomSystem Technologies, in
which we agreed to convert the outstanding indebtedness due on their
respective demand promissory notes into shares of Series B convertible
preferred stock. As a result of these agreements, we issued 72,434 shares
of Series B convertible preferred stock and 51,981 shares of our common
stock to Mr. Sunyich, 3,742 shares of Series B convertible preferred stock
and 2,990 shares of our common stock to Mr. Ellis, and 29,808 shares of
Series B convertible preferred stock and 25,376 shares of our common stock
to the former executive officer and consultant. This offering was exempt in
reliance on Section 4(2) of the Securities Act. Messrs. Sunyich and Ellis
were each accredited investors.
(15) On December 7, 1999 and February 14, 2000, Mr. Sunyich
formally assigned to us all of his rights in Patent No. 4,939,352 and
Patent Nos. 4,857,714 and 4,883,948, which relate to credit card point of
sale technology. In exchange, we issued 65,625 shares of common stock and a
promissory note in the principal amount of $125,000 to Mr. Sunyich. After
paying down the promissory note to approximately $70,000, we converted the
remaining outstanding principal and interest into 23,524 shares of Series B
convertible preferred stock. This offering was exempt in reliance on
Section 4(2) of the Securities Act. Mr. Sunyich was an accredited investor.
(16) On December 30, 1999, we entered into conversion
agreements with Steven L. Sunyich, our chief executive officer and Chairman
of the Board, and Derek Ellis, our chief financial officer, in which we
agreed to convert unpaid salaries in exchange for shares of Series B
convertible preferred stock. As a result of these agreements, we issued
73,052 shares of Series B convertible preferred stock to Mr. Sunyich and
3,776 shares of Series B convertible preferred stock to Mr. Ellis. This
offering was exempt in reliance on Section 4(2) of the Securities Act.
Messrs. Sunyich and Ellis were each accredited investors.
(17) In March and April 2000, we conducted a private
placement, or the 2000 Units Offering, of up to $3,000,000 of units where
each $100,000 unit consisted of a 7% convertible promissory note in the
original principal amount of $25,000, 23,077 shares of Series C convertible
preferred stock and a warrant to purchase 5,000 shares of common stock at
an exercise price of $6.60 per share. The 2000 Units Offering was
underwritten on a best-efforts basis by Donald & Co. Securities Inc., who
received a commission of 8% and a non-accountable expense allowance of 0.5%
As a result of the 2000 Units Offering, we received cash of $950,000 which
resulted in the issuance of 219,227 shares of Series C convertible
preferred stock, notes in the original principal amount of $237,500 and
warrants to purchase 47,500 shares of common stock. Pursuant to the terms
of the Series C convertible preferred stock, the shares are automatically
converted into common stock upon the closing of an initial public offering
at 55% of the initial public offering price if the initial public offering
closes by January 31, 2001. If the initial public offering is not closed by
January 31, 2001, Series C convertible preferred stock shall convert at
$3.30 per share. This offering was exempt from registration in reliance on
Rule 506 of Regulation D of the Securities Act. The securities were issued
to independent third parties and to existing stockholders, each of who were
an accredited investor. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters.
(18) On March 30, 2000, we issued a warrant to purchase
125,000 shares of common stock, exercisable at $4.80 per share through
December 31, 2001, to Hall Communications, Inc. for advertising, marketing
and promotional services. This offering was exempt from registration in
reliance on Section 4(2) of the Securities Act. The investor was an
accredited investor.
(19) As of March 31, 2000, we have issued options pursuant to
our 2000 Stock Option Plan to purchase an aggregate of 1,417,250 shares of
our common stock. The issuances of options and warrants to employees and
consultants of eRoomSystem Technologies under the 2000 Stock Option Plan
were exempt under Section 4(2) and Rule 701 of the Securities Act as
transactions pursuant to a compensatory benefit plan or written
compensation contract. Of the Rule 701 issuances, none of the securities
were issued to consultants. Of the Section 4(2) issuances, the securities
were issued to existing stockholders, officers, director, consultants or
former consultants who were either accredited or sophisticated
non-accredited
II-5
<PAGE>
investors, either alone or with a purchaser representative. Each of the
sophisticated non-accredited investors had access to our corporate,
business and financial information.
(20) As of June 7, 2000, with the exception of the options
granted pursuant to the 2000 Stock Option Plan and the warrants issued to
Hall Communications, we have issued and outstanding options and warrants to
purchase 960,565 shares of common stock to employees, consultants,
investors and other service providers of eRoomSystem Technologies.
(21) On April 13, 2000, we issued 200,000 shares of common
stock in conjunction with the receipt of a $1,500,000 loan evidenced by a
promissory note of the same date. This offering was exempt in reliance on
Regulation S of the Securities Act. The securities were offered and sold
outside of the United States to independent third parties who were not U.S.
persons.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page
of the Form SB-2 which is incorporated herein by reference.
(b) Financial Statement Schedules
None.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus 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.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, State of Nevada, on the 9th day of June 2000.
eROOMSYSTEM TECHNOLOGIES, INC.
By: *
-------------------------------------------------
Steven L. Sunyich
Its: President, Chief Executive Officer and Chairman
of the Board of Directors
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* President, Chief Executive Officer and June 9, 2000
------------------------------------ Chairman of the Board of Directors
Steven L. Sunyich (Principal Executive Officer)
* Chief Financial Officer and Treasurer June 9, 2000
------------------------------------ (Principal Financial and Accounting Officer)
Derek K. Ellis
/s/ GREGORY L. HRNCIR General Counsel and Secretary June 9, 2000
------------------------------------
Gregory L. Hrncir
* Director June 9, 2000
------------------------------------
Lawrence S. Schroeder
*By: /s/ GREGORY L. HRNCIR Attorney-in-Fact June 9, 2000
--------------------------------
Gregory L. Hrncir
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT NAME PAGE
------ ------------- ----
<S> <C>
1.01 *Form of Underwriting Agreement ---
2.01 Agreement and Plan of Reorganization by and between **
RoomSystems International Corporation and RoomSystems,
Inc. dated December 31, 1999 (incorporated by reference as
Exhibit 2.01 to the Registrant's Registration Statement on
Form SB-2, File No. 333-34882, filed on April 14, 2000, or
the Registration Statement)
2.02 Transfer Pricing Agreement by and between RoomSystems **
International Corporation and RoomSystems, Inc. dated
December 31, 1999 (incorporated by reference as Exhibit 2.02
to the Registration Statement)
3.01 Amended and Restated Articles of Incorporation (incorporated **
by reference as Exhibit 3.01 to the Registration
Statement)
3.02 Certificate of Correction dated May 30, 2000 114
3.03 Amended and Restated Certificate of Designation, **
Preferences, Rights and Limitation of Series A
convertible preferred stock (incorporated by reference as
Exhibit 3.02 to the Registration Statement)
3.04 Amended and Restated Certificate of Designation, **
Preferences, Rights and Limitation of Series B
convertible preferred stock (incorporated by reference as
Exhibit 3.03 to the Registration Statement)
3.05 Certificate of Designation, Preferences, Rights and **
Limitation of Series C convertible preferred stock
(incorporated by reference as Exhibit 3.04 to the
Registration Statement)
3.06 Amended and Restated Bylaws 115
4.01 Form of Common Stock Certificate (incorporated by reference **
as Exhibit 4.01 to the Registration Statement)
4.02 Form of Certificate for Series A convertible preferred stock **
(incorporated by reference as Exhibit 4.02 to the
Registration Statement)
4.03 Form of Certificate for Series B convertible preferred stock **
(incorporated by reference as Exhibit 4.03 to the
Registration Statement)
4.04 Form of Certificate for Series C convertible preferred stock **
(incorporated by reference as Exhibit 4.04 to the
Registration Statement)
5.01 * Opinion of Kummer Kaempfer Bonner & Renshaw ---
10.01 Amended and Restated 2000 Stock Option and Incentive Plan 129
10.02 Lease Agreement by and between RoomSystems Finance **
Corporation and 3770 Howard Hughes Parkway Associates
Limited Partnership dated October 8, 1997 (incorporated by
reference as Exhibit 10.02 to the Registration Statement)
10.02A Exhibits to Lease Agreement by and between RoomSystems 141
Finance Corporation and 3770 Howard Hughes Parkway
Associates Limited Partnership dated October 8, 1997
10.03 Lease Agreement by and between RoomSystems, Inc. and Pam Joy 150
Realty, Inc. dated October 10, 1997
10.04 Master Corporate Agreement by and between Innco Corporation **
and RoomSystems, Inc. dated April 6, 1998 (incorporated
by reference as Exhibit 10.04 to the Registration Statement)
10.04A Exhibits to Master Corporate Agreement by and between Innco 166
Corporation and RoomSystems, Inc. dated April 6, 1998
10.05 Indemnification Agreement by and between RoomSystems, Inc. **
and Alan C. Ashton dated August 17, 1999 (incorporated by
reference as Exhibit 10.06 to the Registration Statement)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT NAME PAGE
------ ------------- ----
<S> <C>
10.06 Agreement of Understanding by and between RoomSystems, Inc. **
and Ash Capital, LLC, C&W/RSI Partners, LLC, SKM
Investment, LLC and Thunder Mountain Investments, LC dated
August 17, 1999 (incorporated by reference as Exhibit 10.05
to the Registration Statement)
10.06A Exhibits to Agreement of Understanding by and between 194
RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI Partners,
LLC, SKM Investment, LLC and Thunder Mountain Investments,
LC dated August 17, 1999
10.07 First Amendment to Agreement of Understanding by and between **
RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI Partners,
LLC, SKM Investment, LLC and Thunder Mountain Investments,
LC dated September 30, 1999 (incorporated by reference as
Exhibit 10.08 to the Registration Statement)
10.08 Promissory Note Repurchase Agreement by and between Steven **
L. Sunyich and RoomSystems, Inc. dated September 1, 1999
(incorporated by reference as Exhibit 10.09 to the
Registration Statement)
10.09 Indemnification Agreement by and between RSi BRE, Inc. and **
Donnelly Prehn dated September 27, 1999 (incorporated by
reference as Exhibit 10.10 to the Registration Statement)
10.10 Equipment Transfer Agreement by and between RoomSystems, **
Inc., RoomSystems International Corporation, RSi BRE,
Inc. and RSG Investments, LLC dated September 28, 1999
(incorporated by reference as Exhibit 10.11 to the
Registration Statement)
10.10A Exhibits to Equipment Transfer Agreement by and between 287
RoomSystems, Inc., RoomSystems International Corporation,
RSi BRE, Inc. and RSG Investments, LLC dated September 28,
1999
10.11 Amendment to Equipment Transfer Agreement by and between **
RoomSystems, Inc., RoomSystems International Corporation,
RSi BRE, Inc. and RSG Investments, LLC dated November 23,
1999 (incorporated by reference as Exhibit 10.12 to the
Registration Statement)
10.12 Conversion Agreement by and between Steven L. Sunyich and **
RoomSystems, Inc. dated December 30, 1999 (incorporated
by reference as Exhibit 10.13 to the Registration Statement)
10.13 Loan and Security Agreement by and between RoomSystem **
Technologies, Inc. and Ash Capital, LLC dated February
15, 2000 (incorporated by reference as Exhibit 10.14 to the
Registration Statement)
10.13A Exhibits to Loan and Security Agreement by and between 398
RoomSystem Technologies, Inc. and Ash Capital, LLC dated
February 15, 2000
10.14 Letter Agreement by and between eRoom System Technologies, **
Inc. and Hall Communications, Inc. dated March 30, 2000
(incorporated by reference as Exhibit 10.15 to the
Registration Statement)
10.15 Form of Hotel Revenue Sharing Lease Agreement 434
10.16 Form of Noncompetition and Nondisclosure Agreement (Sales) **
(incorporated by reference as Exhibit 10.17 to the
Registration Statement)
10.17 Form of Consulting Agreement (incorporated by reference as **
Exhibit 10.18 to the Registration Statement)
10.18 Form of Sales Representation Agreement (incorporated by **
reference as Exhibit 10.19 to the Registration Statement)
10.19 Form of Executive Employment Agreement (incorporated by **
reference as Exhibit 10.20 to the Registration Statement)
10.20 Form of Offshore Loan Subscription Agreement dated as of **
April 13, 2000 (incorporated by reference as Exhibit
10.21 to the Registration Statement)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT NAME PAGE
------ ------------- ----
<S> <C>
10.21 Form of Secured Subordinated Promissory Note dated as of **
April 13, 2000 (incorporated by reference as Exhibit
10.22 to the Registration Statement)
10.22 Form of Installation, Co-Maintenance and Software Licensing 442
and Upgrade Agreement
10.23 + Master Business Lease Financing Agreement by and among 448
Amresco Leasing Corporation, eRoomSystem SPE, Inc.,
RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated
May 11, 2000
10.24 Indemnification Agreement by and between eRoomSystem 644
Technologies, Inc. and John J. Prehn dated May 31, 2000
10.25 Amended and Restated Executive Employment Agreement of 650
Steven L. Sunyich dated June 6, 2000
16.01 Letter regarding Change in Certifying Accountant **
(incorporated by reference as Exhibit 16.01 to the
Registration Statement)
21.01 List of Subsidiaries 660
23.01 Consent of Hansen, Barnett & Maxwell 661
23.02 *Consent of Kummer Kaempfer Bonner & Renshaw (included in ---
Exhibit 5.01)
24.01 Power of Attorney **
27.01 Financial Data Schedule 662
99.01 Consent of Dr. Alan C. Ashton (incorporated by reference as **
Exhibit 99.01 to the Registration Statement)
99.02 Consent of S. Leslie Flegel (incorporated by reference as **
Exhibit 99.02 to the Registration Statement)
99.03 Consent of John J. Prehn 663
</TABLE>
--------------------------------------------------------------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain
portions of this agreement, including the exhibits thereto, of
which certain portions have been omitted and filed separately
with the Commission.
II-10