<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1997
Registration No. 333-21879
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1361276
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
BRUCE F. FAILING, JR.
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
WITH COPIES TO:
HOWARD KAILES, ESQ.
KRUGMAN CHAPNICK & GRIMSHAW LLP
PARK 80 WEST - PLAZA TWO
SADDLE BROOK, NJ 07663
(201) 845-3434
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-2 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
-------------------------------- ------------------
<S> <C>
1. Forepart of Registration Statement and Outside Front Cover Page
of Prospectus................................................ Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus......... Inside Front Cover Page; Available
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges................................................ Prospectus Summary; Risk Factors;
Selected Historical Consolidated
Financial and Certain Other Data
4. Use of Proceeds................................................. Use of Proceeds
5. Determination of Offering Price................................. Not Applicable
6. Dilution........................................................ Not Applicable
7. Selling Security Holders........................................ Selling Security Holders
8. Plan of Distribution............................................ Plan of Distribution
9. Description of Securities to be Registered...................... Description of Warrants; Description of
Capital Stock; Certain Federal Income
Tax Considerations
10. Interests of Named Experts...................................... Legal Matters, Independent Accountants
11. Information with Respect to the Registrant...................... Prospectus Summary; Selected Historical
Consolidated Financial and Certain
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Consolidated Financial Statements
12. Incorporation of Certain Information by Reference............... Incorporation of Certain Documents by
Reference
13. Disclosure of Commission Position on Indemnification Per
Securities Net Liabilities................................... Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED MAY , 1997
PROSPECTUS
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
147,312 WARRANTS TO PURCHASE AN AGGREGATE OF 2,538,258 SHARES OF COMMON STOCK
AND 2,538,258 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
---------------------
This Prospectus relates to the offering from time to time by certain holders
(the "Selling Security Holders") of 147,312 warrants (the "Warrants") to
purchase an aggregate of 2,538,258 shares of common stock, par value $.01 per
share (the "Common Stock"), of Electronic Retailing Systems International, Inc.,
a Delaware corporation ("ERS" or the "Company") and the shares of Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares"). This Prospectus
may also be used by the Company in connection with the issuance from time to
time of the Warrant Shares. The Warrants are exercisable beginning on January
24, 1998 and at any time thereafter on or prior to February 1, 2004. The
Warrants that may be sold by the Selling Security Holders were acquired in a
private placement of 147,312 units (the "Units") in January 1997 (the "Private
Placement"); each Unit consisted of one 13-1/4% Senior Discount Note due 2004
(each an "Old Note", and collectively the "Old Notes") and one Warrant to
purchase 17.23 shares of Common Stock at an exercise price of $5.23 per share
(the number of shares and exercise price are subject to adjustment as described
herein).
The Warrants and the Warrant Shares may be offered by the Selling Security
Holders in transactions in the over-the-counter-market at prices obtainable at
the time of sale or in privately negotiated transactions at prices determined by
negotiation. The Selling Security Holders may effect such transactions by
selling the Warrants or the Warrant Shares to or through securities
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers of the Warrants or the Warrant Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Warrants,
Warrant Shares or interests therein as a pledgee and may, from time to time,
effect distributions of the Warrants, Warrant Shares or interests in such
capacity. See "The Selling Security Holders" and "Plan of Distribution." The
Selling Security Holders, the brokers and dealers through whom sales of the
Warrants or Warrant Shares are made and any agent or dealer who distributes
Warrants or Warrant Shares acquired as pledgee may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and any profits realized by them on the sale of the Warrants or Warrant
Shares may be considered to be underwriting compensation.
Except for the sale of the Warrant Shares upon exercise of the Warrants, the
Company is not selling any of the Warrants or Warrant Shares and will not
receive any of the proceeds from the sale of the Warrants or Warrant Shares
being offered by the Selling Security Holders. The Company will receive proceeds
from the exercise of the Warrants. The cost of registering the Warrants and the
Warrant Shares is being borne by the Company. It is anticipated that the Company
will maintain the effectiveness of the registration statement of which this
Prospectus is a part until the earliest of (i) with respect to the Warrants, (A)
such time as all the Warrants have been sold under such registration statement
or exercised, (B) February 1, 2004 (the "Expiration Date") and (C) such time as
the Warrants can be sold without restriction under the Securities Act, and (ii)
with respect to the Warrant Shares, (A) such time as all Warrant Shares have
been sold under such registration statement and (B) the Expiration Date.
The Company has not and does not intend to apply for the listing of the Warrants
on any national securities exchange or to seek the admission thereof to trading
in the Nasdaq Stock Market. See "Risk Factors -- Absence of Public Trading
Market" and "Risk Factors -- Limited Trading Market."
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of the Company
since the date hereof.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
The date of this Prospectus is May , 1997.
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 6
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form S-2
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries, believed to be accurate in all material respects,
of certain terms and provisions of certain agreements; however, in each such
case reference is made to the actual agreements filed as an exhibit to the
Registration Statement, and all such summaries are qualified in their entirety
by this reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Registration Statement and the
exhibits thereto, and the reports and other information, filed by the Company
with the Commission in accordance with the Exchange Act may be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C., 20549 and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549, at prescribed rates, and can also be obtained electronically through
the Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov). The Company's Common Stock is listed
on The Nasdaq Stock Market and copies of such reports and other information can
also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by reference
into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended by Amendment No. 1 thereto;
(ii) the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1997; and
(iii) the Company's Current Reports on Form 8-K dated, respectively,
January 24, 1997 and February 7, 1997.
Any statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except as
so modified or superseded.
The Company hereby undertakes to provide without charge to each Holder to whom a
copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated into this Prospectus by reference, other than
exhibits to such documents. Requests for such copies should be directed to:
Electronic Retailing Systems International, Inc., 372 Danbury Road, Wilton,
Connecticut, 06897, telephone number (203) 761-7900.
<PAGE> 7
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
appearing elsewhere in, or incorporated into, this Prospectus. Certain
capitalized terms used but not defined in this summary are used herein as
defined elsewhere in this Prospectus. Unless otherwise indicated, all references
in this Prospectus to the Company refer to Electronic Retailing Systems
International, Inc., a Delaware corporation, and its subsidiaries and, with
respect to operations prior to the Combination described below, its
predecessors.
THE COMPANY
Electronic Retailing Systems International, Inc. develops and provides
electronic shelf label ("ESL") systems designed to allow supermarket chains and
other retailers to increase productivity, reduce labor costs and improve
management information systems. The Company is the leading provider in the
United States of ESL systems, based on management's estimates of installed ESL
systems. The ERS ShelfNet system (the "ERS ShelfNet System") has been designed
as a productivity enhancing center store automation system, which replaces paper
price tags on retail shelves with electronic liquid crystal display units and
provides a suite of applications to enhance a retailer's pricing, inventory,
shelf management, merchandising and promotional activities. The ERS ShelfNet
System is comprised of proprietary hardware and software that electronically
link a store's shelves to its point-of-sale ("POS") systems and central
computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. An ERS store-based local area network has up to 20,000
individual ESLs connected to a central server. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning alphanumeric
messages. The ERS ShelfNet System is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market. Management estimates, based on studies
conducted in collaboration with the Company's current customers, that cost
savings and benefits to a supermarket with 15,000 ESLs that changes 2,500 to
4,500 prices per week could, under the Company's proposed SayGo Plan (as
defined), provide an annual contribution per store ranging from approximately
$40,000 to approximately $240,000 through the anticipated level of usage of the
applications afforded by the ERS ShelfNet System. However, there can be no
assurance that any such cost savings or benefits will be realized by any
customer. See "Risk Factors -- Use of Assumptions to Estimate Net Cost Savings
and Benefits".
<PAGE> 8
3
As of March 31, 1997, the ERS ShelfNet System was installed in 70
U.S. retail stores, including stores owned by such leading supermarket chains as
The Vons Companies, Inc. ("Vons"), Stop & Shop Supermarket Company ("Stop &
Shop"), H.E. Butt Grocery Co. ("HEB"), Big Y Foods, Inc. ("Big Y"), Shaw's
Supermarkets, Inc. ("Shaw's"), Lucky Stores, Inc. ("Lucky"), The Great Atlantic
& Pacific Tea Company, Inc. and K Mart Corporation, and one supermarket owned by
the Overwaitea Food Group Division of Great Pacific Industries Ltd. (the
"Overwaitea Food Group") in Canada. The Company's customers include five of the
15 largest supermarket chains in the United States. The Company estimates that,
as of March 31, 1997, of the approximately 29,800 supermarkets in the United
States, approximately 125 stores were operating ESL systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it planned in the first quarter
of 1997 to introduce a new generation ERS ShelfNet System that provides spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, in
December 1996 ERS signed its first non-binding letter of intent (the "Letter of
Intent") providing for installation of the ERS ShelfNet System in approximately
60 supermarkets beginning in 1997, and is continuing its efforts to procure
additional letters of intent. The Letter of Intent is, and all such additional
letters of intent will be, subject to numerous conditions, including the
negotiation and execution of definitive contract terms.
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. The Company now intends also to offer the ERS
ShelfNet System on a fee based arrangement called "Save-As-You-Go" (the "SayGo
Plan") whereby the Company will own the system and, with no upfront cash cost to
the retailer, furnish the system to retailers (generally for a period of up to
five years), who will pay monthly fees to the Company based primarily on their
actual usage of the system. The Company believes that the SayGo Plan will
accelerate market acceptance of the ERS ShelfNet System.
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
In December 1996, the Company announced its plan to introduce the new
generation ERS ShelfNet System, providing spread spectrum microwave transmission
of data directly to wireless ESLs. The enhanced ERS ShelfNet System is designed
to provide additional flexibility and convenience to customers by expanding
potential coverage by the Company's ESLs to the entire store and allowing the
retailer to change store placement of the ESLs more easily. The Company believes
that the cost of installing and maintaining its wireless ESLs will be lower than
that of its current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
In December 1996, ERS signed its first non-binding Letter of Intent
providing for installation of the ERS ShelfNet System under the SayGo Plan in
approximately 60 supermarkets beginning in 1997, and is continuing its efforts
to procure additional letters of intent. The Letter of Intent is, and all such
additional arrangements will be, subject to numerous conditions, including
negotiation and execution of definitive contract terms. See "Business --
Marketing and Sales" for a description of the terms to be proposed initially by
the Company.
<PAGE> 9
4
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock and
the contemporaneous private placement of Common Stock to subscribers, including
members of the Company's Board of Directors (the "Board of Directors") and their
affiliates. In January 1997, the Company raised approximately $95 million in net
proceeds as a result of the Private Placement (as defined).
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends: (i) to focus its initial marketing efforts under the SayGo Plan on the
supermarket sector of the retail industry; (ii) to continue to reduce the
manufacturing costs of the system to improve the Company's profitability; and
(iii) to continue to enhance, develop and support value-added applications of
the ERS ShelfNet System.
- SayGo Plan. The Company believes that its SayGo Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use the proceeds from
the Private Placement (as defined) to install the ERS ShelfNet
System in supermarkets under the SayGo Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and because of the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
March 31, 1997, of the approximately 29,900 supermarkets in
the United States, approximately 125 stores were operating ESL
systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the SayGo Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings and benefits) and to
encourage existing customers to adopt the new generation
system and install additional systems, the Company intends to
develop additional productivity enhancing applications for,
and enhance existing applications of, the ERS ShelfNet System.
HISTORY
ERS was founded in 1990 by Norton Garfinkle, the Company's Chairman of
the Board, and Bruce F. Failing, Jr., the Company's Vice Chairman of the Board
and Chief Executive Officer, to develop and supply ESL systems to retailers. Mr.
Failing previously co-founded and served as President of Actmedia, Inc., a
principal provider of in-store marketing products and services, until Actmedia's
sale to Heritage Media Corporation in 1989 for total consideration of
approximately $184 million. Mr. Garfinkle was a significant shareholder, and
served as a director, of Actmedia until its sale. Since inception, the Company
has raised approximately $69 million, excluding the proceeds to the Company from
the Private Placement, in order to develop its system and business, of which
Messrs. Failing and Garfinkle contributed approximately $23 million. The
Company's headquarters is located at 372 Danbury Road, Wilton, Connecticut
06897, telephone (203) 761-7900.
<PAGE> 10
5
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered...................... 147,312 Warrants, which, when exercised, would entitle the holders
thereof to purchase, in the aggregate, 2,538,258 shares of Common Stock
(equal to approximately 10.75% of the outstanding Common Stock giving
effect to the exercise of the Warrants but not to the exercise or
conversion of any other stock options, convertible securities or
warrants); and 2,538,258 shares of Common Stock issuable upon the
exercise of such Warrants.
Warrants Outstanding.................... As of May 15, 1997, 147,312 Warrants were outstanding.
Common Stock Outstanding................ As of May 15, 1997, 21,084,156 shares of Common Stock
were outstanding.
Use of Proceeds......................... There will be no proceeds to the Company from the sale of the Warrants
or the Warrant Shares by the Selling Security Holders. Upon the
exercise of the Warrants, the Company will receive $5.23 per common
share, or aggregate gross proceeds of approximately $13,275,089.
However, there can be no assurance that the Company will receive any
proceeds from the exercise of the Warrants, as there is no assurance
that any such Warrants will be exercised by the Selling Security
Holders. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
Description of the Warrants
Expiration of Warrants.................. February 1, 2004 (the "Expiration Date").
Exercise................................ Each Warrant entitles the holder thereof to purchase 17.23 shares of
Common Stock for $5.23 per share (subject to adjustment as described
herein). The Warrants may be exercised at any time beginning January
24, 1998, and on or prior to the Expiration Date, provided a
registration statement relating to the shares of Common Stock underlying
the Warrants is then in effect or the exercise of such Warrants is
exempt from the registration of the Securities Act, and such securities
are qualified for sale or exempt from qualification under applicable
securities laws of the states or other jurisdictions in which such
holders reside. See "Description of the Warrants - Registration Rights."
Adjustments............................. The number of shares of Common Stock for which a Warrant is exercisable
and the purchase price thereof are subject to adjustment from time to
time upon the occurrence of certain events, including, among other
things, certain issuances of options or convertible securities certain
dividends and distributions and certain changes in options and
convertible securities. A Warrant does not entitle the holder thereof
to receive any dividends paid on Common Stock.
</TABLE>
For additional information concerning the Warrants, see "Description of the
Warrants."
RISK FACTORS
Prospective purchasers of the Warrants and Warrant Shares should consider
carefully the information set forth under "Risk Factors" and all other
information set forth in this Prospectus before making any investment in the
Warrants or Warrant Shares.
<PAGE> 11
6
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect summary historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following summary historical consolidated statement of operations
data, insofar as it relates to each of the years 1992-1996, has been derived
from audited annual consolidated financial statements, including the
consolidated statement of operations for the three years ended December 31, 1996
and the notes thereto included elsewhere in this Prospectus. The summary
historical consolidated statement of operations data for the three months ended
March 31, 1996 and 1997 and the summary historical consolidated balance sheet
data as of March 31, 1997 have been derived from unaudited condensed
consolidated financial statement also included elsewhere in this Prospectus and
which, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the unaudited interim periods. The unaudited interim period results are not
necessarily indicative of the results to be expected for the full year. For a
discussion of factors affecting the comparability of this data, see "Selected
Historical Consolidated Financial and Certain Other Data".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues................................. $ 941 $ 1,122 $ 2,376 $ 2,973 $ 5,002 $ 1,221 $ 520
Loss from operations..................... (9,420) (16,518) (11,324) (10,717) (9,832) (2,274) (2,593)
Net loss(2).............................. (9,533) (15,997) (11,278) (10,868) (9,412) (2,327) (4,270)
Net loss per common share(3)............. -- (1.40) (0.97) (0.95) (0.60) (0.22) (0.20)
Weighted average number of common shares
outstanding(4)........................ -- 11,461 11,682 11,743 16,169 11,767 21,055
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1997
--------------------
(DOLLARS
IN THOUSANDS)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital $ 102,432
Total assets 110,627
Long-term debt 102,436
Warrants to purchase common stock 5,100
Stockholders' equity 1,529
</TABLE>
<PAGE> 12
7
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5)........................ $ (8,371) $(15,290) $(10,839) $(10,114) $(18,370) $(2,088) $(1,223)
Cash flows from operating
activities.................... (8,133) (11,855) (10,026) (11,160) (7,549) (2,571) (1,072)
Cash flows from investing
activities.................... (324) (8,641) 6,737 100 (989) (299) (274)
Cash flows from financing
activities.................... 12,866 18,606 1,901 13,139 13,526 1,651 95,075
Depreciation and amortization.... 240 367 374 463 660 152 324
Capital expenditures............. 324 574 303 452 397 76 199
Deficiency of earnings to fixed
charges(6).................... (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
Stores with ERS ShelfNet System
installed at end of period.... 7 13 21 42 65 48 71
</TABLE>
- ---------------------------
(1) Reflects the consummation of the combination of the Company, the
Principal Subsidiary, which was incorporated in Connecticut in 1990,
and ERS Associates Limited Partnership (the "Partnership"), which was
organized in Connecticut in 1992 in order to continue the business and
hold the principal assets of the Principal Subsidiary, immediately
prior to the closing of the Company's initial public offering (the
"Initial Public Offering") of Common Stock on May 7, 1993. This
combination is herein referred to as the "Combination". References to
historical financial information of the Company prior to the date of
the Combination refer to the historical financial information of the
Principal Subsidiary.
(2) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(3) Net loss per common share data for periods prior to December 31, 1993
has not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common share equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not
reflect common share equivalents that are anti-dilutive.
(5) EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization. EBITDA is presented because the Company
believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by
an investor as an alternative to net income or income from operations,
as an indicator of the operating performance of the Company or other
consolidated operations or cash flow data prepared in accordance with
generally accepted accounting principles, or as an alternative to
<PAGE> 13
8
cash flows as a measure of liquidity. For the years ended December 31,
1993 and 1994, EBITDA included non-cash charges for stock option
compensation expense of $7.5 million and $1.1 million, respectively;
for the years ended December 31, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997, such amounts were not
material.
(6) For purposes of determining the deficiency of earnings to fixed
charges, "earnings" consist of earnings before fixed charges and "fixed
charges" consist of interest on all debt and that portion of rental
expense that the Company believes to be representative of interest.
<PAGE> 14
9
RISK FACTORS
Prospective purchasers of the Warrants and Warrant Shares should
carefully consider the risk factors set forth below, as well as the other
information appearing in this Prospectus, when evaluating an investment in the
Company. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, the following risk
factors.
RELIANCE ON SINGLE PRODUCT IN EMERGING MARKET
For the foreseeable future, the Company's revenues, if any, will be
derived entirely from the ERS ShelfNet System. The market for ESL systems, such
as the ERS ShelfNet System, is in the development stage, and market acceptance
of, and demand for, these systems are subject to a high level of uncertainty.
The Company's success will be dependent upon, among other things, the extent to
which retailers choose to install ESL systems. The demand for such systems may
be affected by numerous factors, many of which are beyond the Company's control,
including the actual savings and benefits experienced by the individual
supermarket stores using the ESL system. See " -- Use of Assumptions to Estimate
Net Cost Savings and Benefits." There can be no assurance that supermarket
chains will choose to install ESL systems in a significant number of their
stores. If the ERS ShelfNet System fails to generate adequate operating cash
flows, whether as a result of lack of market acceptance, the Company's inability
to place or service the system, the failure of the system to perform as
expected, the obsolescence of the system or otherwise, the Company will be
unable to pay the principal of or interest on the Notes, and the Warrants may
become worthless. See " -- Introduction of Enhanced System".
INTRODUCTION OF NEW GENERATION SYSTEM
In December 1996, ERS announced that, in the first quarter of 1997, it
planned to introduce the new generation ERS ShelfNet System, providing spread
spectrum microwave transmission of data directly to wireless ESLs. Although the
Company has commenced solicitation of orders for the new generation system while
it completes field testing of the system, there can be no assurance that the new
generation ERS ShelfNet System will function successfully over time in actual
retail usage or will result in the lower costs of manufacturing, installing and
maintaining the system that the Company anticipates. If the new generation ERS
ShelfNet System or its applications fail to perform as expected, the Company's
business and results of operations would be materially adversely affected.
The introduction of the new generation ERS ShelfNet System could affect
the Company's ability to sell on-hand inventories of the current system and
could affect the recoverability of the book value of such inventory and certain
related assets. During the fourth quarter of 1996, the Company recorded a
special provision for excess inventory in the amount of $750,000, in connection
with the introduction of its new generation ERS ShelfNet System.
USE OF ASSUMPTIONS TO ESTIMATE NET COST SAVINGS AND BENEFITS
As noted above, demand for the ERS ShelfNet System will be affected by,
among other things, the actual savings and benefits experienced by the
individual stores using the ERS ShelfNet System. Estimates of the potential for
such savings and benefits used in this Prospectus are based on a number of
assumptions made by the Company, including, for example, the assumed average
cost of labor, other assumed average supermarket operating data and the assumed
usage of the system's applications by retailers. Because the market for ESL
systems is in the development stage, these estimates are based on information
and studies which may not be representative of the
<PAGE> 15
10
overall retail market for ESL systems and may overstate the cost savings and
benefits that retailers are able to achieve in actual practice. Moreover, these
estimates are not based on actual results obtained by any particular retailer
using the ERS ShelfNet System and are inherently subject to business and
economic uncertainties. There can be no assurance, therefore, that the estimated
cost savings and benefits will actually be achieved by any particular retailer
or by any particular group of retailers, and prospective purchasers of the
Securities are cautioned not to place undue reliance upon these estimates. The
actual cost savings and benefits may vary significantly from the Company's
estimates used in this Prospectus. To the extent that retailers are not able to
achieve the anticipated cost savings and benefits, the appeal of the ERS
ShelfNet System will be adversely affected.
HISTORICAL AND ANTICIPATED LOSSES AND NEGATIVE CASH FLOW; ACCUMULATED DEFICIT
The Company has never been profitable and has incurred significant net
operating losses and negative cash flow from operations to date in connection
with developing, designing and market testing its ESL systems. As of March
31, 1997, the Company had a cumulative net loss of approximately $70 million
(which includes non-cash charges in the amount of $8.6 million for stock option
compensation expense), resulting in an accumulated deficit of $49.4 million. See
"Selected Historical Consolidated Financial and Certain Other Data". Losses and
negative cash flow from operations will continue, and the accumulated deficit
will increase, while the Company concentrates on such activities and until it
has established a sufficient revenue-generating customer base, if ever. Under
its new SayGo Plan, the Company will recognize revenues to the extent monthly
usage and other fees are billed to customers and, although the cost of hardware
components of its systems will be depreciated over the shorter of their
estimated useful lives or five years, the Company will have substantial cash
requirements for manufacturing and carrying costs attendant to introduction of
the SayGo Plan which will not initially be covered by revenues. There can be no
assurance that an adequate revenue base will be established or that sales of the
Company's products and services will generate positive cash flow from
operations. If the Company is not able to generate profits and positive cash
flow in the next few years, the Company will most likely be unable to pay the
principal of or interest on the Notes, and the Warrants may become worthless.
LETTER OF INTENT; ABILITY TO OBTAIN FIRM COMMITMENTS
The Company intends to continue using the proceeds of the Private
Placement to provide the capital necessary to permit the Company to offer the
ERS ShelfNet System pursuant to the SayGo Plan, whereby the Company will own the
ERS ShelfNet System and provide it to retailers on a fee basis. Although the
Company has entered into the Letter of Intent which contemplates the
installation of the ERS ShelfNet System in approximately 60 stores, and is
continuing its efforts to procure additional letters of intent, the Letter of
Intent is not, and all such additional arrangements will not be, binding
obligations and, in any case, will be subject to numerous conditions, including
the negotiation and execution of definitive contract terms. There can be no
assurance that the arrangements contemplated by the Letter of Intent or such
additional arrangements will be consummated. In addition, under the SayGo Plan a
customer may elect to terminate its usage of the ERS ShelfNet System in certain
circumstances. If the Company is not able to consummate the arrangements
contemplated by the Letter of Intent or such additional arrangements to provide
the ERS ShelfNet System or if the use of the ERS ShelfNet System is terminated
by its customers, the Company's business and results of operations will be
materially adversely affected.
<PAGE> 16
11
SUBSTANTIAL LEVERAGE; DEBT SERVICE REQUIREMENTS
As a result of the Private Placement, the Company is highly leveraged
with indebtedness that is substantial in relation to its stockholders' equity.
As of March 31, 1997, the Company had recorded total outstanding indebtedness of
approximately $102.4 million, including $97.4 million with respect to the Notes,
and total stockholders'equity of $1.5 million.
Certain debt obligations of the Company, including the Indenture dated
January 20, 1997, pursuant to which the Old Notes were issued (the "Indenture")
and the Company's high degree of leverage could have important consequences to
holders of the Warrants, including that (i) a substantial portion of the
Company's cash flow from operations, if any, after February 1, 2000, will be
required to be dedicated to the Company's interest expense obligations and may
not be available to the Company for its operations, working capital, capital
expenditures or other purposes, (ii) the Company's ability to obtain financing
in the future may be limited, (iii) the Company's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures as
compared to less highly-leveraged competitors could be limited (including by
reason of the covenants contained in the Indenture), and (iv) the Company may be
more vulnerable to downturns in general economic conditions or in its business
or be unable to undertake capital expenditures that are important for its growth
strategy, any of which could have a material adverse effect on the Company and
its ability to make payments of principal of, and interest on, the Notes.
Since inception, the Company has not generated positive cash flow from
operations. As a result, the Company has been required to pay its fixed charges
(including interest on existing indebtedness) and operating expenses with the
proceeds from sales of its equity securities, loans from stockholders and other
credit arrangements. With the issuance of the Notes, as of February 1, 2000, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations. Commencing August 1, 2000, cash interest on the Notes will
be payable semi-annually at the rate of 13-1/4% per annum (approximately $19.5
million per year). The full accreted principal amount at maturity of the Notes
of $147,312,000 will become due on February 1, 2004.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes (including, under certain circumstances,
its obligation to purchase the Notes at 101% of the Accreted Value plus accrued
and unpaid interest, if any, at the time) and its other indebtedness will
ultimately depend on its financial and operating performance, which in turn is
subject to prevailing economic and competitive conditions and to certain
financial, business and other factors that may be beyond its control, including
operating difficulties, increased operating costs, prices it can charge its
customers, the response of competitors, regulatory developments and delays in
implementing its strategy. The Company's ability to meet its debt service and
other obligations will depend largely on the extent to which the Company can
implement successfully its business strategy of achieving large-scale
commercialization of the ERS ShelfNet System. There can be no assurance that the
Company will be able to implement fully its strategy or that the anticipated
results of its strategy will be realized. There can be no assurance that the
Company will be able to generate sufficient cash flow or otherwise obtain funds
in the future to cover interest and principal payments associated with the Notes
and any other debt of the Company and its subsidiaries. See "Business --
Business Strategy".
In the event the Company is unable to meet its obligations with respect
to its existing indebtedness, it may be required to reduce or delay capital
expenditures, refinance or restructure all or a portion of its indebtedness,
sell material assets or operations or seek to raise additional debt or equity
capital. There can be no assurance that the Company will be able to effect any
such refinancing or restructuring or sell assets or obtain any such additional
capital on satisfactory terms or at all, or that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
<PAGE> 17
12
HOLDING COMPANY STRUCTURE
The Company is a holding company and conducts substantially all of its
operations through subsidiaries. As such, the Company has no substantial source
of operating cash flow other than from dividends and distributions from its
subsidiaries. Therefore, the Company's ability to make required principal and
interest payments with respect to the Company's indebtedness (including the
Notes) and other obligations depends on the earnings of its subsidiaries and on
its ability to receive funds from its subsidiaries through dividends and other
payments. Although the Indenture prohibits the Company from casting the
imposition of or permitting to exist any restrictions on the ability of its
subsidiaries to make such distributions, there can be no assurance that other
factors, including legal or regulatory restrictions, will not limit the ability
of such subsidiaries to make such distributions in the future. Although each of
the Company's subsidiaries, at such future time as it incurs certain
indebtedness, may be required to guarantee the Company's obligations under the
Notes, any such guarantee is subject to certain limitations and such
subsidiary's liability under its guarantee could be reduced to zero. To the
extent that any subsidiary that does not guarantee the Company's obligations
under the Notes is subject to or incurs indebtedness and becomes insolvent or is
liquidated, secured and unsecured creditors of such subsidiary would be entitled
to payment from the proceeds of such subsidiary's assets before the Company and
its creditors would derive any value from such subsidiary's assets. Furthermore,
because any such guarantees by the Company's subsidiaries will be unsecured, the
secured creditors of any such subsidiary would be entitled to payment from such
proceeds before the Company and its creditors would derive any value from such
subsidiary's assets. As of March 31, 1997, the Company's subsidiaries
(including the Principal Subsidiary (as defined), as co-borrower under the CDA
Note (as defined)) had in aggregate $5.0 million of long-term indebtedness
outstanding (exclusive of indebtedness to the Company in the amount of $40.6
million), all of which was secured. The Company's subsidiaries may incur
additional indebtedness in the future, subject to certain restrictions imposed
by the Indenture.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel Systems Inc. ("Telepanel") of Markham, Ontario, Canada, Pricer, Inc.
of Norwalk, Connecticut, a subsidiary of Pricer AB ("Pricer") of Uppsala, Sweden
and, recently, NCR Corporation ("NCR"). However, the emerging market for ESL
systems is characterized by rapid technological advances and evolving industry
standards and is subject to a high degree of potential competition. As a result,
the Company has been and will continue to be required to make substantial
expenditures for engineering and development. Telepanel has publicly reported
the existence of an arrangement with IBM whereby IBM may market the Telepanel
system. Additionally, other companies that are larger than the Company and have
greater financial and other resources than the Company may attempt to develop or
market competing ESL systems. No assurance can be given that other companies,
such as other vendors of POS systems, including Fujitsu-ICL, will not enter the
market in which the Company competes or that the Company will have the resources
required to respond to technological changes or to compete successfully in the
future. The Company's ESL system is also subject to competition from vendors
selling traditional paper labeling methods, as well as providers of hand-held
portable data terminals. See "Business -- Competition".
PROTECTION OF INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on
the competitive advantage it enjoys as a result of its intellectual property,
and thus on its ability to continue to protect its intellectual property. The
Company relies principally upon patent and copyright protection and its trade
secret program to protect its proprietary technology. There can be no assurance
that any additional patents will be issued as a result of any applications made
by the Company therefor or that claims allowed under such patents or any
existing patents will not be challenged or invalidated or will be of adequate
scope to protect the Company's technology. The Company also relies on
non-disclosure agreements with its employees, customers and consultants and
other parties. There can be no assurance that such measures will be adequate to
protect the Company's intellectual property. Although the Company believes that
its products and technology do not infringe on the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
in the future or that such claims will not be
<PAGE> 18
13
successful. In any case, the Company could incur substantial costs in defending
itself in patent infringement suits brought by others and in prosecuting suits
against patent infringers. See "Business --Intellectual Property" and "Business
- -- Legal Proceedings".
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
The Company does not manufacture any of the hardware components of the
ERS ShelfNet System and is solely dependent upon third parties to manufacture
and assemble components comprising the ERS ShelfNet System on a purchase order
basis. The Company does not have written long-term arrangements with such
contract manufacturers. In addition, the Company's ESLs currently incorporate a
microprocessor which is supplied solely by Sanyo Semiconductor Corporation
("Sanyo"). While the Company, on the basis of its familiarity with the design of
such microprocessor and the capabilities of other sources, believes that other
suppliers could produce equivalent microprocessors within approximately four
months of notification by the Company, any inability to obtain microprocessors
from its current supplier in sufficient quantities could result in a temporary
interruption of the Company's production of ESLs and any such replacement
supplier could charge more for such production or produce a lower-quality unit,
thus diminishing the Company's revenues and income from operations. Although the
Company believes that several parties are available to manufacture the
components of its system, the termination of the Company's relationship with one
or more of its contract manufacturers, legal or regulatory changes in any
country in which such manufacturer resides or an extreme loss of property (e.g.,
as a result of a fire, hurricane, etc.) to any such manufacturer may result in a
temporary interruption in the manufacture and assembly of the Company's system
and, thus, in the delay or loss of placements of the ERS ShelfNet System, with a
corresponding loss of revenues. See "Business -- Manufacturing".
DEPENDENCE ON SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, 79% of the Company's revenues
was attributable to purchases by three supermarket chains, and, in 1994 and
1995, 81% and 83%, respectively, of the Company's revenues were attributable to
purchases by two and three supermarket chains, respectively (aggregating five
chains for the entire three year period). The failure of such customers to
continue to utilize systems from the Company could have a material adverse
effect on the business of the Company. Additionally, customers who account for
significant portions of the Company's revenues may have the ability to negotiate
prices for the Company's products and services that are more favorable to such
customers and that result in lower profit margins for the Company. See "Business
- -- Customers".
ABILITY TO MANAGE GROWTH
If the ERS ShelfNet System is installed in the stores contemplated by
the Letter of Intent and the Company is able to obtain significant orders from
other large retailing chains, the Company will experience rapid growth, which in
turn will place significant pressure on the Company's managerial, operational
and financial resources. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base, and any inability of the Company to attract and
retain the executive and managerial personnel required by its expanding business
could have a material adverse effect on the Company's business operating results
and financial condition. The Company will also be required to develop and manage
multiple relationships with various customers, business partners and other third
parties. The Company's systems, procedures or controls may not be adequate to
support the Company's operations, and Company management may not be able to
achieve the rapid expansion necessary to exploit potential market opportunities
for the Company's products and services. The Company's future operating results
will also depend on its ability to expand its sales and marketing, and research
and development, organizations, to implement and manage new distribution
channels, to penetrate markets and to expand its support organization.
Furthermore, there can be no assurance that the Company will be successful in
procuring expanded third party sources for the manufacture and assembly of the
components of
<PAGE> 19
14
the ERS ShelfNet System, in expanding the capabilities of its personnel and
subcontractors engaged in the installation and servicing of its system or in
lowering the costs of manufacturing, installing or maintaining its system. In
addition, any anticipated expansion of the Company's marketing efforts outside
of the United States will expose the Company to the economic, political and
regulatory environments within the countries in which the Company's new and
potential customers are located, which may be more restrictive or burdensome
than those in the United States and with which the Company may be unfamiliar.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on its ability to recruit, retain and motivate
high quality personnel, including technical employees, competition for whom is
intense. Any inability of new management to adjust quickly to, and perform as
expected in, their respective roles within the Company, or any inability of the
Company to attract and retain personnel with the requisite skills, could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company does not currently have fixed term employment
agreements with its key personnel. See "Management".
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Indenture contains numerous financial and operating covenants,
including, but not limited to, restrictions on the Company's ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in certain
mergers and acquisitions, make investments and enter into new lines of business.
For example, such covenants require the Company to maintain certain financial
ratios in order to incur additional indebtedness which, as of March 31, 1997,
would not have permitted the Company to incur additional indebtedness
(exclusive of the indebtedness permitted by the exceptions to such covenants).
Such covenants could materially limit or exclude potentially profitable
activities in which the Company might otherwise engage. The ability of the
Company to comply with the covenants and other terms of the Indenture, to make
cash payments with respect to the Notes and to satisfy its other debt
obligations will depend on the future performance of the Company. In addition,
under certain circumstances, the Company will be required, subject to certain
conditions, to offer to purchase all outstanding Notes at a price equal to
101% of the Accreted Value of the Notes at such time plus accrued interest, if
any. There can be no assurance that the Company would be able to raise
sufficient funds to meet this obligation. In the event the Company fails to
comply with the various covenants contained in the Indenture, it would be in
default thereunder and the maturity of substantially all of its long-term debt
(including the Notes) could be accelerated.
CONTROL BY EXISTING STOCKHOLDERS
Norton Garfinkle, Chairman of the Board and a director of the Company,
together with two affiliated limited partnerships, and Bruce F. Failing, Jr.,
Vice Chairman of the Board and Chief Executive Officer and a director of the
Company, together with a related trust established for the benefit of his
children, beneficially own approximately 53% of the outstanding Common Stock
(without giving effect to any outstanding stock options, convertible securities
and warrants). Messrs. Garfinkle and Failing have entered into an agreement
relating to the voting and disposition of such shares. Accordingly, Messrs.
Garfinkle and Failing, acting together, effectively control the Company and are
currently able to elect all of the Company's directors and to take any other
action requiring majority stockholder approval.
TRANSACTIONS WITH AFFILIATES
A significant source of funds for the Company historically has been
certain credit arrangements with members of the Board of Directors and their
affiliates and the sale of additional shares of its capital stock to such
parties. No such credit arrangements are in effect as of the date of this
Prospectus. In connection with such transactions, the Company has entered into
registration rights agreements with such directors and their affiliates. As a
result of holding the Company's convertible note and warrants, the Connecticut
Development Authority (the "CDA") is also the beneficial owner of in excess of
5% of the outstanding Common Stock. The Company subleases
<PAGE> 20
15
certain premises to a company owned by Messrs. Garfinkle and Failing and is
indebted to the CDA in accordance with its existing arrangements.
POTENTIAL LOSS OF NOLS
As of March 31, 1997, the Company had net operating loss
carryforwards ("NOLs") of approximately $46 million for U.S. federal income tax
purposes. These NOLs, if not utilized to offset taxable income in future
periods, will expire between 2008 and 2011. Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder,
impose limitations on the ability of corporations to use NOLs, if the
corporation experiences a more than 50% change in ownership during any
three-year period. The Company does not believe that it has experienced an
ownership change between the Initial Public Offering and the date of this
Prospectus, although it is possible that such an ownership change may occur or
be deemed to have occurred as a result of events beyond the control of the
Company (such as transfers of Common Stock by certain stockholders or the
exercise or treatment of warrants, conversion rights or stock options issued by
the Company). In addition, it is possible that the Private Placement itself will
have caused or contributed to an ownership change, as a result of treatment of
either the Notes or the Warrants as stock for purposes of Section 382 of the
Code. There can also be no assurance that the Company will not take additional
actions, such as the issuance of additional stock, that would cause an ownership
change to occur. In addition, the NOLs are subject to examination by the
Internal Revenue Service (the "IRS"), and are thus subject to adjustment or
disallowance resulting from any such IRS examination. Accordingly, prospective
purchasers of the Warrants or Warrant Shares should not assume the unrestricted
availability of the Company's currently existing or future NOLs, if any, in
making their investment decisions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Income
Taxes".
ABSENCE OF PUBLIC TRADING MARKET FOR WARRANTS
The Company has not and does not intend to apply for the listing of the
Warrants on any national securities exchange or to seek the admission thereof to
trading in the Nasdaq Stock Market, and there can be no assurance as to the
liquidity of any market for the Warrants or the Warrant Shares.
See " -- Investment Company Act Considerations" for a description of
certain risks associated with the Company being determined to be an "investment
company".
LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF PRICE OF THE COMMON STOCK;
ELIGIBILITY FOR THE NASDAQ STOCK MARKET
Currently, the Company's Common Stock is quoted on The Nasdaq Stock
Market and the Alternative Investment Market of the London Stock Exchange and is
thinly traded. The market price of the Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's results of
operations, changes in earnings, estimates by analysts, conditions in the
Company's market segment or general market or economic conditions. The Company's
revenues and operating results may vary significantly from quarter to quarter as
a result of various factors, including the timing of customer orders, delays in
installation required by customers during peak selling periods, seasonal
patterns of capital spending by customers and disruptions in sources of
components. In addition, in recent years, the stock market has experienced price
and volume fluctuations. These fluctuations often have had a particularly
substantial effect on the market prices for many emerging growth companies, and
often such fluctuations have been unrelated to their specific operating
performances. Such market fluctuations could adversely affect the market price
of the Warrants.
In order to maintain the listing of the Common Stock on The Nasdaq
Stock Market, the Company will be required to satisfy the criteria for continued
listing, which (as applied to the Company) presently include, without
limitation, the requirement to maintain net tangible assets in the amount of
$4.0 million. If under the then current requirements it were unable to do so,
its Common Stock could be delisted. At March 31, 1997, the Company's net
tangible assets were lesser in amount than $4.0 million and, in the event the
<PAGE> 21
16
SayGo Plan is implemented as proposed, the Company does not anticipate that it
will be able to achieve $4.0 million of net tangible assets through the year
ending December 31, 1997. There can be no assurance that the Company will be
able to satisfy the criteria for continued listing of its Common Stock on the
Nasdaq Stock Market. The delisting of the Common Stock could adversely affect
its market price and, therefore, the value of the Warrants and the Warrant
Shares.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940 Act"),
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily, in the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and are
not primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading securities. As a result of the receipt and investment of the
proceeds of the Private Placement a majority of the Company's assets will be
invested in investment securities (as defined in the 1940 Act), and the Company
may be deemed to be an investment company.
In order to clarify the Company's status under the 1940 Act, the
Company applied on January 15, 1997 (the "Application") to the Commission for an
order under Section 3(b)(2) of the 1940 Act declaring that the Company is
primarily engaged in a business other than that of investing, reinvesting,
owning, holding or trading in securities and in the alternative for an order
under Section 6(c) of the 1940 Act exempting the Company from all provisions of
the 1940 Act. The staff of the Commission has informed the Company that it is
the policy of the Commission not to take enforcement action for failure to
register as an investment company if a company's bona fide application for an
exemptive order is pending. The Company does not intend to register as an
investment company in reliance upon this policy and in the expectation that an
exemptive order will be granted. However, there is no assurance that any such
order will be granted.
Any order that may be granted may be conditioned on, among other
things, (i) the Company limiting the nature of the securities in which the
proceeds of the Private Placement are invested, which would be likely to result
in the Company obtaining lower yields on the funds invested than might be
available in the securities markets generally, (ii) compliance with Sections 9,
17(a), 17(d), 17(e), 17(f) and Sections 36-53 of the 1940 Act and the rules and
regulations thereunder as if the Company were a registered investment company,
and (iii) disclosure in the Company's reports required to be filed under the
Exchange Act that any such order has been granted and that the Company is
subject to certain provisions of the 1940 Act and the rules and regulations
thereunder as if it were a registered investment company. In addition, the
duration of any such order may be limited to a period of two years from the date
of the filing of the Application and therefore may require the Company to reduce
its holdings of securities and investment securities by January 15, 1999, so
that the Company would no longer be considered an investment company under
Section 3(a) of the 1940 Act. Because the rate at which the proceeds of the
Private Placement will be expended depends in part on circumstances not within
the Company's control, there is no assurance that this timetable will be met.
If the Company were required to register as an investment company under
the 1940 Act, it would become subject to substantial regulation with respect to
its capital structure, management, operations, transactions with affiliated
persons (as defined in the 1940 Act) and other matters in addition to any such
regulations that may apply as a result of the conditions discussed above that
may be imposed by any exemptive order issued by the Commission. Application of
all provisions of the 1940 Act to the Company would have a material adverse
effect on the Company. In the event that an exemptive order is not granted by
the Commission or expires prior to the time the Company would no longer be
considered an investment company under Section 3(a) of the 1940 Act, the Company
would take such action as may be prudent to seek to avoid becoming subject to
further regulation under the 1940 Act. There is no assurance, however, that
under such circumstances such regulation could be avoided.
<PAGE> 22
17
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of the Warrants
or the Warrant Shares by the Selling Security Holders. Upon the exercise of the
Warrants and the issuance of the Warrant Shares, the Company will receive $5.23
per common share, or aggregate gross proceeds of approximately $13,275,089. The
Company intends to use any proceeds from the exercise of the Warrants, after
deduction of related registration expense, in connection with the anticipated
expansion of the Company's operations, including for manufacturing and carrying
costs attendant to the implementation of the Company's business strategy
described under "Business Marketing and Sales - SayGo Agreements", and for
general corporate purposes, including the funding of the Company's ongoing
engineering and development efforts. In addition, the Company will continue to
pursue its efforts to seek strategic partners to develop its business and may,
from time to time, explore the acquisition of compatible technologies and
products, and a portion of the proceeds may be used in connection with such
future collaborative arrangements and acquisitions. The Company has no
agreement, understanding, arrangement or commitment pertaining to any such
future collaborative arrangement or acquisition. Any such collaborative
arrangement or acquisition may be subject to certain limitations imposed by the
provisions of the Indenture. The Company may also subsequently elect to utilize
a portion of the proceeds from the exercise of the Warrants to satisfy its
long-term indebtedness under the CDA Note (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources"), but has not made any such determination. However, there can
be no assurance that any such Warrants will be exercised by the Selling Security
Holders or, accordingly, that the Company will receive any proceeds from the
exercise of the Warrants.
SELLING SECURITY HOLDERS
Certain Selling Security Holders may sell their Warrants or Warrant
Shares on a delayed or continuous basis. This Registration Statement has been
filed pursuant to Rule 415 under the Securities Act to afford holders of the
Warrants and the Warrant Shares the opportunity to sell such securities in
public transactions rather than pursuant to exemptions from the registration and
prospectus delivery requirements of the Securities Act.
The following table sets forth certain information as of ,
1997, with respect to the number of Warrants and Warrant Shares held by each
Selling Security Holder. None of the Selling Security Holders has had a material
relationship with the Company within the past three years other than as a result
of the ownership of the Warrants and the Warrant Shares except as noted herein.
The Warrants and the Warrant Shares offered by this Prospectus may be offered
from time to time by the Selling Security Holders named below:
<PAGE> 23
18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
WARRANTS WARRANT SHARES(1)
- ---------------------------------------------------------------------------------------------------------------------------
NAME OF SELLING OWNED PRIOR TO OFFERED OWNED AFTER OWNED PRIOR TO OFFERED OWNED AFTER
SECURITYHOLDER THIS OFFERING FOR SALE THIS OFFERING THIS OFFERING FOR SALE THIS OFFERING
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER PERCENT NUMBER OF PERCENT OF
OF SHARES OF SHARES SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Turnberry Capital
Management, L.P. 4,000 4,000
TCW Shared
Opportunity Fund 2,150 2,150
II L.P.
Richmont
Corporation-
Richmont High
Yield Bond
Fund, L.P. 500 500
</TABLE>
- --------------
(1) The Warrants are not exercisable until January 24, 1998.
Information concerning the Selling Security Holders may change from
time to time and will be set forth in supplements to this Prospectus.
Accordingly, the number of Warrants and Warrant Shares offered hereby may
increase or decrease.
The Selling Security Holders may offer all or some of the Warrants that
they hold and the Common Stock issuable upon the exercise of such Warrants
pursuant to the offering contemplated by this Prospectus at various times.
Therefore, no estimate can be given as to the amount of Warrants or Warrant
Shares that will be held by the Selling Security Holders upon completion of such
offerings.
The Company and the Selling Security Holders have agreed to indemnify
each other against certain liabilities arising under the Securities Act, the
Exchange Act or otherwise.
PLAN OF DISTRIBUTION
The Warrants or the Warrant Shares may be offered by the Selling
Security Holders in transactions in the over-the-counter-market at prices
obtainable at the time of sale or in privately negotiated transactions at prices
determined by negotiation. The Selling Security Holders may effect such
transactions by selling the Warrants or the Warrant Shares to or through
securities broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Security
Holders and/or the purchasers of the Warrants or the Warrant Shares for whom
such broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Warrants,
Warrant Shares or interests therein as a pledgee and may, from time to time,
effect distributions of the Warrants, Warrant Shares or interests in such
capacity. Sales of the Warrants or Warrant Shares may also be made pursuant to
Rule 144A adopted under the Securities Act. Except for the sale of the Warrant
Shares upon exercise of the Warrants, the Company is not selling any of the
Warrants or Warrant Shares.
The Selling Security Holders, the brokers and dealers through whom
sales of the Warrants or Warrant Shares are made and any agent or dealer who
distributes Warrants or Warrant Shares acquired as pledgee may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and profit on any resale of the Warrants or
Warrant Shares as principal might be deemed to be underwriting discounts and
commissions under the Securities Act.
<PAGE> 24
19
PRICE OF COMMON STOCK AND DIVIDEND POLICY
PRICE OF COMMON STOCK
The Company's Common Stock is currently traded on the over-the-counter
market, with price quotations reported on the Nasdaq Stock Market under the
symbol "ERSI." As of May 15, 1997, the number of record holders of the
Company's Common Stock was 651.
The Common Stock began trading on the Nasdaq Stock Market on April 30,
1993. The following table sets forth, for the calendar Periods indicated, the
range of quarterly high and low sales prices for the Common Stock, as reported
by Nasdaq. Quotations represent prices between dealers and do not include retail
mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ------- --------
<S> <C> <C>
First Quarter............................................ $ 6.50 $ 4.63
Second Quarter........................................... 5.75 3.00
Third Quarter............................................ 5.25 3.50
Fourth Quarter........................................... 4.75 2.38
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter............................................ $ 3.25 $ 1.63
Second Quarter........................................... 2.38 1.63
Third Quarter............................................ 4.13 1.63
Fourth Quarter........................................... 4.25 2.63
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter ........................................... $ 7.38 $ 3.38
Second Quarter (through May 15, 1997).................... $ 7.50 $ 4.88
</TABLE>
On May 15, 1997 the reported closing price per share was $5.88.
Since July 11, 1996, the Common Stock has also been admitted to trading
on the Alternative Investment Market of the London Stock Exchange.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends or its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company intends to retain its earnings, if any, for the
future operation and expansion of its business. The payment of dividends in the
future will depend upon the restrictions imposed by the Indenture, the Company's
available earnings, the capital requirements of the Company, its general
financial condition and other factors deemed pertinent by the Board of
Directors. See Note 12 of the Notes to the Company's Consolidated Financial
Statements included elsewhere herein.
<PAGE> 25
20
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of the Company as of March 31, 1997. The table should be read
in conjunction with the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents ........................ $ 101,927
=========
Long-term debt
CDA Note ...................................... $ 4,989
13-1/4% Senior Discount Notes Due 2004 ........ 97,447
---------
Total long-term debt .......................... 102,436
---------
Common stock purchase warrants(1) ................ 5,100
---------
Stockholders' equity:
Preferred stock, undesignated (par value
$1.00 per share; 2,000,000 shares
authorized; none outstanding) .............. --
Common stock (par value $0.01 per share;
35,000,000 shares authorized; 21,078,206
issued and outstanding)(2) ................. 211
Additional paid-in capital ................... 50,730
Accumulated deficit .......................... (49,412)
---------
Total stockholders' equity ................. 1,529
---------
Total capitalization ..................... $ 110,627
=========
</TABLE>
- ---------------------------
(1) Reflects the $5.1 million ascribed to the Warrants issued in connection
with the Private Placement. No assurance can be given that the value
allocated to the Warrants is indicative of the price at which the
Warrants may actually trade.
<PAGE> 26
21
(2) On April 1, 1997, the Company had 21,078,206 shares of Common Stock
outstanding, which did not include, at such date: (i) 2,538,258 shares
of Common Stock initially reserved for issuance upon exercise of the
Warrants, (ii) 943,388 shares of Common Stock which may be issued upon
exercise of outstanding stock options granted to directors, officers
and employees of the Company, (iii) 699,724 shares of Common Stock
subject to purchase upon exercise of a warrant ("the CDA Warrant") to
purchase shares of Common Stock through August 1999 held by the CDA,
(iv) 802,568 shares of Common Stock issuable upon conversion of the
CDA Note (as defined); and (v) 50,000 shares of Common Stock subject
to purchase through June 1998 upon the exercise of additional
warrants issued by the Company. In April 1997, the Company issued
additional warrants exercisable with respect to 250,000 shares of
Common Stock through April 2000.
<PAGE> 27
22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect selected historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following selected historical consolidated statement of operations
and balance sheet data, insofar as it relates to each of the years 1992-1996,
has been derived from audited annual consolidated financial statements,
including the consolidated balance sheet at December 31, 1995 and 1996 and the
related consolidated statement of operations for the three years ended December
31, 1996 and the notes thereto included elsewhere in this Prospectus. The
selected historical consolidated statement of operations data for the three
months ended March 31, 1996 and 1997 and the selected historical consolidated
balance sheet data as of March 31, 1997 have been derived from unaudited
condensed consolidated financial statements included elsewhere in this
Prospectus and which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited interim periods. The unaudited
interim period results are not necessarily indicative of the results to be
expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- --------- --------- -------- -------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 941 $ 1,122 $ 2,376 $ 2,973 $5,002 $1,221 $ 520
Cost of goods sold................. 2,373 1,718 3,822 4,113 6,204 1,444 565
-------- -------- --------- --------- ------ ------ -------
Gross profit (loss)............. (1,432) (596) (1,446) (1,140) (1,202) (223) (45)
-------- -------- --------- --------- ------ ------ -------
Operating expenses:
Selling, general and 4,628 5,966 6,039 6,952 6,807 1,696 2,017
administrative................
Research and development........ 2,503 2,325 2,571 2,491 1,117 313 490
Stock option compensation(2).... -- 7,454 1,119 27 44 -- --
Patent license fee.............. 700 -- -- -- -- -- --
Depreciation and amortization... 157 177 149 107 162 42 41
-------- -------- --------- --------- ------ ------ -------
Total operating expenses...... 7,988 15,922 9,878 9,577 8,130 2,051 2,548
-------- -------- --------- --------- ------ ------ -------
Loss from operations.......... (9,420) (16,518) (11,324) (10,717) (9,332) (2,274) (2,593)
-------- -------- --------- --------- ------ ------ -------
Other income (expenses):
Interest income................. 44 438 288 134 302 34 1,046
Interest expense................ (922) (340) (65) (291) (382) (87) (2,723)
Gain (loss) on short-term
investments..................... -- -- (177) 6 -- -- --
Other........................... (66) -- -- -- -- -- --
-------- -------- --------- --------- ------ ------ -------
Total other income (expenses). (944) 98 46 (151) (803) (53) (1,677)
-------- -------- --------- --------- ------ ------ -------
Loss before minority interest in
consolidated affiliate........ (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
</TABLE>
<PAGE> 28
23
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Minority interest in loss of
consolidated affiliate........ 831 423 -- -- -- -- --
-------- -------- --------- --------- ------- ------- -------
Net loss(3)................... $ (9,533) $ (15,997) $ (11,278) $ (10,868) $(9,412) $(2,327) $(4,270)
======== ======== ========= ========= ======= ======= =======
Earnings per share:
Weighted average number of
common shares outstanding(4).. 11,461 11,682 11,743 16,169 11,767 21,055
======== ========= ========= ======= ======= =======
Net loss per common share(5)....... $ (1.40) $ (0.97) $ (0.95) $ (0.60) $ (0.22) $ (0.20)
======== ========= ========= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- MARCH 31,
1992 1993(1) 1994 1995 1996 1997
-------- --------- -------- -------- ------ --------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Net working capital................ $ 2,800 $ 11,642 $ 3,452 $ 5,283 $ 8,764 $102,432
Total assets....................... 5,445 13,241 5,195 8,316 12,260 110,627
Long-term debt..................... 14,199 -- 1,981 3,335 4,989 102,436
Minority interest in consolidated
affiliate........................ 8,531 -- -- -- -- --
Stockholders' equity (deficiency).. (19,374) 12,405 2,268 3,215 5,725 1,529
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6) ........................ $ (8,371) $(15,290) $ (10,839) $ (10,114) $ (8,370) $(2,088) $(1,223)
Cash flows from operating
activities..................... (8,133) (11,855) (10,026) (11,160) (7,549) (2,571) (1,072)
Cash flows from investing
activities..................... (324) (8,641) 6,73 100 (989) (299) (274)
Cash flows from financing
activities...................... 12,866 18,606 1,901 13,139 13,526 1,651 95,075
Depreciation and amortization..... 240 367 37 463 660 152 324
Capital expenditures.............. 324 574 303 452 397 76 199
Deficiency of earnings to fixed
charges(7)..................... (10,364) (16,420) (11,278) (10,868) (9,412) (2,327) (4,270)
Stores with ERS ShelfNet System
installed at end of period..... 7 13 21 42 65 48 71
</TABLE>
- ---------------------------
(1) Reflects the consummation of the Combination immediately prior to the
closing of the Initial Public Offering.
<PAGE> 29
24
(2) The non-cash compensation expense recognized for 1993 included
compensation earned for services prior to the Combination and
compensation earned for the period subsequent to the Combination
through December 31, 1993. Compensation expense recognized in 1994,
1995 and 1996 and for the first three months of 1997 related to
services provided by employees during those periods.
(3) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common stock equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not
reflect common share equivalents that are anti-dilutive.
(5) Net loss per common share data for periods prior to December 31, 1993
has not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(6) EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization. EBITDA is presented because the Company
believes it is a widely accepted financial indicator of an entity's
ability to incur and service debt. EBITDA should not be considered by
an investor as an alternative to net income or income from operations,
as an indicator of the operating performance of the Company or other
consolidated operation or cash flow data prepared in accordance with
generally accepted accounting principles, or as an alternative to cash
flows as a measure of liquidity. For the years ended December 31, 1993
and 1994, EBITDA included non-cash charges for stock option
compensation expense of $7.5 million and $1.1 million, respectively;
for the years ended December 31, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997, such amounts were not
material.
(7) For purposes of determining the deficiency of earnings to fixed
charges, "earnings" consist of earnings before fixed charges and "fixed
charges" consist of interest on all debt and that portion of rental
expense that the Company believes to be representative of interest.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The market for ESL systems is in the development stage, and the Company
estimates that, as of March 31, 1997, approximately 125 stores in the United
States were operating such systems, out of a potential market in excess of
100,000 supermarkets and other stores. Large supermarket chains have tested the
productivity benefits as well as the technical functionality of ESL systems in
pilot stores, as a result of which the Company believes they are in a position
to consider rolling out the systems. The Company's objective is to be the
worldwide leader in the emerging ESL system market as product adoption and
penetration increases.
Because the market for ESL systems is in the development stage, market
acceptance of and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at and extent to
which retailers choose to install ESL systems throughout their stores. The
initial acceptance and rate of installation by retailers may be affected by
numerous factors beyond the Company's control, including the customer's
assessment of the benefits of and the need for ESL systems and the customer's
available capital resources.
<PAGE> 30
25
Since its inception in April 1990, the Company has been engaged
primarily in the development, design, market testing and, more recently, sale of
the ERS ShelfNet System. The Company subcontracts to third parties the
manufacture and assembly of the components comprising the ERS ShelfNet System.
In addition, the Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued development of the ERS
ShelfNet System. Since inception and through March 31, 1997, the Company has
generated cumulative revenues of $13.1 million, and has incurred a cumulative
net loss of approximately $70 million, which excludes non-cash charges in the
amount of $8.6 million for stock option compensation expense.
The Company historically has marketed the ERS ShelfNet System for sale
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for capital-constrained retailers. The Company now intends also to
market its ERS ShelfNet System on a fee based arrangement whereby the Company
will own the system and, with no upfront cash cost to the retailer, furnish the
system to retailers (generally for a period of up to five years), who will pay
monthly fees to the Company based largely on their actual usage of the system.
The Company believes the SayGo Plan will increase market acceptance of the ERS
ShelfNet System. However, there can be no assurance that the pricing strategy
will be accepted by customers or will be successful in helping the Company to
attain profitability.
Under the SayGo Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers. Also, under the SayGo Plan the
Company will retain ownership of the systems, which will be reflected as
long-term assets on the Company's consolidated balance sheet and which will be
depreciated on a straight-line basis over the shorter of their economic lives or
five years. Such assets will be subject to periodic impairment testing as
prescribed by Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Revenues. During the three month period ended March 31, 1997, the
Company's total revenues were $520,000 compared to $1,221,000 in the
corresponding quarter in 1996. Product sales in the first quarter of 1997
included $122,000 of software license fees (48% of product sales for the
quarter); no such revenues were recorded in the comparable quarter of the
prior year. In each of the three month periods ended March 31, 1997 and 1996,
product sales were to three customers within the supermarket industry.
Maintenance revenues for the three months ended March 31, 1997 increased to
$266,000 from $173,000 in the corresponding 1996 period reflecting a larger
installed customer base. The Company anticipates that past patterns in
revenues may not be indicative of future results of operations as the Company
introduces its SayGo Plan, under which the Company will recognize revenues as
monthly usage and other fees are billed to customers. See "Business-Marketing".
Cost of goods sold. Cost of goods sold consists of the cost of hardware
components of the ERS ShelfNet System, system installation costs, depreciation
of tools and dies owned by the Company and utilized in the manufacturing of
hardware components, amortization of capitalized product development costs,
warranty and maintenance costs, freight and inventory obsolescence.
In connection with introduction of the SayGo Plan, the Company will
depreciate the cost of hardware components of its system over the shorter of
their estimated useful lives or five years.
Cost of goods sold was $565,000 for the three months ended March 31,
1997, compared to $1,444,000 for the three months ended March 31, 1996,
reflecting decreased product sales in 1997. The gross loss (cost of goods sold
in excess of revenues) decreased to 9% in the first quarter of 1997, from 18%
in the first quarter of 1996. Cost of goods sold for the three months ended
March 31, 1997 included warranty and maintenance expenses of $242,000 compared
to $200,000 for the same period in 1996, reflecting the growing installation
base for the ERS ShelfNet System. The Company anticipates that system
enhancements to be implemented in 1997 will decrease future warranty and
maintenance expenses per installation and, in the future, that the cost of
goods sold will decrease as a percentage of revenues as a result of higher
manufacturing volumes of its components and as the installation process is
improved.
Selling, General and Administrative. Selling, general and
administrative costs consist of costs associated with selling and
administrative staff, overhead, market research and development, and
customer service personnel. Selling, general and administrative costs
increased to $2,017,000 for the three month period ended March 31, 1997,
compared to $1,696,000 for the same period in 1996. This increase reflects
efforts to expand the Company's organization in anticipation of sales growth.
Research and Development. Research and development expenses were
$490,000 for the three month period ended March 31, 1997 compared to $313,000
for the same period in 1996, reflecting increased hardware engineering
activities. Additionally, for the three month periods ended March 31, 1997 and
1996, respectively, the Company capitalized $75,000 and $223,000 of product
development software costs that will be amortized over the shorter of the
estimated useful life of the related software product or process or three years.
Interest Income. Interest income increased to $1,046,000 for the
three month period ended March 31, 1997, compared to $34,000 for the same
period in 1996, due to increased cash and cash equivalents available for
investment, including the proceeds of the Private Placement.
Interest Expense. Interest expense increased to $2,723,000 for the
three month period ended March 31, 1997, compared to $87,000 for the same
period in 1996. Interest expense in 1996 and 1997 included interest on
amounts borrowed from the CDA and additionally, in 1997, interest on the Old
Notes. Commencing with the consummation of the Private Placement in January
1997, the Company will record interest on an amount equal to the net proceeds
to the Company from the Old Notes at the annual rate of 13.25%. Additional
expense will be recorded as a result of the amortization of the discount
recorded on the Old Notes (for value attributed to the Warrants) and the
amortization of costs of issuance.
Income Taxes. The Company has incurred net losses since inception
which have generated net operating loss carryforwards of approximately $46
million for federal and state income tax purposes, which are available to
offset future taxable income and expire through the year 2012 for federal
income tax purposes. In consideration of the Company's accumulated losses
through March 31, 1997 and the uncertainty of its ability to utilize any
future tax benefits resulting from these losses, the impact of this potential
tax benefit has been eliminated in the Company's condensed consolidated
financial statements. See Note 11 of the Notes to Consolidated Financial
Statements included elsewhere herein and "Risk Factors -- Potential Loss of
NOLs".
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenues. The Company's revenues were $5,002,000 in 1996, compared to
$2,973,000 in 1995. The increase of $2,029,000 in 1996 is primarily attributable
to greater product sales in 1996, including software license fees in the amount
of $243,000 (6% of product sales for 1996) recorded in the second quarter. The
increase in revenue also reflects a $586,000 increase in maintenance revenue
associated with a larger installed customer base. All revenues are attributable
to sales to customers in the supermarket industry. In 1996, a single customer
was responsible for 46% of revenues and 79% of revenues was attributable to
three customers. Approximately 30% of revenues in 1995 was attributable to a
single customer, with three customers accounting for 83% of total revenues.
Cost of Goods Sold. Cost of goods sold was $6,204,000 in 1996 compared
to $4,113,000 in 1995, reflecting increased product sales in 1996. The Company
realized lower hardware component costs on installations during 1996 as
compared to
<PAGE> 31
26
1995, reflecting an increase in the use of high volume low cost suppliers. Cost
of goods sold in 1996 includes warranty and maintenance expenses of $966,000,
compared to $561,000 for such expenses in 1995. The increase in warranty and
maintenance costs reflects the growing installation base for the ERS ShelfNet
System.
Cost of goods sold in 1996 also includes a special provision for excess
inventory of $750,000 recorded in the fourth quarter of 1996, in connection with
the introduction of the new generation electronic shelf labeling system.
Selling, General and Administrative. Selling, general and
administrative costs decreased $145,000, to $6,807,000 in 1996, compared to
$6,952,000 in 1995, reflecting reduced discretionary spending in 1996.
Research and Development. Research and development expenses were
$1,117,000 in 1996 compared to $2,491,000 in 1995, reflecting the winding down
or completion in 1996 of several hardware and software development projects
commenced in prior years. During the years ended December 31, 1996 and 1995, the
Company also capitalized product development costs of $592,000 and $475,000,
respectively, that will be amortized over the shorter of the estimated useful
life of the related software product or process or three years.
Interest Income. Interest income increased to $302,000 in 1996 compared
to $134,000 in 1995, due to increased cash and cash equivalents available for
investment.
Interest Expense. Interest expense increased to $382,000 in 1996
compared to $291,000 in 1995. Interest expense represents interest on amounts
borrowed from the CDA and, through July 24, 1995, a revolving credit facility
with the principal stockholders of the Company and members of the Board of
Directors and their affiliates.
<PAGE> 32
27
Income Taxes. In consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize any future tax benefits resulting from
these losses, the impact of this potential tax benefit has been eliminated in
the Company's consolidated financial statements as of December 31, 1996 and
1995. See Note 11 of the Notes to Consolidated Financial Statements included
elsewhere herein and "Risk Factors - Potential Loss of NOLs".
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. The Company's revenues were $2,973,000 in 1995, compared to
$2,376,000 in 1994. The increase of $597,000 in 1995 was attributable to an
increase of $436,000 in product sales. The total increase in revenue also
reflected a $161,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues were attributable to sales to customers in
the supermarket industry. Approximately 30% of revenues in 1995 was attributable
to a single customer, with three customers accounting for 83% of total revenues.
In 1994, a single customer was responsible for 67% of revenues and 81% of
revenues was attributable to two customers.
Cost of Goods Sold. Cost of goods sold was $4,113,000 in 1995, compared
to $3,822,000 in 1994, reflecting increased product sales in 1995. The Company
realized lower hardware component costs on installations during 1995 as compared
to 1994, reflecting an increase in the use of high volume, low cost suppliers.
In addition, included in cost of goods sold in 1994 is $300,000 of product
performance-related costs expected to be non-recurring. Such product
performance-related costs included a $125,000 provision for the upgrade of
certain prior customer installations with an enhanced version of a component of
the ERS ShelfNet System and the costs of a special quality and performance audit
of customer installations. Cost of goods sold in 1995 included warranty and
maintenance expenses of $561,000. The comparable costs in 1994 were $206,000,
excluding such special product performance-related costs. The increase in
warranty and maintenance costs reflected the growing installation base for the
ERS ShelfNet System.
Selling, General and Administrative. Selling, general and
administrative costs increased $913,000, to $6,952,000 in 1995 compared to
$6,039,000 in 1994. The increase in selling, general and administrative costs
was primarily attributable to efforts to expand the Company's organization in
anticipation of sales growth.
Research and Development. Research and development expenses were
$2,491,000 in 1995, compared to $2,571,000 in 1994. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were
$1,523,000 in 1995, compared to $989,000 in 1994, due to an increased use of
third parties to augment the Company's internal activities in the area of
long-term product development. Expenses incurred in the development of the
Company's software system were $968,000 in 1995, compared to $1,582,000 in 1994.
During the year ended December 31, 1995, the Company also capitalized $475,000
of product development costs that will be amortized over the shorter of the
economic life of the related software product or process or three years.
Stock Option Compensation.
<PAGE> 33
28
The Company recorded non-cash compensation expense of $27,000 in 1995 and
$1,119,000 in 1994. Non-cash compensation expense results from the Company's
issuance of stock options to employees at exercise prices below the fair market
value at the date of grant and is recognized as expense over the employees'
respective service periods.
Interest Income. Interest income decreased to $134,000 in 1995,
compared to $288,000 in 1994, due to the decrease in the level of short-term
investments. Short-term investments were sold during 1995 and 1994 to fund the
Company's operating cash requirements.
Interest Expense. Interest expense increased $226,000 to $291,000 in
1995, compared to interest expense of $65,000 in 1994. Interest expense
represented interest on amounts borrowed from the CDA and, through July 24,
1995, a revolving credit facility between the Company and members of the Board
of Directors and their affiliates.
Gain (Loss) on Short-Term Investments. The Company recognized $6,000 in
gains in 1995 and $177,000 in losses in 1994 on the market value of short-term
investments. There were no unrealized gains or losses on short-term investments
at December 31, 1995. At December 31, 1994, short-term investments of $1,027,000
were recorded net of a valuation allowance of $77,000 for unrealized losses. The
remaining $100,000 of such losses had been realized in 1994.
Income Taxes. In consideration of the Company's accumulated losses and
the uncertainty of its ability to utilize any future tax benefits resulting from
these losses, the impact of this potential tax benefit has been eliminated in
the Company's Consolidated Financial Statements as of December 31, 1995 and
1994. See Note 11 of the notes to consolidated financial statements included
herein and "Risk Factors -- Potential Loss of NOLs".
<PAGE> 34
29
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had net working capital of
$102,432,000, reflecting cash and cash equivalents of $101,927,000, compared to
net working capital of $8,764,000, reflecting cash and cash equivalents of
$8,198,000, at December 31, 1996 and net working capital of $5,283,000,
reflecting cash and cash equivalents of $3,210,000 at December 31, 1995. The
increase in net working capital and in cash and cash equivalents during 1997
resulted primarily from $95 million in net proceeds raised in the Private
Placement, and in 1996 resulted primarily from the offshore public offering and
contemporaneous private placement (the "1996 Transactions") of Common Stock in
July 1996, ($12 million), and additional borrowings during the first quarter of
1996 under the Company's facility with the CDA ($1.65 million).
Net cash used in operations was $1,072,000 for the three months ended
March 31, 1997, compared to net cash of $2,571,000 used for operating
activities for the three months ended March 31, 1996. In the first quarter of
1997, the net loss of $4,270,000 included $2,468,000 of non-cash interest
expense not used by operations. Net cash used in operations was
<PAGE> 35
30
$7,549,000 in 1996 compared to net cash of $11,160,000 used for operating
activities in 1995, resulting primarily from the net losses of $9,412,000 and
$10,868,000, respectively, for such periods. The 1996 and 1995 net losses
reflect non cash provisions for doubtful accounts receivable of $168,000 and
$82,000, respectively, and for inventory obsolescence of $843,000 and $94,000,
respectively. The 1996 improvement in net cash used in operations also reflected
decreases in trade accounts receivable (net of allowance for doubtful accounts)
of $294,000 and inventory (net of reserves) of $1,052,000, compared to increases
of $853,000 and $497,000, respectively, for such items during the prior year.
During 1996, current liabilities decreased $217,000, reflecting a reduction in
outstanding trade payables, compared to an increase of $820,000 in the prior
year.
Cash used in investing activities totaled $274,000 for the three months
ended March 31, 1997, compared to $299,000 of cash used for investing activities
for the three months ended March 31, 1996, and $989,000 in 1996 compared to
$100,000 of cash provided by investing activities in 1995. Investing activities
included capital expenditures of $199,000 and $76,000 for the three months
ended, respectively, March 31, 1997 and 1996, and $397,000 and $452,000 in 1996
and 1995, respectively. The Company also incurred $75,000 and $223,000 in
product development costs during the respective quarterly periods and $592,000
and $475,000 in 1996 and 1995, respectively, in product development costs. In
1995, cash provided by investing activities also included $1,027,000 from the
sale of short-term investments.
In addition to selling the ERS ShelfNet System to customers at a price
generally in excess of $100,000 per store, under the Company's proposed SayGo
Plan the Company will offer the system on a fee-based arrangement whereby the
Company retains ownership of the system. See "Business -- Marketing and Sales --
SayGo Agreements" below for a description of fixed and variable charges proposed
by the Company under the SayGo Plan. As a result, the Company will have
substantial cash requirements for manufacturing and carrying costs attendant to
introduction of the SayGo Plan, which will not initially be covered by revenues
calculated on the basis of usage fees paid by customers. Accordingly, the
Company will require substantial funds in order to support the introduction of
the SayGo Plan.
To date, the Company has not generated positive cash flow from
operations, and has historically funded its operations primarily through loans
from its stockholders, the sale of interests in an affiliated partnership, the
Initial Public Offering consummated in 1993, its arrangements with the CDA, the
sale of Series A Cumulative, Convertible Preferred Stock $1.00 par value
("Series A Preferred Stock"), to members of the Board of Directors and their
affiliates, the 1996 Transactions, and the Private Placement.
Cash from financing activities provided $95,075,000 in first quarter
1997 compared to $1,651,000 in the first quarter of 1996, and $13,526,000 in
1996 compared to $13,139,000 in 1995. In July 1996, the Company completed: (i)
the offshore public offering of an aggregate of 4,963,500 shares of its Common
Stock, in accordance with Regulation S under the Securities Act, and (ii) the
contemporaneous private placement of an aggregate of 911,657 shares of Common
Stock to subscribers, including certain members of the Board of Directors and
their affiliates. In connection with completion of such transactions, holders of
all 125,556 outstanding shares of the Series A Preferred Stock converted their
shares, in accordance with their terms, into an aggregate of 3,138,900 shares of
Common Stock, in exchange for payments aggregating $235,000. The aggregate
proceeds to the Company in such transactions were approximately $12 million
(exclusive of non-cash expenses represented by the issuance of 218,957 shares of
Common stock as commissions).
<PAGE> 36
31
In addition, the Company borrowed the remaining $1,650,000 under its
facility with the CDA (all such indebtedness under such facility, the "CDA
Indebtedness") during the first quarter of 1996. The aggregate of $5,000,000 of
CDA Indebtedness is repayable five years after the August 1994 closing on such
facility and is convertible to shares of Common Stock, through August 12, 1997
at an adjusted conversion price calculated at $3.00 plus the average market
price of the Common Stock during the eighteen months prior to conversion and
thereafter at $3.00 plus the average market price of the Common Stock during the
twelve months prior to conversion. At closing, the CDA acquired five-year
warrants to purchase 699,724 shares (as adjusted through December 31, 1996) of
Common Stock, exercisable at an adjusted price through August 12, 1997
calculated as $2.58 plus the average market price of the Common Stock during the
eighteen months prior to exercise, and thereafter as $2.58 plus the average
market price of the Common Stock during the twelve months prior to exercise.
Under its arrangements with the CDA, the Company will be obligated to comply
with certain covenants (some of which remain in effect for up to ten years from
closing), whether or not the CDA Indebtedness has been repaid in full, or be
subject to certain penalties including immediate repayment of the CDA
Indebtedness in full. In the event of specified changes in control of the
Company coupled with prepayment of its note, the Company has rights to
repurchase such warrants and shares at the fair market value thereof (calculated
pursuant to such arrangements), and thereby, subject to the foregoing,
extinguish such covenants. In all events (and notwithstanding any such
repurchase), if the Company relocates outside of Connecticut before August 2004,
all advances made by the CDA are subject to acceleration, together with a
penalty of $250,000.
In January 1997, the Company completed the private sale of 147,312
Units, consisting of $147,312,000 principal amount at maturity of the Old Notes
and Warrants, which were sold to investors at a price aggregating $100 million
($95 million net proceeds to the Company). The Old Notes mature on February 1,
2004, with accrual of cash interest at the rate of 13-1/4% per annum commencing
February 1, 2000, such interest payable thereafter on February 1 and August 1 of
each year commencing August 1, 2000. The Old Notes may be called, at the
Company's option, in whole or in part, at any time after February 1, 2001, and,
upon specified change in control events, each holder has the right to require
the Company to purchase its Old Notes at specified prices.
The Indenture places limitations on operations and sales of assets by
the Company or its subsidiaries, requires maintenance of certain financial
ratios in order for the Company to incur additional indebtedness (subject to
specified exceptions), requires the delivery by the Company's subsidiaries of
guaranties if specified debt is subsequently incurred by such subsidiaries, and
limits the Company's ability to pay cash dividends or make other distributions
to the holders of its capital stock or to redeem such stock. The Warrants are,
subsequent to January 24, 1998, exercisable through February 1, 2004 with
respect to an aggregate of 2,538,258 shares of Common Stock, at a per share
price of $5.23.
The Company will utilize the net proceeds from the Private Placement in
connection with the anticipated expansion of its operations, including for
manufacturing and carrying costs attendant to the SayGo Plan, and
<PAGE> 37
32
for general corporate purposes, including the funding of the Company's ongoing
engineering and development efforts. The Company believes that the proceeds of
the Private Placement, together with its other cash and cash equivalents, will
be sufficient to meet the Company's currently anticipated operating and capital
expenditure requirements for the foreseeable future.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and related
arrangements, and the Company may consider additional transactions, consistent
with the provisions of the Indenture, that will further enhance its liquidity.
The Company has not reached any determination with respect to the size or nature
of any such transaction or whether any such transaction will be undertaken, and
there can be no assurance that any such transaction will be effected. The
Company has engaged Patricof & Co. in connection with certain corporate finance
services and, in addition to fees that become due if certain transactions are
consummated, Patricof's retainer includes three-year warrants issued in the
second quarter of 1997 exercisable with respect to 250,000 shares of Common
Stock at an exercise price of $5.24 per share.
<PAGE> 38
33
BUSINESS
GENERAL
The Company develops and provides ESL systems designed to allow
supermarket chains and other retailers to increase productivity, reduce labor
costs and improve management information systems. The Company is the leading
provider in the United States of ESL systems, based on management's estimates of
installed ESL systems. The ERS ShelfNet System has been designed as a
productivity enhancing center store automation system which replaces paper price
tags on retail shelves with electronic liquid crystal display units and provides
a suite of applications to enhance a retailer's pricing, inventory, shelf
management, merchandising and promotional activities. The ERS ShelfNet System is
comprised of proprietary hardware and software that electronically link a
store's shelves to its POS systems and central computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. An ERS store-based local area network has up to 20,000
individual ESLs connected to a central server. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning alphanumeric
messages. The ERS ShelfNet System is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market.
As of March 31, 1997, the ERS ShelfNet System was installed in 70
U.S. retail stores, including stores owned by such leading supermarket chains as
Vons, Stop & Shop, HEB, Big Y, Shaw's, Lucky, The Great Atlantic & Pacific Tea
Company, Inc. and K Mart Corporation, and one supermarket owned by the
Overwaitea Food Group in Canada. The Company's customers include five of the 15
largest supermarket chains in the United States. The Company estimates that, as
of March 31, 1997, of the approximately 29,800 supermarkets in the United
States, approximately 125 stores were operating ESL systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it planned in the first quarter
of 1997 to introduce a new generation ERS ShelfNet System that provides spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, in
December 1996 ERS signed its first Letter of Intent
<PAGE> 39
34
providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997, and is continuing its efforts to procure
additional letters of intent. The Letter of Intent is, and all such additional
arrangements will be, subject to numerous conditions, including the negotiation
and execution of definitive contract terms.
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. The Company now intends also to offer the ERS
ShelfNet System on a fee based arrangement whereby the Company will own the
system and, with no upfront cash cost to the retailer, furnish the system to
retailers (generally for a period of up to five years), who will pay monthly
fees to the Company based primarily on their actual usage of the system. The
Company believes that the SayGo Plan will accelerate market acceptance of the
ERS ShelfNet System.
Management estimates that, under the SayGo Plan, the annual cost
savings and benefits realized by its anticipated supermarket customers using the
ERS ShelfNet System could substantially exceed the anticipated annual cost to
the customer for the new generation system proposed by ERS. For example,
management estimates, based on studies conducted in collaboration with the
Company's current customers, that cost savings and benefits to a supermarket
with 15,000 ESLs that changes 2,500 to 4,500 prices per week could, under the
Company's proposed SayGo Plan, provide an annual net contribution per store
ranging from approximately $40,000 to approximately $240,000 through the
anticipated level of usage of the applications afforded by the ERS ShelfNet
System. However, there can be no assurance that any such benefits will be
realized by any customer. See "Risk Factors --Use of Assumptions to Estimate Net
Cost Savings and Benefits".
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
In December 1996, the Company announced its plan to introduce the new
generation ERS ShelfNet System, providing spread spectrum microwave transmission
of data directly to wireless ESLs. The enhanced ERS ShelfNet System is designed
to provide additional flexibility and convenience to customers by expanding
potential coverage by the Company's ESLs to the entire store and allowing the
retailer to change store placement of the ESLs more easily. The Company believes
that the cost of installing and maintaining its wireless ESLs will be lower than
that of its current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
In December 1996, ERS signed its first non-binding Letter of Intent
providing for installation of the ERS ShelfNet System under the SayGo Plan in
approximately 60 supermarkets beginning in 1997, and is continuing its efforts
to procure additional letters of intent. The Letter of Intent is, and all such
additional arrangements, will be, subject to numerous conditions, including
negotiation and execution of definitive contract terms. See " -- Marketing and
Sales" below for a description of the terms to be proposed initially by the
Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock in
accordance with Regulation S under the Securities Act and the contemporaneous
private placement of Common Stock to subscribers, including members of the Board
of Directors
<PAGE> 40
35
and their affiliates. In January 1997, the Company raised approximately $95
million in net proceeds as a result of the Private Placement.
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends: (i) to focus its initial marketing efforts under the SayGo Plan on the
supermarket sector of the retail industry; (ii) to continue to reduce the
manufacturing costs of the system to increase the Company's profitability; and
(iii) to continue to enhance, develop and support value-added applications of
the ERS ShelfNet System.
- SayGo Plan. The Company believes that its SayGo Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use the proceeds from
the Private Placement to install the ERS ShelfNet System in
supermarkets under the SayGo Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and because of the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
March 31, 1997, of the approximately 29,900 supermarkets in
the United States, approximately 125 stores were operating ESL
systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the SayGo Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings) and to encourage existing
customers to adopt the new generation system and install
additional systems, the Company intends to develop additional
productivity enhancing applications for, and enhance existing
applications of, the ERS ShelfNet System.
RETAIL INDUSTRY OVERVIEW
The Company's target market consists of retailers that stock a large
number of stockkeeping units ("SKUs"), operate in highly competitive
environments, have relatively low margins and change prices frequently. Such
retailers include supermarkets, discount mass merchandisers, chain drug stores
and convenience stores. The Company believes that such retailers generally seek
automated solutions to reduce labor costs and improve efficiencies in
operations. The approximate number of supermarkets, discount mass merchandisers,
chain drug stores and convenience stores in the United States is set forth in
the table below. The table does not include the European market, where the
aggregate number of comparable stores is greater than in the United States.
<TABLE>
<CAPTION>
TYPE OF STORE NUMBER OF STORES
- --------------------------------- ----------------
<S> <C>
Supermarkets..................... 29,870
Discount mass merchandisers...... 10,075
Chain drug stores................ 19,995
Convenience stores............... 56,000
----------------
Total 115,940
================
</TABLE>
<PAGE> 41
36
Source: Progressive Grocer Annual Report, April 1997; MMR Annual Report,
April 21, 1997.
The Company believes that many of its target retailers are capital
constrained and have compared potential investments in the ERS ShelfNet System
to alternative capital expenditures. Such alternative uses of capital include
purchasing additional stores, remodeling and refurbishing existing stores,
making acquisitions and investing in technology, including ESL systems. The
Company's SayGo Plan is designed to eliminate a retailer's upfront cash cost to
install the ERS ShelfNet System, instead assessing charges largely for services
the retailer actually uses. Thus, the ERS ShelfNet System will constitute an
operating expense (that the Company estimates to be more than offset by cost
savings and benefits) rather than a capital expenditure for retailers, allowing
retailers to conserve capital for other projects while also choosing to install
the ERS ShelfNet System.
SUPERMARKET SECTOR
The supermarket sector is mature, intensely competitive and tends to
have margins that are among the lowest in the retailing industry. The Company
estimates that an average supermarket stocks approximately 19,500 SKUs, most of
which are available at competitive stores, and runs frequent promotions with
respect to many of these items. As a result, a supermarket's success depends in
large part on the efficiency of its operations, which in turn affects its
ability to offer competitive prices and maintain acceptable operating margins.
Supermarkets are under constant pressure to reduce costs, manage inventory more
effectively and offer competitive prices.
Historically, supermarkets have been among the first retailers to adopt
technologies designed to reduce labor and other costs, improve operations and
enhance customer service. For example, POS scanners were first introduced in the
supermarket sector and have achieved the greatest level of market penetration
there. While fewer than 15 supermarkets in the United States had POS scanners in
1974, by 1995 approximately 95% of all chain supermarket stores and
approximately 80% of independent supermarket stores had installed POS scanners.
POS systems have enabled retailers to reduce labor costs, improve pricing
integrity and increase efficiency while also providing additional applications
such as electronic funds transfer and computerized inventory management. The
Company believes that supermarkets and other retailers will more quickly adopt
other technological innovations as a result of their experience with POS
scanners. As a result, and because of the Company's established relationships
with supermarket chains and its installed base of ERS ShelfNet Systems in
supermarkets, the Company intends to continue to focus its marketing efforts in
the supermarket sector.
CHALLENGES FACING RETAILERS THAT AFFECT THE COMPANY
The Company has designed the ERS ShelfNet System to address retailer
productivity, labor costs, merchandising and competitive market share issues, as
summarized below:
MANUAL PRICE CHANGES
Although POS systems have enabled supermarkets to achieve efficiencies
at the "front end" of the store, the center of the typical store has not been
automated and remains labor intensive. The Company estimates that an average
supermarket carries approximately 19,500 SKUs and changes approximately 2,500
prices per week at the shelf with newly printed paper labels. These price
changes require numerous manual steps resulting in (i) significant labor costs
and (ii) delays in implementing price changes following special promotions or
increases in wholesale costs, both of which adversely affect supermarket
profitability.
PRICING INTEGRITY
In addition to being labor intensive and time-consuming, manual
implementation of price changes also is more susceptible to pricing inaccuracy.
Stores with inaccurate prices risk customer dissatisfaction as well as fines and
penalties levied by governmental agencies. According to Supermarket News,
February 5, 1996, over 90% of supermarket executives
<PAGE> 42
37
surveyed rate the issue of pricing verification as extremely or highly
important. As a result, supermarket operators incur significant expense in
auditing pricing integrity and correcting pricing inaccuracies.
MERCHANDISING MANAGEMENT
Supermarkets actively promote products at the shelf with a variety of
merchandising materials such as "hangers" or "bibs", which are affixed to the
shelf or a product's price label and alert consumers to pricing or promotional
activities. Supermarkets install and remove bibs manually, with employees
generally walking the aisle and checking promotional items against a printed
list arranged according to the shelfset schematics (called "planograms"). The
Company believes using such a printed list is an unnecessarily time-consuming,
inaccurate and costly process.
REPLENISHMENT/INVENTORY MANAGEMENT
Supermarkets lose sales (and their corresponding margins) when products
are inadvertently missing from designated planogrammed shelves, often due to
lost or damaged paper labels. In addition, damaged and handwritten paper labels
result in increased order entry errors, which increases both out-of-stocks
(resulting in lost sales) and labor costs associated with the product ordering
process.
SHELFSET MANAGEMENT
Typically, supermarkets carefully develop planograms for the management
of products and product categories in the stores, on the belief that products
perform best in the aggregate when arranged on shelves in the quantities and
with the facings prescribed by the planogram. When paper labels are lost,
damaged or moved, deviations from the planogram occur, resulting in a higher
incidence of out-of-stock items, loss of sales of potentially high margin items,
continued stocking of discontinued or unauthorized products, and increased time
and labor associated with new cut-ins to a shelfset that differ from the
planogram.
ERS SHELFNET APPLICATIONS
The ERS ShelfNet System has been designed (i) to replace paper price
tags on retail shelves with electronic liquid crystal display units, and (ii) to
provide a suite of applications to address the challenges to retailers of manual
price changes, pricing integrity, merchandising management,
replenishment/inventory management and shelfset management. The ERS ShelfNet
System's applications are designed to include Instant Response Pricing to
eliminate manual price changes, Integrated Electronic Pricing to ensure pricing
integrity, Quick Point-of Purchase (QuickPop(R)) Merchandising to reduce the
cost of changing merchandising materials, AccuStock(TM) to facilitate inventory
replenishment and ShelfSet Audit to provide for efficient shelfset management.
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
Manual Price Changes.................. Instant Response Pricing. The ERS ShelfNet System allows retailers to
implement price changes almost instantaneously from the store's central
computer or directly from corporate or regional headquarters, which the
Company believes facilitates significant labor savings from manual
implementation of price changes. In addition, electronic price changes
are significantly faster to implement, which the Company believes leads
to increased margins as prices may be increased promptly following
special promotions or increases in wholesale prices.
Pricing Integrity..................... Integrated Electronic Pricing. The ERS ShelfNet System electronically
links a store's POS systems and its ESLs, virtually eliminating
discrepancies between prices displayed on the store shelves and prices
charged at checkout. This assurance of pricing integrity permits
retailers to reduce or eliminate manual pricing audits and fines paid to
governmental entities for pricing inaccuracies. In
</TABLE>
<PAGE> 43
38
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
addition, such pricing accuracy can result in fewer price checks and
errors at checkout, can result in faster checkout times, improved
cashier productivity and increased customer satisfaction.
Merchandising Management.............. QuickP.O.P. The ERS ShelfNet System's QuickP.O.P. application is
designed to increase the speed and accuracy of placing product displays
and promotional material by displaying a signal on the ESLs of products
that require the addition or removal of merchandising bibs or hangers.
This is intended to eliminate the time-consuming and potentially
inaccurate manual process of checking promotional items against a
printed list arranged according to the planogram.
Replenishment/Inventory Management.... AccuStock. The ERS ShelfNet System's AccuStock application is designed
to allow authorized store personnel to change ESLs from a price display
to an out-of-stock message. This procedure replaces the current system
of noting out-of-stocks manually, with the use of a label scanner, which
requires follow-up by the store employee. AccuStock facilitates simple
notation of out-of-stocks during normal stocking procedures, with the
system automatically generating an out-of-stock report that can be
resolved quickly by store management. In addition, the display of an
out-of-stock message, rather than removal of a paper label, holds the
shelf placement for the missing product, increasing planogram integrity.
Shelfset Management................... ShelfSet Audit. The ERS ShelfNet System is designed to maintain
shelfsets more easily, because the ESLs stay locked in place and cannot
be moved back and forth as can paper tags. In addition, the ESL is
designed to display product facing information and section, shelf, and
bay locations for simple, more accurate and less paper-intensive
planogram implementations or changes. These features are intended to
reduce labor associated with shelfset management and stocking and
increase planogram compliance and monitoring.
</TABLE>
Management estimates that, under the SayGo Plan, the cost savings and benefits
to its anticipated supermarket customers using the ERS ShelfNet System
(including the full suite of its applications at the anticipated level of usage)
could provide an annual net contribution per store ranging from approximately
$40,000 to approximately $240,000. See " -- Recent Developments -- New Marketing
and Pricing Program" above.
THE ERS SHELFNET SYSTEM
The Company's ESL system replaces paper price tags on retail shelves
with liquid crystal display labels and transmits pricing and other information
to and from the shelf edge. The Company's new generation system permits the
transmission of data directly to wireless ESLs.
Each ERS ShelfNet System generally consists of 10,000 to 20,000 ESLs
and the necessary communication and support infrastructure to link the ESLs with
the store's central computer and POS systems. The Company's new generation
system consists of the following components:
ELECTRONIC SHELF LABEL
Each ESL is a mini data transceiver contained in a plastic case, which
displays price and other information by means of a wide-angle view liquid
crystal display window. The ESL is also able to display pricing and other
promotional information for the consumer and inventory and reorder information
for store employees, and is equipped with two buttons designed to allow store
staff to interact with the store computers from the ESL on the
<PAGE> 44
39
shelf. The Company offers four different sizes and types of ESLs for use in
different applications, such as SKUs for coolers and freezers. The Company's
currently installed ESLs are powered through the rails to which they are
connected, whereas the wireless ESLs are powered by long-life batteries.
SPREAD SPECTRUM WIRELESS NETWORK
Communication to the ESLs is managed by a high frequency, real-time
communication system that uses spread spectrum technology. Active cell antennae
in the store ceiling send and receive signals to and from wireless ESLs in their
respective coverage areas. The cells form a radio frequency infrastructure in
which multiple, non-overlapping cells may be active simultaneously, while
overlapping cells synchronize their transmissions, permitting spectrum re-use.
The redundancy of transmission provided by ERS' spread spectrum network helps to
eliminate interference problems and to ensure that complete information is
clearly communicated.
COMMUNICATION HUB
The local area network's communication hub, located in the store's back
office area, has two functions: (i) the hub distributes signals to the ESLs
through computerized information processors which relay information to active
cell antennae in the store ceiling and from the antennae to the individual
product ESLs located on the shelf and (ii) the hub receives information from the
information processors which has been relayed by the antennae in the ceiling
after receipt from the ESLs located on the shelf.
SYSTEM CONTROLLER
The system controller is a personal computer or the existing in-store
processor, also located in the store's back office area, which is linked
directly to the store's electronic POS system. The system software resides in
the system controller, and allows the same pricing data that is incorporated
into the POS system to be used with the ERS ShelfNet System simultaneously. The
system controller communicates the pricing or other data directly to and from
the communication hub. The system controller is designed to receive information
from the store's corporate or regional headquarters (such as product price or
promotional information) and to communicate data to such headquarters (such as
product order information).
SOFTWARE SYSTEM
The Company's ESL system is designed to be compatible with electronic
POS scanning systems and is compatible with systems provided by the three major,
worldwide suppliers of POS systems, IBM, NCR, and Fujitsu-ICL. The Company's
system may also be interfaced with major store operating systems, such as OS/2,
Windows NT and Unix. Because the "intelligence" of the ERS ShelfNet System is
located in the system controller and not the individual ESLs, the Company is
able to incorporate new functions into its system by upgrading software without
replacing any hardware.
The Company's system can be linked to an in-store laser printer capable
of printing paper overlays for ESLs, paper labels for non-electronic shelves and
other promotional items. The Company furnishes its customers with specific
procedures and guidelines for each application which show store managers how to
utilize the ERS system and software tools, and a data collection and analysis
format to document productivity increases and to monitor ongoing improvements in
store operations.
MARKETING AND SALES
GENERAL
The Company historically has marketed its ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store, a significant capital
expenditure for retailers. The Company now intends also to market the ERS
ShelfNet System under its SayGo Plan, whereby the Company will own the system
and, with no
<PAGE> 45
40
upfront cash cost to the retailer, furnish the system to retailers who will pay
monthly fees to the Company based largely on their actual usage of the system.
The Company will continue to focus its marketing efforts on major
national and regional supermarket chains. The Company believes that each
supermarket chain will typically choose a single supplier of ESL systems to
maximize chainwide efficiency. Therefore, the Company's marketing strategy is to
make installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such installations by
installing systems through the rest of the chain's stores. In response to
retailing trends, the Company has also increased its marketing efforts to mass
merchandisers.
Based upon its experience to date, the Company expects that the
adoption process for the ERS ShelfNet System will occur in four successive
phases, as follows:
- Detailed review of store procedures and systems and
documentation of expected cost savings and benefits;
- Agreement for multi-store adoption of the ERS ShelfNet System
subject to design, installation and implementation of a single
store evaluation system and concurrent design of integration
plans, operating procedures and training programs for broader
use by the retailer;
- Installation of the first group of stores within a chain,
defined by a geographic or merchandising region, to establish
final chain-wide operating procedures; and
- Chain-wide commercial rollout.
SAYGO AGREEMENTS
In December 1996, the Company signed its first non-binding Letter of
Intent providing for installation of the ERS ShelfNet System under the SayGo
Plan, and is continuing its efforts to procure additional letters of intent. The
Letter of Intent is, and all such additional arrangements will be, subject to
numerous conditions, including negotiation and execution of definitive contract
terms.
Under the terms proposed by the Company, the Company will own the ERS
ShelfNet System and furnish the system to qualified customers, identified by the
Company as those retailers who meet minimum requirements with respect to price
change potential per store and number of ESLs ordered. The Company's contract
with such customers will provide for: (i) a fixed rate charge per ESL per month
and (ii) a base rate charge per ESL price change, less volume discounts. Charges
will be billed to the customer on a monthly basis. In addition to such amounts,
the Company will collect transaction fees for usage of each value added
application.
The Company's proposals will allow the customer to terminate the
program and return the Company's system at any time after the first twelve
months. The customer's fees will cease upon termination, except for agreed upon
amounts in certain circumstances.
Under the SayGo Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers, and will depreciate the cost of
hardware components of its systems over the shorter of their estimated useful
lives or five years. In connection with introduction of the SayGo Plan, the
Company will have substantial cash requirements for manufacturing and carrying
costs which will not initially be covered by revenues.
<PAGE> 46
41
ORGANIZATION
The Company currently markets its products directly to major retail
chains through a marketing and sales force. The Company's marketing and sales
personnel have significant retail experience, including experience in the POS
system and local area network industries. The Company's marketing staff works
with existing and potential customers to define their needs for ESL systems and
to coordinate their implementation of the ERS ShelfNet System. The Company
exhibits its system at major trade shows worldwide and produces and distributes
promotional materials to increase market awareness of the Company's system. In
addition, the Company will continue to investigate the feasibility of marketing
its system through indirect channels such as value added resellers and
distributors and, in this connection, in May 1997 announced its first letter of
intent relative to such a distribution channel, which remains subject to
definitive documentation.
COLLABORATIVE DEVELOPMENT
The Company has collaborated with supermarket retailers and suppliers
of in-store wireless networks, printing services, merchandise planning systems
and other retail systems providers in order to develop a better understanding of
customer needs and to offer comprehensive customer solutions. The Company will
continue to pursue such efforts and will seek strategic partners to assist the
Company in the broad market adoption and roll-out of the Company's new
generation system.
CUSTOMERS
As of March 31, 1997, the ERS ShelfNet System was installed in 70
U.S. retail stores, including those owned by such leading supermarket chains as
Vons, Stop & Shop, HEB, Big Y, Shaw's, Lucky, The Great Atlantic & Pacific Tea
Company, Inc., and K Mart Corporation, and one supermarket owned by the
Overwaitea Food Group in Canada. The Company's customers include five of the 15
largest supermarket chains in the United States.
In June 1996, the Company obtained a sub-contract from NCR under NCR's
prime contract to upgrade POS systems at U.S. military commissaries, subject to
receipt of purchase orders by the Company from NCR. Pursuant to such
arrangements, NCR has delivered an order for a software license covering the
installation of the ERS ShelfNet System.
During the year ended December 31, 1994, HEB and Vons accounted for 14%
and 67%, respectively, of the Company's consolidated revenues; and during the
year ended December 31, 1995, HEB, Vons and Shaw's accounted for 30%, 27% and
26%, respectively, of the Company's consolidated revenues; and during the year
ended December 31, 1996, Stop & Shop, Big Y and Shaw's accounted for 46%, 20%
and 13%, respectively, of the Company's consolidated revenues.
INSTALLATION AND CUSTOMER SERVICE
The ERS ShelfNet System is designed to be installed in a store without
disrupting normal store operations. In connection with the introduction of its
new generation system, the Company intends to use a team comprised of one
Company employee and two sub-contracted installers to install communications
infrastructure and software and, if rail strips are also ordered by the
customer, up to an additional five sub-contracted installers to install such
hardware. The ESLs generally will be programmed by the customer or at the
Company's facilities and shipped to the site where they will be installed by the
customer.
The Company's customer service group is staffed with employees
experienced in POS and other retail systems. The Company's SayGo Plan will
commit the Company to a standard maintenance contract, at no additional charge,
with extended maintenance services available at additional charges to the
customer.
<PAGE> 47
42
MANUFACTURING
The Company utilizes third parties to manufacture and assemble the
components comprising the ERS ShelfNet System. The Company's ESLs currently
incorporate a microprocessor which is supplied solely by Sanyo. However, the
Company believes that other suppliers could produce equivalent microprocessors
within approximately four months. The Company's policy is to maintain an
inventory of microprocessors sufficient to meet substantially all of its
requirements during any such period. The Company intends to evaluate, from time
to time, establishing relationships with other manufacturers of microprocessors
to provide a second source of supply for its ESLs.
The Company intends to maintain its practice of utilizing manufacturing
subcontractors, and has a supply arrangement with Surface Mount Technology Ltd.,
of Hong Kong, for the assembly of ESLs. The Company also continues to utilize
Modulus, Inc. as a domestic source for the assembly of its ESLs. The Company has
not experienced interruptions or delays in the manufacture or assembly of its
systems, and believes that alternative sources of system components are readily
available.
ENGINEERING AND DEVELOPMENT
The Company's principal engineering and development efforts have been
conducted through software and hardware development groups located at its
facilities in Connecticut and Massachusetts. These groups focus on improvements
to current technology and also on new applications of existing technology. The
Company's engineering staff also generates the functional specifications and
development schedules for each of the Company's customers. The Company has also
from time to time engaged third parties to design hardware components based upon
requirements or specifications developed by the Company, and entered into
arrangements with hardware and software developers to augment the Company's
internal activities in the area of long-term product development. The Company's
arrangements with such developers are typically subject to termination by the
Company without penalty, and continuation of such arrangements will in each case
depend upon the satisfactory achievement by such developers of specified
milestones or other satisfactory performance by them.
During the years ended December 31, 1994, 1995 and 1996, the Company
incurred expenses for research and development activities of, respectively,
$2,571,000, $2,491,000 and $1,117,000. During the years ended December 31, 1995
and December 31, 1996, the Company capitalized an aggregate of $475,000 and
$592,000, respectively, in costs of internal labor and outside services
associated with product development. During the three months ended March 31,
1996 and 1997, the Company incurred expenses for research and development of
$313,000 and $490,000, respectively, and capitalized an aggregate of $223,000
and $75,000, respectively, of software product development costs.
INTELLECTUAL PROPERTY
The Company has aggressively pursued an intellectual property rights
strategy to protect its product developments. The Company's policy is to file
patent applications to protect its technology, inventions and improvements that
are important to the development of its business, and to seek copyright
protection with respect to its software. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The Company holds thirteen United States patents and has eight
additional United States patent applications pending, and eleven foreign patent
applications pending. The Company also has other applications under preparation
and intends to continue to file patent applications on its novel products and
systems. Certain of these patents and patent applications are directed to
salient features of the Company's ESL system, in particular relating to the ESL
and associated hardware, and the communications network linking the components
of the system.
<PAGE> 48
43
The Company's wholly-owned subsidiary, Amacrine International, Inc.
("Amacrine"), is entitled to use, and to grant sublicenses with respect to,
certain Telepanel patents directed to an alphanumeric display module and radio
frequency communications system, which Amacrine designed and developed for
Telepanel under a technical services agreement which existed between such
companies. The Company has become aware of certain statements made by Telepanel,
which the Company believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents.
The Company attempts to protect certain computer software and service
applications through the use of copyright and trade secret law. The Company
relies on non-disclosure agreements with its employees, customers, consultants,
and strategic partners.
In 1993 in connection with the settlement of certain litigation, the
Company was granted a limited non-exclusive license in the United States,
Canada, the United Kingdom, Australia, Japan and Germany covering certain United
States and foreign patents, of which Telepanel is the exclusive licensee, in
consideration of a $700,000 payment made by the Company to Telepanel. During
1994, the United States patent underlying Telepanel's patent rights applicable
to such license expired.
See "Risk Factors -- Protection of Intellectual Property" for a
description of certain risks involving the Company's intellectual property.
COMPETITION
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel, Pricer and, recently, NCR. Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the Telepanel
system. See " -- Intellectual Property" above for a description of the
settlement in 1993 of certain patent litigation between the Company and
Telepanel. The Company believes NCR also has developed and is testing an ESL
system in the United States. Outside of the United States, in addition to
Pricer, the Company expects to compete with a number of companies with ESL
systems under development.
As more fully described under "Risk Factors -- Competition and
Technological Change" above, the emerging ESL system market is characterized by
rapid technological advances and evolving industry standards, and the Company
may be subject to a high degree of potential competition with additional
companies which may attempt to develop or market competing ESL systems. In the
future, the Company may face competition from vendors of POS systems, or scanner
manufacturers which offer products related to POS systems, who may elect to
enter the market for ESL systems. The ERS ShelfNet System is also subject to
competition from vendors selling traditional paper labeling methods, as well as
providers of hand-held portable data terminals.
The principal competitive factors in the Company's business are product
functionality, price/performance and reliability. The Company believes that it
competes favorably on each of these factors.
EMPLOYEES
As of December 31, 1996, the Company had 62 full-time employees,
consisting of 26 engaged in engineering and development and manufacturing
support, 12 in marketing and sales activities, 18 in customer services and six
in general administrative and executive functions. At such date, the Company had
an additional 27 part-time employees, engaged primarily in customer service
functions. The Company does not have a collective bargaining agreement with any
of its employees and considers its relationship with its employees to be
excellent.
FACILITIES
The Company's executive offices are located at 372 Danbury Road,
Wilton, Connecticut, where the Company leases approximately 14,700 square feet
of space (exclusive of space subleased to an affiliate). The
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Company's lease expires in July 1997 and requires payment of annual rent (net of
sublease payments) in the amount of approximately $241,000 (in addition to
increases in operating expenses and real estate taxes). Of the Company's space
in Wilton, approximately 1,900 square feet is devoted to office and
administrative uses, approximately 6,600 square feet to engineering and
development activities, and approximately 6,200 square feet to marketing, sales
and customer service functions. The Company is engaged in negotiations with
respect to a lease of new executive offices in Norwalk, Connecticut.
The Company leases an additional space of approximately 10,000 square
feet for engineering and development activities in Westford, Massachusetts, and
at other smaller locations where required to support its operations. The
foregoing facilities are regarded by management as adequate in all material
respects for the current requirements of the Company's business.
As described under Note 6 of the Notes to the Company's Consolidated
Financial Statements included elsewhere in this Prospectus, the CDA Note is
secured by the assets of the Company and the Principal Subsidiary.
LEGAL PROCEEDINGS
In 1992, in proceedings commenced by the Company in the High Court of
Justice, Chancery Division, England against defendants John Baxter and
Epsi'lanne (UK) Limited, the defendants served counterclaims seeking, among
other things, to enjoin the Company from selling its system in the United
Kingdom. The Company does not believe that these counterclaims have any merit.
GOVERNMENT REGULATION
Accuracy in pricing on the part of supermarkets has been an objective
of state and local regulation. At least 18 states currently have laws or
regulations requiring some form of "unit pricing" (which require prices and
price per measure to be displayed at the shelf), and at least nine states (and
other local jurisdictions) have laws requiring "item pricing" (which require the
marking of prices on individual consumer packages for some or all products in
the retail store). The existence of item pricing laws applicable to any of the
Company's intended customers increases such customers' costs of providing price
information to consumers and may decrease or eliminate some of the potential
benefits of implementation of the ERS ShelfNet System. In some of the states
that have item pricing laws, such pricing is not required if the price is
clearly presented on the shelf and consumers are offered the means by which to
mark individual items. In the State of Connecticut, the item pricing law allows
the State's Department of Consumer Protection to exempt from item pricing
requirements stores employing an approved ESL system.
The United States Federal Communications Commission has established
standards for radio frequency emissions from computer products, and certain
components utilized in the Company's ESL system must comply with such criteria.
All components currently incorporated into the ERS ShelfNet System comply with
such standards, and the Company does not anticipate any material delays in
securing any required certification for components under development by the
Company. Certain foreign countries also regulate radio frequency emissions.
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MANAGEMENT
The executive officers and directors of the Company, and their
respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Norton Garfinkle(1)(2)(3)(4) 66 Chairman of the Board and Director
Bruce F. Failing, Jr.(1)(3).... 48 Vice Chairman of the Board and Chief
Executive Officer and Director
George B. Weathersby(1)........ 52 Chairman of the Executive Committee
of the Board, President and Director
William W. Erdman.............. 55 Executive Vice President
Michael R. Valiton............. 35 Senior Vice President, Technology
and Operations
William B. Ames................ 53 Vice President, Manufacturing
William B. Fischer............. 46 Vice President, Finance
James M. Nolan, Jr............. 42 Vice President, New Product
Development
Paul M. Patrick................ 44 Vice President
Paul A. Biddelman(1)(2)(4)..... 51 Director
David Diamond.................. 38 Director
Donald E. Zilkha(1)(2)(4)...... 46 Director
</TABLE>
- ----------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Director Stock Option Committee.
(4) Member of Audit Committee.
Each director holds office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each executive
officer serves at the discretion of the Board of Directors.
Mr. Garfinkle, a founder of the Company and its Chairman of the Board,
has been a director of the Company since its inception in April 1990. Since
1970, Mr. Garfinkle has also been the Chairman of Cambridge Management
Corporation, which manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as Chairman of its
affiliates, including Oxford Management Corporation, which specialize in the
research and development of new technologies. From 1985 to 1988, Mr. Garfinkle
was Chairman of Oral Research Laboratories, Inc., a manufacturer of dental
hygiene products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to 1988. In December
1995, pursuant to an agreement with New York State authorities, Mr. Garfinkle
admitted to a misdemeanor relating to his 1989 New York State tax return and
paid all taxes required by the agreement.
Mr. Failing, a founder of the Company and its Vice Chairman of the
Board and Chief Executive Officer, has been a director of the Company since its
inception and served as President through February 1997. In 1973, Mr. Failing
co-founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive Officer of Actmedia,
Inc. until its sale in 1989.
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Mr. Weathersby, the Chairman of the Executive Committee of the Board of
Directors, has been President of the Company since February 1997 and a director
of the Company since April 1996. Mr. Weathersby has been Vice Chairman of
Cambridge Management Corporation and its affiliates including Oxford Management
Corporation, since 1993. From 1991 to 1993, Mr. Weathersby was a general partner
of Founder's Court, an investment management firm. Mr. Weathersby is a director
of Holnam, Inc. and USA Group, Inc.
Mr. Erdman has been Executive Vice President of the Company since March
1997. From 1992 until prior to joining the Company, Mr. Erdman was President and
Chief Executive Officer at InterDigital Communications Corporation (formerly,
International Mobile Machine Corporation).
Mr. Valiton has been Senior Vice President, Technology and Operations
of the Company since March 1996, having joined the Company in July 1994 and
become Vice President, Delivery in January 1995. From prior to 1991 until
joining the Company, Mr. Valiton held various positions with Ungermann-Bass,
Inc., the last of which was as Director of Customer Administration.
Mr. Ames has been Vice President, Manufacturing of the Company since
April 1995. From prior to 1992 until joining the Company, Mr. Ames was employed
in various positions by the Hewlett-Packard Company, the last of which were as
Strategic Planning Manager and Manufacturing Development Engineering Manager.
Mr. Fischer has been Vice President, Finance of the Company since April
1995, having served as Controller of the Company from May 1994 until April 1995.
From September 1990 until joining the Company, Mr. Fischer was Director of
Financial Accounting Policies at GTE Corporation. From 1978 until 1990, Mr.
Fischer was employed by Price Waterhouse LLP, having last held the position of
Senior Manager.
Mr. Nolan has been Vice President, New Product Development of the
Company since November 1993. From 1981 until 1993, Mr. Nolan held various
positions with Sequoia Systems, Inc., a developer of fault tolerant computer
systems, the last of which was as Vice President of Engineering.
Mr. Patrick has been a Vice President of the Company since 1992. From
1989 to 1992, Mr. Patrick was Vice President, Canadian Operations, of Stores
Automated Systems, Inc., a manufacturer of retail point-of-sale products and
services.
Mr. Biddelman has been a director of the Company since 1993. Since
1992, Mr. Biddelman has been the Treasurer of Hanseatic Corporation, a private
investment company, and from 1991 to 1992 was a Managing Director of Clements
Taee Biddelman Incorporated, a financial advisor. Mr. Biddelman is a director of
Insituform Technologies, Inc., Celadon Group, Inc., Premier Parks, Inc.,
Petroleum Heat & Power Co., Inc., Star Gas Corporation (general partner of Star
Gas Partners, L.P.), and Oppenheimer Group, Inc.
Mr. Diamond has been a director of the Company since April 1996. Since
January 1997, Mr. Diamond has been Executive Vice President of Marketing and New
Applications of Catalina Marketing Corp. and Mr. Diamond has been a consultant
to suppliers of products and services to the supermarket industry since 1994.
From 1992 to 1994, Mr. Diamond was President of Lamaze Publishing Company, Inc.,
a publisher of material on neonatal care. From prior to 1991 until 1992, Mr.
Diamond was Senior Vice President of Strategic Planning and New Development of
Actmedia, Inc.
Mr. Zilkha has been a director of the Company since 1993. Since prior
to 1991, Mr. Zilkha has been President of Zilkha & Company, a private investment
advisor.
No family relationship exists between any of the directors or executive
officers of the Company.
DESCRIPTION OF THE WARRANTS
In the Private Placement, the Company issued an aggregate of 147,312
Warrants to the purchasers of the Units. The Warrants were issued pursuant to a
warrant agreement, dated as of January 24, 1997 (the "Warrant
<PAGE> 52
47
Agreement"), between the Company and American Stock Transfer & Trust Company, as
warrant agent ("the Warrant Agent"). The Warrants are subject to the terms in
the Warrant Agreement and holders of Warrants are referred to the Warrant
Agreement, which is incorporated herein by reference, for a complete statement
of such terms. The following summary of certain provisions of the Warrant
Agreement does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Warrant Agreement, including the
definitions therein of certain terms. Capitalized terms in this "Description of
the Warrants" not defined in this Prospectus have the meanings ascribed to them
in the Warrant Agreement.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to
purchase 17.23 shares of Common Stock from the Company at a price (the "Exercise
Price") of $5.23 per share. The Exercise Price and the number of shares of
Common Stock issuable upon exercise of a Warrant are both subject to adjustment
in certain cases. See " -- Adjustments" below. The Warrants currently entitle
the holders thereof to acquire, in the aggregate, 2,538,258 shares of Common
Stock.
The Warrants may be exercised at any time after January 24, 1998;
provided, however, that holders of Warrants will be able to exercise their
Warrants only if the Registration Statement is effective or the exercise of such
Warrants is exempt from the registration requirements of the Securities Act, and
such securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
holders reside. Unless earlier exercised, the Warrants will expire on February
1, 2004 (the "Expiration Date"). The Company will give notice of expiration not
less than 90 nor more than 120 days prior to the Expiration Date to the
registered holders of the then outstanding Warrants. If the Company fails to
give such notice, the Warrants will nevertheless expire and become void on the
Expiration Date.
At the Company's option, fractional shares of Common Stock may not be
issued upon exercise of the Warrants. If any fraction of a share of Common Stock
would, except for the foregoing provision, be issuable upon the exercise of any
such Warrants (or specified portion thereof), the Company will pay an amount in
cash equal to the Current Market Value per share of Common Stock, as determined
on the day immediately preceding the date the Warrant is presented for exercise,
multiplied by such fraction, computed to the nearest whole cent.
Certificates for Warrants will be issued in fully registered form only.
No service charge will be made for registration of transfer or exchange upon
surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Warrant Certificates.
In the event a bankruptcy or reorganization is commenced by or against
the Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court. As a result, holders of the Warrants may, even if sufficient
funds are available, not be entitled to receive any consideration or may receive
an amount less than they would be entitled to if they had exercised their
Warrants prior to the commencement of any such bankruptcy or reorganization.
CERTAIN TERMS
EXERCISE
In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related Warrant Certificate and
pay in full the Exercise Price for each share of Common Stock or other
securities issuable upon exercise of such Warrants. The Exercise Price may be
paid (i) in cash or by certified or official bank check or by wire transfer to
an account designated by the Company for such purpose or (ii) without the
payment of cash, by reducing the number of shares of Common Stock that would be
obtainable upon the exercise of a Warrant and payment of the Exercise Price in
cash so as to yield a number of shares of Common Stock upon the exercise of such
Warrant equal to the product of (a) the number of shares of Common Stock for
which such Warrant
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48
is exercisable as of the date of exercise (if the Exercise Price were being paid
in cash) and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The
"Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the
excess of the Current Market Value per share of Common Stock on the Exercise
Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date. Upon surrender of a Warrant Certificate representing more
than one Warrant in connection with the holder's option to elect a Cashless
Exercise, the number of shares of Common Stock deliverable upon a Cashless
Exercise shall be equal to the number of shares of Common Stock issuable upon
the exercise of Warrants that the holder specifies are to be exercised pursuant
to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions
of the Warrant Agreement shall be applicable with respect to a surrender of a
Warrant Certificate pursuant to a Cashless Exercise for less than the full
number of Warrants represented thereby.
NO RIGHTS AS STOCKHOLDERS
The holders of unexercised Warrants are not entitled, by virtue of
being such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of the Company in respect
of any stockholders meeting for the election of directors of the Company or any
other purpose, or to exercise any other rights whatsoever as stockholders of the
Company.
MERGERS, CONSOLIDATIONS, ETC.
In the event that the Company consolidates with, merges with or into,
or sells all or substantially all of its assets to, another Person, each Warrant
thereafter shall entitle the holder thereof to receive upon exercise thereof,
per share of Common Stock for which such Warrant is exercisable, the number of
shares of common stock or other securities or property which the holder of a
share of Common Stock is entitled to receive upon completion of such
consolidation, merger or sale of assets. However, if (i) the Company
consolidates with, merges with or into, or sells all or substantially all of its
assets to, another Person and, in connection therewith, the consideration
payable to the holders of Common Stock in exchange for their shares is payable
solely in cash or (ii) there is a dissolution, liquidation or winding-up of the
Company, then the holders of the Warrants will be entitled to receive
distributions on an equal basis with the holders of Common Stock or other
securities issuable upon exercise of the Warrants, as if the Warrants had been
exercised immediately prior to such event, less the Exercise Price. Upon receipt
of such payment, if any, the Warrants will expire and the rights of the holders
thereof will cease. In the case of any such merger, consolidation or sale of
assets, the surviving or acquiring person and, in the event of any dissolution,
liquidation or winding-up of the Company, the Company must deposit promptly with
the Warrant Agent the funds, if any, required to pay to the holders of the
Warrants. After such funds and the surrendered Warrant Certificates are
received, the Warrant Agent is required to deliver a check in such amount as is
appropriate (or, in the case of consideration other than cash, such other
consideration as is appropriate) to such Persons as it may be directed in
writing by the holders surrendering such Warrants.
ADJUSTMENTS
The number of Warrant Shares issuable upon the exercise of the Warrants
and the Exercise Price are subject to adjustment in certain events including:
(i) the payment by the Company of certain dividends (or other distributions) on
the Common Stock of the Company including dividends or distributions payable in
shares of such Common Stock or other shares of the Company's capital stock, (ii)
subdivisions, combinations and certain reclassifications of the Common Stock,
(iii) the issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for shares of Common Stock, or of securities
convertible into or exchangeable or exercisable for shares of Common Stock, for
a consideration per share which is less than the Current Market Value per share
of the Common Stock, (iv) the issuance of shares of Common Stock for a
consideration per share which is less than the Current Market Value per share of
the Common Stock, and (v) the distribution to all holders of the Common Stock of
any of the Company's assets, debt securities or any rights or warrants to
purchase securities (excluding those rights and warrants referred to in clause
(iii) above, any rights which may be issued under a shareholder rights plan and
cash dividends and other cash distributions from current or retained earnings).
No adjustment to the number of Warrant Shares issuable upon the exercise of the
Warrants and the Exercise Price will be required in certain events including:
(i) the issuance of shares of Common Stock in bona fide public
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49
offerings that are underwritten or in which a placement agent is retained by the
Company, (ii) the issuance of options or shares of Common Stock pursuant to any
option or employee benefit plans approved by the Board of Directors and (iii)
the issuance of shares of Common Stock in connection with acquisitions of
products, technologies and businesses other than to affiliates of the Company.
In the event of a distribution to holders of Common Stock which results
in an adjustment to the number of shares of Common Stock or other consideration
for which a Warrant may be exercised, the holders of the Warrants may, in
certain circumstances, be deemed to have received a distribution subject to
United States Federal income tax as a dividend. See "Certain Federal Income Tax
Consequences".
No adjustment in the Exercise Price will be required unless such
adjustment would require an increase or decrease of at least one percent in the
Exercise Price; provided, however, that any adjustment which is not made as a
result of this paragraph will be carried forward and taken into account in any
subsequent adjustment.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the
consent of the holders of the Warrants, may amend or supplement the Warrant
Agreement for certain purposes, including curing defects or inconsistencies or
making any change that does not adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has an adverse effect on
the interests of the holders of the Warrants shall require the written consent
of the holders of a majority of the then outstanding Warrants. The consent of
each holder of the Warrants affected shall be required for any amendment
pursuant to which the Exercise Price would be increased or the number of Common
Shares issuable upon exercise of Warrants would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
REGISTRATION RIGHTS
The Company is required under the Warrant Agreement to keep the
Registration Statement of which this prospectus is a part under the Securities
Act covering the resale of the Warrants or the Warrant Shares by the holders
thereof effective until the earliest of (i) such time as all of the Warrants
have been sold thereunder, (ii) the Expiration Date and (iii) such time as the
Warrants can be sold by the holders thereof without restriction under the
Securities Act. The Company is also required under the Warrant Agreement to keep
the Registration Statement of which this prospectus is a part under the
Securities Act covering the issuance of shares of Common Stock to the holders of
the Warrants upon exercise of the Warrants by the holders thereof effective
until the earlier of (i) such time as all Warrant Shares have been sold
thereunder and (ii) the Expiration Date.
Each holder of Warrants and Warrant Shares that sells such Warrants and
Warrant Shares pursuant to the Registration Statement generally will be required
to be named as a Selling Security Holder in the Registration Statement and to
deliver this Prospectus to the purchaser, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by certain provisions of the Warrant Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Warrants and Warrant Shares will be required to deliver
information to be used in connection with this Registration Statement in order
to have its Warrants and Warrant Shares included in the Registration Statement.
During any consecutive 365-day period, the Company shall be entitled to
suspend the availability of this Registration Statement for up to two 45
consecutive-day periods (except for the 45 consecutive-day period immediately
prior to the Expiration Date) if the Board of Directors determines in the
exercise of its reasonable judgment that there is a valid business purpose for
such suspension and provides notice that such determination was made to the
holders of the Warrants; provided, however, that in no event shall the Company
be required to disclose the business purpose for such suspension if the Company
determines in good faith that such business purpose must remain confidential.
There can be no assurance that the Company will be able to file, cause to be
declared effective, or keep a registration statement continuously effective
until all of the Warrants have been exercised or have expired.
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50
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following
definitions:
"Current Market Value" per share of Common Stock or any other security
at any date means (i) if the security is not registered under the Exchange Act,
(a) the value of the security, determined in good faith by the Board and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a Person other than an
Affiliate of the Company, the closing of which shall have occurred on such date
or within the six-month period preceding such date, or (b) if no such
transaction shall have occurred on such date or within such six-month period,
the value of the security as determined by an independent financial expert or
(ii) if the security is registered under the Exchange Act, the average of the
daily closing bid prices (or the equivalent in an over-the-counter market) for
each Business Day during the period commencing 15 Business Days before such date
and ending on the date one day prior to such date, or if the security has been
registered under the Exchange Act for less than 15 consecutive Business Days
before such date, then the average of the daily closing bid prices (or such
equivalent) for all of the Business Days before such date for which daily
closing bid prices are available; provided, however, that if the closing bid
price is not determinable for at least ten Business Days in such period, the
"Current Market Value" of the security shall be determined as if the security
were not registered under the Exchange Act.
"Issue Date" means January 24, 1997.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Separation Date" means the date of the commencement of an exchange
offer or the effectiveness of a shelf registration statement for the Notes or
such earlier date after February 24, 1997, as the Initial Purchasers may
determine.
"Warrant Certificates" mean the registered certificates (including the
Global Warrants (as defined below)) issued by the Company under the Warrant
Agreement representing the Warrants.
BOOK-ENTRY, DELIVERY AND FORM
Each of the Warrants was issued in the form of one or more fully
registered Warrants in global form ("Global Warrants"), except that each of the
Warrants offered and sold to institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or 7 under the Securities Act) was delivered in
certificated fully registered form only and bear a legend containing
restrictions on transfers.
Upon issuance of the Global Warrants, the Depositary or its nominee
will credit, on its book-entry registration and transfer system, the number of
Warrants represented by such Global Notes to the accounts of institutions that
have accounts with the Depositary or its nominee ("participants"). Ownership of
beneficial interests in the Global Warrants will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interest in such Global Warrants will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depositary or
its nominee (with respect to participants' interests) for such Global Warrants,
or by participants or persons that hold interests through participants (with
respect to beneficial interests of persons other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Warrants.
So long as the Depositary, or its nominee, is the registered holder of
any Global Warrants, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and holder of such Warrants represented by such
Global Warrants for all purposes under the Warrant Agreement and Warrant. Except
as set forth below, owners of beneficial interests in Global Warrants will not
be entitled to have such Global Warrants represented thereby registered in their
names, will not receive or be entitled to receive physical delivery or
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51
Certificated Securities in exchange therefor and will not be considered to be
the owners or holders of such Global Warrants represented thereby for any
purpose under the Warrant Agreement. The Company understands that under existing
industry practice, in the event an owner of a beneficial interest in a Global
Warrant desires to take any action that the Depositary, as the holder of such
Global Warrant, is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Company expects that the Depositary or its nominee, upon receipt of
any payment of principal or interest in respect of the Global Warrants, will
credit immediately the accounts of the related participants with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Warrants as shown on the records of the Depositary. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Warrants held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name", and will be the responsibility of such participants.
None of the Company, the Trustee, or any payment agent for the Global
Warrants will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in any
of the Global Warrants or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for other aspects of the
relationship between the Depositary and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Warrants owning through such participants.
Notice by participants or by owners of beneficial interests in a Global
Warrant held through such participants of the exercise of the option to elect
repayment of beneficial interests in Warrants represented by a Global Warrant
must be transmitted to DTC in accordance with its procedures on a form required
by DTC and provided to participants. In order to ensure that DTC's nominee will
timely exercise a right to repayment with respect to a particular Warrant, the
beneficial owner of such Warrant must instruct the broker or other participant
to exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their customers and, accordingly, each beneficial
owner should consult the broker or other participant through which it holds an
interest in a Warrant in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to DTC. The
Company will not be liable for any delay in delivery of notices of the exercise
of the option to elect repayment.
Although the Depositary has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Warrants among participants
of the Depositary, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Company will have any responsibility for the performance by
the Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the Trustee may conclusively rely on, and shall be protected in
relying on, instructions from the Depositary for all purposes.
Upon transfer of Certificated Warrants to a QIB, such Certificated
Warrants will be transferred to the corresponding Global Warrants. Global
Warrants shall be exchangeable for corresponding Certificated Warrants
registered in the name of persons other than the Depositary or its nominee only
if (A) the Depositary (i) notifies the Company that it is unwilling or unable to
continue as Depositary for any of the Global Warrants or (ii) at any time ceases
to be a clearing agency registered under the Exchange Act, or (B) the Company
executes and delivers to the Trustee an order that the Global Warrants shall be
so exchangeable. Any Certificated Warrants so issued will be registered in such
names and in such denominations as the Depositary shall request.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of
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the Exchange Act. The Depositary was created to hold securities of institutions
that have accounts with the Depositary ("participants") and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Initial settlement in the Warrants will be in same-day funds. Investors
holding their Warrants through the Depositary will follow settlement practices
applicable to United States corporate debt obligations.
DESCRIPTION OF CAPITAL STOCK
As of May 15, 1997, there were 21,084,156 shares of Common Stock
outstanding, held of record by 651 holders. As of such date, no shares of
Preferred Stock were outstanding and no shares of capital stock were held in the
treasury of the Company. The following summary of certain provisions of the
Company's capital stock describes all material provisions of, but does not
purport to be complete and is subject to, and qualified in its entirety by, the
Company's certificate of incorporation and by-laws and by the provisions of
applicable law.
COMMON STOCK
The Company is authorized to issue up to 35,000,000 shares of Common
Stock, $0.01 par value. Holders of Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of stockholders and do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. See "Risk Factors --Control by Existing
Stockholders". Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
subject to Warrants will be, when issued and paid for, fully-paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future.
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock, $1.00 par value. The Board of Directors is authorized, subject to any
limitations prescribed by law, without further stockholder approval, to issue
such shares of Preferred Stock in one or more series. Each such series of
Preferred Stock shall have such rights, preferences, privileges, and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred
Stock and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specified issuances. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
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DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware. In general, this statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transactions in which the person becomes an interested stockholder, unless
the business combination is approved in a prescribed manner. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the prior three years did own) 15% or more of the corporation's voting
stock.
The Company has included in its certificate of incorporation provisions
to eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
Delaware General Corporation Law and to indemnify its directors and officers to
the fullest extent permitted by Section 145 of the Delaware General Corporation
Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
American Stock Transfer & Trust Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income
tax considerations applicable to initial purchasers of the Warrants. This
summary is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), regulations, rulings and decisions currently in effect,
all of which are subject to change (possibly with retroactive effect). The
discussion does not purport to deal with all aspects of federal taxation that
may be relevant to particular investors in light of their personal investment
circumstances (for example, to persons holding Warrants as part of a conversion
transaction or as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes), nor does it discuss federal income tax
considerations applicable to certain types of investors subject to special
treatment under the federal income tax laws (for example, life insurance
companies, tax-exempt organizations and financial institutions). In addition,
the discussion does not consider the effect of any foreign, state, local, gift,
estate or other tax laws that may be applicable to a particular investor. The
discussion assumes that investors will hold the Warrants and Common Stock as
capital assets within the meaning of Section 1221 of the Code. A prospective
purchaser is strongly urged to consult his, her or its tax advisor regarding the
particular tax consequences to such prospective purchaser of purchasing, holding
and disposing of the Warrants and Common Stock.
TAX TREATMENT OF WARRANTS
SALE OR REDEMPTION
The sale or exchange of a Warrant will result in the recognition of
gain or loss to the holder in an amount equal to the difference between the
amount realized and his or her adjusted basis therein. Such a sale or exchange
(other than a redemption by the Company) will result in capital gain or loss.
Such capital gain or loss will be long-term capital gain or loss if the Warrants
being sold or exchanged have been held for more than one year at the time of
such sale or exchange.
If the redemption of a Warrant by the Company is treated as a sale or
exchange of a capital asset, any gain or loss recognized on the transaction will
be capital gain or loss. However, it is unclear whether the redemption of
Warrants by the Company will be treated as the sale or exchange of a capital
asset, and if such redemption is not treated as the sale or exchange of a
capital asset, the holder of a Warrant would recognize ordinary income or loss
on such redemption.
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ADJUSTMENTS
Under Section 305 of the Code, certain actual or constructive
distributions of stock may be taxable to a shareholder of the Company.
Adjustments in the exercise price of the Warrants, or the number of shares of
Common Stock purchasable upon exercise of the Warrants, in each case made
pursuant to the anti-dilution provisions of the Warrants described in
"Description of the Warrants -- Adjustments", may result in a constructive
distribution if and to the extent that there is an increase in the proportionate
interest of a holder of a Warrant in the fully diluted Common Stock, whether or
not the Warrant is exercised. Such a distribution may be taxable as a dividend
under the Code to the holders of the Warrants.
EXERCISE
No gain or loss will be recognized to a holder of Warrants on his, her
or its purchase of the Common Stock for cash upon exercise of the Warrants
(other than any gain or loss attributable to the receipt of cash in lieu of a
fractional share of Common Stock upon exercise). The adjusted initial basis of
the Common Stock so acquired would be equal to the adjusted basis of the
exercised Warrants plus the exercise price (less any cash received in lieu of a
fractional share). For tax purposes, the holding period of the Common Stock
acquired upon the exercise of the Warrants will begin on the date of exercise.
A holder who exercises Warrants without payment of cash pursuant to a
Cashless Exercise, as described in "Description of the Warrants -- Certain Terms
- -- Exercise", may be treated as disposing of the Warrants or a portion thereof
in a taxable transaction. If a Cashless Exercise is so treated, it is possible
that the amount of gain or loss that a holder would be required to recognize
would be measured by the difference between the value of the Common Stock
received (plus any cash received in lieu of a fractional share) and the holder's
tax basis in all of the Warrants surrendered in the Cashless Exercise.
Alternatively, it is possible that the amount of gain or loss would be measured
by the difference between the Exercise Price for the number of shares of Common
Stock actually received in the Cashless Exercise and the holder's tax basis in
the portion of the Warrants that would be deemed to be surrendered in lieu of
cash (plus any gain or loss attributable to cash received in lieu of a
fractional share of Common Stock). Such gain or loss should generally be capital
gain or loss, although this is not entirely clear. The basis of the Common Stock
received upon such a Cashless Exercise will equal the sum of the holder's basis
in the Warrants being exercised and surrendered, increased by any gain or
decreased by any loss recognized upon the exercise. Because the tax consequences
of a Cashless Exercise (including a partial Cashless Exercise) are not entirely
certain, holders considering a Cashless Exercise are urged to consult with their
own tax advisors before doing so.
LAPSE
If the Warrants are not exercised and are allowed to expire, the
Warrants will be deemed to have been sold or exchanged on the expiration date
resulting in a loss equal to the holder's tax basis in the Warrants. Any loss to
the holder will be a capital loss, and the classification of the loss as
long-term or short-term will depend upon the date the Warrants were acquired and
the length of time the Warrants were held.
TREATMENT OF THE COMPANY
No gain or loss will be recognized by the Company upon the termination,
exercise or expiration of any Warrants.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will make annual reports to the Internal Revenue Service
and holders of the Warrants and Common Stock regarding the amount of actual and
constructive dividends with respect to such securities paid or accrued during
the year, to the extent required by law.
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Under federal income tax law, a holder of Warrants or Common Stock may,
under certain circumstances, be subject to "backup withholding" unless such
holder (i) is a corporation, or is otherwise exempt and, when required,
demonstrates this fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
The withholding rate is 31% of "reportable payments," which include dividends
and proceeds from a sale or redemption.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN HOLDERS
The following discussion summarizes certain United States federal
income tax consequences generally applicable to the ownership and disposition of
the Warrants and Common Stock by a holder who is not a United States Person
("Non-U.S. Holder"). The term "United States Person" means a citizen or resident
of the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any state thereof or an
estate or trust, the income of which is subject to federal income taxation
regardless of its source. This discussion does not purport to deal with all
aspects of United States federal income taxation that may be relevant to a
Non-U.S. Holder and does not describe any tax consequences arising out of the
laws of any state, locality or foreign jurisdiction or out of United States
federal estate and gift tax laws. NON-U.S. HOLDERS ARE ADVISED TO CONSULT THEIR
TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THEIR PURCHASE, OWNERSHIP AND DISPOSITION OF THE WARRANTS OR
COMMON STOCK.
DIVIDENDS
Generally, any dividends on shares of Common Stock to a Non-U.S. Holder
will be subject to withholding of United States federal income tax at the rate
of 30% unless the dividend is effectively connected with the conduct of a trade
or business within the United States by the Non-U.S. Holder, in which case the
dividend will be subject to the United States federal income tax on net income
that applies to United States persons generally (and, with respect to corporate
holders under certain circumstances, the branch profits tax). Non-U.S. Holders
should consult any applicable income tax treaties, which may provide for a lower
rate of withholding or other rules different from those described above. Under
current Treasury Regulations, dividends paid to an address in a foreign country
are presumed to be paid to a resident of such country for purposes of
determining the applicability of a treaty rate unless the Company had definite
knowledge that such presumption is not warranted or an applicable treaty rate
requires some other method for determining a Non-U.S. Holder's residence. Under
proposed Treasury Regulations, this presumption would no longer apply and
Non-U.S. Holders would be required to satisfy certain certification requirements
in order to obtain a reduced rate of withholding under a tax treaty.
GAIN ON DISPOSITION
A Non-U.S. Holder generally will not be subject to United States
federal income tax (subject to the discussions under "FIRPTA" and "Information
Reporting and Backup Withholding" below) on gain recognized on a sale or other
disposition (including a redemption) of Warrants or Common Stock unless (i) the
gain is effectively connected with the conduct of a trade or business within the
United States by the Non-U.S. Holder or (ii) in the case of a Non-U.S. Holder
who is a nonresident alien individual and holds the Warrants or Common Stock as
a capital asset, such holder is present in the U.S. for 183 or more days in the
taxable year of the sale or disposition and either has a "tax home" (as defined
for United States federal income tax purposes) in the United States or an office
or other fixed place of business in the United States to which the sale or
disposition is attributable.
FIRPTA
Under certain rules added to the Code by the Foreign Investment in Real
Property Tax Act ("FIRPTA") the Company would be classified as a United States
real property holding corporation ("USRPHC") if the fair market value of its
U.S. real property interests were to exceed 50% of the fair market value of its
real property interests and other assets held for use in its trade or business.
A Non-U.S. Holder of Warrants or Common Stock would be subject to United States
federal income tax on gain arising from a sale or other disposition of such
Warrants or
<PAGE> 61
56
Common Stock if the Company is or has been a USRPHC within the preceding five
years or the period of such holder's ownership of such Warrants or Common Stock,
if shorter (the "FIRPTA period"). However, if the Common Stock is regularly
traded on an established securities market (within the meaning of the applicable
Treasury Regulations), a Non-U.S. Holder of Warrants or Common Stock, other than
certain 5% holders (within the meaning of the applicable Treasury Regulations),
would not be subject to FIRPTA tax on any gain arising from a sale or other
disposition of such Warrants or Common Stock. A required withholding in respect
of FIRPTA tax ("FIRPTA withholding") is imposed at a rate of 10% of the amount
realized on certain sales or other dispositions of certain interests (including
stock) in USRPHCs.
A Non-U.S. Holder of Warrants or Common Stock could generally avoid
FIRPTA tax and withholding if he, she or it obtains a statement from the Company
to the effect that the Company is not and has not been a USRPHC within the
FIRPTA period and the Company provides certain information to the Internal
Revenue Service, including the name, address and identification number (if any)
of the Non-U.S. Holder requesting the statement. Treasury Regulations require
that the Company provide upon request of any person a statement as to whether or
not it is or has been a USRPHC within the FIRPTA period.
Management believes that the Company is not, has not been, and does not
presently expect to become a USRPHC.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service the
total amount of federal income taxes withheld from dividends (including
constructive dividends) distributed to Non-U.S. Holders. In addition, the
Company must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends distributed to and the tax withheld with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced by an applicable treaty.
The 31% backup withholding tax will not generally apply to dividends
distributed to Non-U.S. Holders outside the United States that are subject to
the 30% withholding discussed above or that are not so subject because a tax
treaty applies that reduces or eliminates such withholding. In that regard,
under current Treasury Regulations, dividends payable at an address located
outside of the United States to a Non-U.S. Holder are not subject to the backup
withholding rules. These backup withholding and information reporting
requirements may also apply to the gross proceeds paid by or through a broker to
a foreign holder upon the disposition of Warrants or Common Stock.
REFUNDS
Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
OTHER TAX CONSIDERATIONS
There may be other federal, state, local or foreign tax considerations
applicable to the circumstances of a particular prospective purchaser of the
Warrants. ACCORDINGLY, EACH PROSPECTIVE PURCHASER OF WARRANTS SHOULD CONSULT
HIS, HER OR ITS TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH
PROSPECTIVE PURCHASER OF PURCHASING, HOLDING AND DISPOSING OF THE WARRANTS.
LEGAL MATTERS
Certain legal matters regarding the Warrants and the Warrant Shares
will be passed on for the Company by Krugman Chapnick & Grimshaw LLP, Saddle
Brook, New Jersey.
<PAGE> 62
57
EXPERTS
The consolidated financial statements of Electronic Retailing Systems
International, Inc. as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
<PAGE> 63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Accountants ................................... F-2
Consolidated Balance Sheet as of December 31,
1995 and 1996 ..................................................... F-3
Consolidated Statement of Operations for
the years ended December 31, 1994, 1995
and 1996 .......................................................... F-4
Consolidated Statement of Cash Flows
for the years ended December 31, 1994, 1995
and 1996 .......................................................... F-5
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 .................................. F-6
Notes to Consolidated Financial Statements .......................... F-7
Interim Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of
December 31, 1996 and March 31, 1997 (unaudited) .................. F-17
Condensed Consolidated Statement of Operations for
the three months ended March 31, 1996 and 1997 (unaudited) ........ F-18
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 1996 and 1997 (unaudited) ........ F-19
Notes to Condensed Consolidated Financial Statements (unaudited) .... F-20
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Electronic Retailing Systems International, Inc.
In our opinion, the consolidated financial statements listed in the index on
page F-1 present fairly, in all material respects, the financial position of
Electronic Retailing Systems International, Inc. and its subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based upon
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Stamford, Connecticut
March 20, 1997
F-2
<PAGE> 65
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2) $ 3,210 $ 8,198
Accounts receivable - net of allowance for doubtful
accounts of $88 in 1995 and $90 in 1996 1,356 1,061
Receivables from affiliates (Note 3) 8 20
Installations in progress 522 87
Inventories - net of reserves of $195 in 1995 and
$838 in 1996 (Note 2) 1,874 821
Prepayments and other current assets 79 125
-------- --------
Total current assets 7,049 10,312
-------- --------
Equipment (Note 2) 2,047 2,444
Accumulated depreciation (1,365) (1,798)
-------- --------
Net equipment 682 646
-------- --------
Other non-current assets 585 1,302
-------- --------
TOTAL ASSETS $ 8,316 $ 12,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,549 $ 1,286
Accrued salaries and benefits 217 262
-------- --------
Total current liabilities 1,766 1,548
-------- --------
Long-term debt (Note 6) 3,335 4,989
-------- --------
Commitments (Note 8) -- --
-------- --------
Stockholders' equity
Preferred stock, undesignated (par value $1.00 per share;
1,860,000 and 2,000,000 shares authorized, none outstanding)
Series A Cumulative, Convertible Preferred Stock
(140,000 and no shares authorized; 123,246 and no shares
issued and outstanding in 1995 and 1996, including 2,049
shares issued January 1, 1996 as a stock dividend to
holders of record on December 31, 1995) 123 --
Common stock (par value $0.01 per share; 25,000,000 shares
authorized; 11,748,232 and 21,047,106 shares issued
and outstanding in 1995 and 1996, respectively) 117 210
Additional paid-in capital 38,474 50,655
Accumulated deficit (35,499) (45,142)
-------- --------
Total stockholders' equity 3,215 5,723
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,316 $ 12,260
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 66
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Product sales $ 2,227 $ 2,663 $ 4,106
Maintenance 149 310 896
-------- -------- --------
Total revenues 2,376 2,973 5,002
-------- -------- --------
COST OF GOODS SOLD
Product sales 3,316 3,552 4,488
Maintenance 506 561 966
Special inventory provision (Note 2) -- -- 750
-------- -------- --------
Total cost of goods sold 3,822 4,113 6,204
-------- -------- --------
Gross profit (loss) (1,446) (1,140) (1,202)
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative (including
amounts to related parties of $76 in 1994,
$91 in 1995 and $34 in 1996) (Note 3) 6,039 6,952 6,807
Research and development ( Note 9) 2,571 2,491 1,117
Depreciation and amortization 149 107 162
Stock option compensation (Note 10) 1,119 27 44
-------- -------- --------
Total operating expenses 9,878 9,577 8,130
-------- -------- --------
Loss from operations (11,324) (10,717) (9,332)
-------- -------- --------
OTHER INCOME (EXPENSES)
Interest income 288 134 302
Interest expense (including amounts to related parties
of $52 in 1995) (Note 3) (65) (291) (382)
Gain (loss) on short-term investments (Note 2) (177) 6 --
-------- -------- --------
Total other income (expenses) 46 (151) (80)
-------- -------- --------
NET LOSS $(11,278) $(10,868) $ (9,412)
======== ======== ========
EARNINGS PER SHARE
Weighted average common shares outstanding 11,682 11,743 16,169
======== ======== ========
Net loss per common share $ (0.97) $ (0.95) $ (0.60)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 67
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,278) $(10,868) $ (9,412)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 374 463 660
Provision for inventory obsolescence 93 94 843
Provision for doubtful accounts 38 82 168
Stock option compensation 1,119 27 44
Accounts receivable 179 (935) 126
Inventories (534) (591) 209
Other current and non-current assets (127) (252) 30
Current liabilities 110 820 (217)
-------- -------- --------
Net cash used in operating activities (10,026) (11,160) (7,549)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (303) (452) (397)
Capitalized product development costs -- (475) (592)
Proceeds from sales or maturities of short-term investments 7,040 1,027 --
-------- -------- --------
Cash provided by (used in) investing activities 6,737 100 (989)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 2 -- 12,111
Net proceeds from the issuance of long-term note and warrant 1,899 1,350 1,650
Conversion of preferred stock -- -- (235)
Net proceeds from the issuance of preferred stock -- 8,789 --
Borrowings under line of credit -- 3,000 --
-------- -------- --------
Cash provided by financing activities 1,901 13,139 13,526
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,388) 2,079 4,988
-------- -------- --------
Cash and cash equivalents at beginning of period 2,519 1,131 3,210
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,131 $ 3,210 $ 8,198
======== ======== ========
</TABLE>
There were no cash payments for income taxes in the years 1994, 1995
and 1996. Cash payments for interest expense were $45, $262 and $380 in
1994, 1995 and 1996, respectively, including payments of $52 made to
related parties in 1995. In 1995, preferred stock was issued in a non
cash exchange for surrender of $3 million of debt held by preferred
stock subscribers. In 1996, preferred stock was converted to 3,138,900
shares of common stock in a non cash transaction.
See accompanying notes to consolidated financial statements
F-5
<PAGE> 68
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL ACCUMULATED
STOCK STOCK PAID-IN CAPITAL DEFICIT
--------- ------- --------------- -----------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ -- $ 115 $ 25,318 $(13,028)
-------- ------- -------- --------
Vesting of previously issued stock options 1,119
Issuance of stock warrants 20
Issuance of 193,500 shares with exercise of
stock options 2
Net loss for year (11,278)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1994 $ -- $ 117 $ 26,457 $(24,306)
-------- ------- -------- --------
Vesting of previously issued stock options 27
Proceeds from issuance and sale of 120,000
shares of preferred stock 120 11,668
Issuance of 3,246 shares of preferred stock
as dividends 3 322 (325)
Net loss for year (10,868)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995 $ 123 $ 117 $ 38,474 $(35,499)
-------- ------- -------- --------
Vesting of previously issued stock options 44
Issuance of 65,860 shares with exercise of
stock options 1
Issuance of 2,310 shares of preferred stock
as dividends 2 229 (231)
. Proceeds from issuance and sale of 4,963,500
shares in offshore offering, and issuance of
218,957 shares to placement agent 52 10,087
Proceeds from issuance and sale of 911,657
shares in private placement 9 1,982
Conversion of Series A preferred stock and
issuance of 3,138,900 common shares (125) 31 (161)
Net loss for year (9,412)
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1996 $ -- $ 210 $ 50,655 $(45,142)
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 69
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
Electronic Retailing Systems International, Inc. ("ERS" or the "Company"),
was incorporated in 1993 under the laws of the State of Delaware as a
holding company for the business and assets of Electronic Retailing
Systems International, Inc., incorporated in 1990 under the laws of
Connecticut, and an affiliated partnership. The Company develops and
supplies electronic shelf labeling systems. Electronic shelf labeling
systems replace paper price tags on retail shelves with liquid crystal
display labels and transmit pricing and other information to and from the
aisle. The Company's system is designed to address retailers' needs for
improved pricing accuracy and labor efficiencies by electronically linking
a store's shelves to its POS scanners and central computer. The Company
currently operates in North America.
Note 2 - Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions covering a broad spectrum of the Company's financial
activities, and while the Company believes these estimates to be prudent,
there exists a possibility that unexpected events might affect these
estimates. While actual results could differ from those estimates,
management believes that it is highly unlikely that any one event would
have a material effect on the Company's future operating results.
Cash Equivalents
Cash equivalents consist of short-term, highly-liquid U.S. Treasury Bills
and certificates of deposit with original maturities of less than three
months and are stated at cost, which approximates market. Interest income
is accrued as earned.
Cash and cash equivalents at December 31, 1995 included deposits of
$440,000 held as interest bearing collateral for irrevocable letters of
credit of the same amount relating to future inventory purchases in 1996.
There were no letters of credit outstanding at December 31, 1996.
Investments in Debt Securities
The Company's short-term investments have consisted primarily of corporate
debt obligations. Such investments have had maturities of less than one
year and have yielded interest at prevailing interest rates at the time of
acquisition.
During 1994, realized and unrealized losses totaling $177,000 were
recognized on short-term investments. Realized gains and realized losses
in 1994 totaled $6,000 and $106,000, respectively. There were no
short-term investments at December 31, 1995 and 1996.
F-7
<PAGE> 70
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
Financial instruments include cash, short-term investments consisting of
fixed rate overnight deposits and short-term corporate debt obligations,
letters of credit fully collateralized by cash and cash equivalents,
accrued salaries and expenses, and a convertible long-term note. Financial
instruments are carried at cost which approximates fair market value.
Inventories
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1995
consisted of approximately $674,000 of materials and supplies and
$1,200,000 of finished goods. Inventories at December 31, 1996 consist of
approximately $188,000 of materials and supplies and $633,000 of finished
goods. Inventories in excess of expected requirements due to new product
introductions are expensed currently.
In December 1996, the Company announced its new generation wireless
electronic shelf labeling system. In that connection, the Company assessed
the expected market demand for the new product and the inventory on hand
needed to support its forecasted installations and the maintenance
requirements of its existing installed base and recorded a special
provision for excess inventory of $750,000 in the fourth quarter of 1996.
Charges for excess, slow moving and obsolete inventory for the years 1994,
1995 and 1996 were $93,000, $94,000 and $843,000, respectively.
Equipment
Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of
which exceeds five years.
Product Development Costs
The Company capitalizes product development costs, principally wages and
contractor fees, after establishing commercial and technical viability.
Product development costs are stated at the lower of cost or net
realizable value. These costs are amortized using the straight-line method
over the shorter of the estimated useful life of the product or three
years. Amortization commences when the product is available for general
release to customers. As of December 31, 1995 and 1996, unamortized
capitalized costs of $468,000 and $857,000, respectively, are included as
non-current assets. Amortization expense totaled $7,000 and $203,000 for
1995 and 1996, respectively. There were no amounts capitalized or
amortized in 1994.
Revenue Recognition
Revenue is recognized when the product is shipped or upon completion of
installation of a trial electronic shelf label system, provided that no
significant obligations remain and collection of the resulting receivable
is deemed probable. Revenue from providing installation services to
customers is recognized upon the completion of an installation.
Maintenance revenue for services provided under maintenance contracts is
recognized over the service contract period. Other revenue for parts and
services is recognized when provided.
F-8
<PAGE> 71
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
which requires an asset and liability approach to the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income taxes relate to
timing differences between financial and income tax reporting for stock
option compensation, product development costs, depreciation and other
items.
Earnings Per Share
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents assumed to be outstanding
during the period. Common share equivalents consist of the Company's
common shares issuable upon exercise of stock options and stock purchase
warrants. The computation of net loss per common share does not reflect
common share equivalents that are anti-dilutive.
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), effective for fiscal years beginning after
December 15, 1995. FAS 123 indicates a preference for a fair value based
method of accounting for employee stock options, but allows for
continuation of the intrinsic value based method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB Opinion 25"). The Company adopted FAS 123 effective January 1, 1996
and has chosen to continue its use of the intrinsic value based method of
accounting. (See Note 10).
Note 3 - Related Party Transactions:
The Company incurs certain common costs on behalf of affiliates, which are
reimbursed by the affiliates. The Company subleases a portion of its
headquarters facility to an affiliate. Such common costs, including
sublease payments, amounted to $184,000, $112,000 and $63,000 in 1994,
1995 and 1996, respectively (see Note 8). Unpaid amounts are included in
receivables from affiliates at December 31, 1995 and 1996.
The Company has received consulting services and paid a former member of
its Board of Directors fees of $38,000, $34,000 and $34,000 in 1994, 1995
and 1996, respectively. The Company also received consulting services and
paid fees to another former member of the Board of Directors of $38,000
and $20,000 in 1994 and 1995, respectively.
On March 30, 1995, the Company entered into a revolving credit facility
with its principal stockholders and certain members of its Board of
Directors and their affiliates. On July 24, 1995, in connection with the
sale of preferred stock (see Note 4), $3 million in debt borrowed under
such revolving credit facility was surrendered, and the unused portion of
the facility in the amount of $2 million was terminated. Interest expense
in 1995 on amounts borrowed under the line of credit totaled $52,000, at
an average rate of prime plus 1%. Additionally, a facility fee of $100,000
was paid to the lenders pursuant to the terms of the credit facility.
F-9
<PAGE> 72
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Preferred Stock:
On July 24, 1995, the Company completed a private sale of 85,000 shares of
its newly-created Series A Cumulative, Convertible Preferred Stock, $1.00
par value ("Series A Preferred Stock"), for an aggregate purchase price of
$8.5 million. The purchase price was delivered by surrender of $3 million
of the Company's debt held by the subscribers, which consisted of certain
members of the Company's Board of Directors and their affiliates, and cash
in the amount of $5.5 million. Subsequently in 1995, an affiliate of the
Company's Chairman of the Board, and one of the subscribers, acquired
35,000 additional shares of Series A Preferred Stock at a purchase price
per share of $100.
On July 11, 1996 in connection with the Company's offshore public offering
(see Note 5) and contemporaneous private placement, holders of the
Company's Series A Preferred Stock converted their shares, in accordance
with their terms, into an aggregate of 3,138,900 shares of Common Stock,
$.01 par value ("Common Stock"). In connection with the conversion,
payments aggregating $235,000 were made to the Series A Preferred Stock
holders.
Each share of Series A Preferred Stock entitled the holder to a dividend
of $7.50 per annum, payable quarterly, which would cumulate if not paid.
Dividends were payable by the Company, at its election, in either cash or
in the form of additional shares of Series A Preferred Stock valued at
$100 per share. Dividends paid to holders of record of such stock in 1995
and 1996 were paid in the form of additional shares of Series A Preferred
Stock (aggregating 5,556 shares).
Each share of Series A Preferred Stock, valued at $100, was convertible
into shares of the Company's Common Stock at a conversion price of $4.00
(subject to certain adjustments), and was subject to redemption, at the
option of the Company, at a price of $100 under certain conditions.
Holders of Series A Preferred Stock voted together with holders of Common
Stock, each share carrying one vote, and were entitled to a liquidation
preference of $100 per share.
Note 5 - Common Stock Offering:
On July 11, 1996, the Company completed the offshore public offering of an
aggregate of 4,963,500 shares of its Common Stock, in accordance with
Regulation S under the Securities Act of 1933, and the contemporaneous
private placement to subscribers, including certain members of the
Company's Board of Directors and their affiliates, of an aggregate of
911,657 shares of Common Stock. Net proceeds from these transactions were
approximately $12 million (exclusive of non-cash expenses represented by
the issuance of 218,957 shares of Common Stock as commissions).
F-10
<PAGE> 73
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-Term Liabilities:
On August 12, 1994, the Company completed a financing arrangement with the
Connecticut Development Authority ("CDA"), under which the CDA loaned $2
million to the Company at closing and agreed to loan the Company up to an
additional $3 million through August 12, 1997. At December 31, 1995, $3.35
million was outstanding under such facility, with the remainder of the $5
million credit limit advanced in February 1996. Such indebtedness is
repayable five years after closing, accrues interest, payable monthly, at
a rate of 7.4% per annum, is subject to prepayment without premium at the
option of the Company, and is convertible into shares of the Common Stock
of the Company. Such indebtedness is secured by the Company's assets. The
Company also issued to the CDA warrants to purchase 600,000 shares of
Common Stock. At issuance, the initial conversion price of the debt and
exercise price of the warrants was $13.00 per share which was in excess of
the then market price of the Company's Common Stock of $7.00. Due to the
excess, nominal value was assigned to the warrants.
During 1995, the Company also entered into agreements with the CDA, which
became effective upon consummation of the initial sale of the Company's
Series A Preferred Stock (see Note 4), whereby, through August 12, 1997,
the conversion price of the debt held by the CDA and the exercise price of
its warrants were reduced so as to be calculated as $3.00 plus the average
market price of the Common Stock during the 18 months prior to conversion,
and thereafter as $3.00 plus the average market price of Common Stock
during the twelve months prior to conversion. Pursuant to such agreements,
and as a result of additional provisions contained in the CDA's warrants,
effective upon consummation of the sale of the Preferred Stock, and
issuance of the initial dividend thereon: (i) through August 12, 1997, the
exercise price of the CDA's warrants was reduced so as to be calculated as
$2.58 plus the average market price of the Common Stock during the 18
months prior to exercise, and thereafter as $2.58 plus the average market
price of the Common Stock during the twelve months prior to exercise, and
(ii) the number of shares subject to purchase upon exercise of the CDA's
warrants was adjusted to 699,724.
Note 7 - Customer Information:
All of the Company's sales are to customers in the retail food market
industry. Significant customer sales for the years ended December 31,
1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Customer 1994 1995 1996
-------- ---- ---- ----
<S> <C> <C> <C>
The Stop & Shop Supermarket Company -- -- 46%
Big Y Foods, Inc. -- -- 20%
Shaw's Supermarkets, Inc. -- 26% 13%
H.E. Butt Grocery Co. 14% 30% --
The Vons Companies, Inc. 67% 27% --
</TABLE>
F-11
<PAGE> 74
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable at December 31, 1995 and 1996 are unsecured and
concentrated among major supermarket chains in the United States. If the
customers within this concentration failed to pay according to the terms
of their agreements these receivables would be reduced to nominal value.
Note 8 - Commitments:
The Company leases its facilities under operating lease agreements. During
1994, 1995 and 1996, rental expense amounted to approximately $258,000,
$295,000 and $278,000, respectively.
Future minimum lease payments on a calendar year basis under
non-cancelable leases, as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Total
Commitments
-----------
<S> <C>
1997 $218,000
1998 23,000
--------
$241,000
========
</TABLE>
The Company subleases a portion of its headquarters facility to an
affiliate for which sublease payments were $63,000 in 1996. Future
sublease amounts from its affiliate are $83,000 in 1997.
Note 9 - Research and Development:
Research and development activities were a major component of the
Company's expenditures and efforts during 1994, 1995 and 1996. The
Company's research and development expenses (including the allocation of
salaries) during 1994, 1995 and 1996 were $2,571,000, $2,491,000 and
$1,117,000, respectively.
During 1994 and 1995, the Company had research and development contracts
with unaffiliated parties for both hardware and software elements of its
electronic shelf labeling system. The Company reimbursed these contractors
generally based on milestone achievements or satisfactory performance.
F-12
<PAGE> 75
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Stock Option and Defined Contribution Plans:
The Company has an employee stock option plan whereby options to purchase
shares of Common Stock may be granted to key employees of the Company. In
June 1994 and December 1996, the stockholders approved an increase in the
number of authorized shares of Common Stock available for issuance under
the plan from 850,005 to 1,225,000 and from 1,225,000 to 1,775,000,
respectively. Options granted under the plan typically become exercisable
over a period of four years.
A summary of all option activity pursuant to the employee stock option
plan is as follows:
<TABLE>
<CAPTION>
Price Range Options
----------- -------
<S> <C> <C>
Options outstanding December 31, 1993 $ .01 - $6.00 697,978
--------
Option grants $ .01- $8.50 239,823
Options exercised $ .01 (193,500)
Options canceled $ .01- $6.00 (13,931)
--------
Options outstanding December 31, 1994 $ .01 - $8.50 730,370
--------
Option grants $ .01 - $5.63 480,205
Options exercised $ .01 (27,766)
Options canceled $ .01 - $8.50 (265,080)
--------
Options outstanding December 31, 1995 $ .01 - $6.00 917,729
--------
Option grants $ 1.88 - $2.25 380,784
Options exercised $ .01 (65,860)
Options canceled $ 2.25 - $6.00 (354,161)
--------
Options outstanding December 31, 1996 $ .01 - $5.875 878,492
========
</TABLE>
F-13
<PAGE> 76
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ .01 389,676 5 years $ .01 70,125 $ .01
$1.88-$3.63 371,784 9 $2.25 10,000 $1.88
$5.00-$5.875 117,032 8 $5.05 64,917 $5.09
------- -------
878,492 145,042
======= =======
</TABLE>
Additionally, the Company has a director stock option plan under which
options covering shares of Common Stock may be granted to directors of the
Company. During 1996, 122,500 options were granted to directors of the
Company to purchase an equal number of common shares pursuant to this plan
at option prices ranging from $1.875 to $3.38. In January 1997, the
stockholders approved an increase in the number of authorized shares of
Common Stock available under the plan from 50,000 to 150,000. All such
options remain outstanding as of December 31, 1996.
The Company applies APB Opinion 25 and related interpretations in
accounting for its employee and director stock option plans. The
consolidated statement of operations for the years ended December 31,
1994, 1995 and 1996 includes noncash stock option compensation expense of
$1,119,000, $27,000, and $44,000, respectively, representing compensation
earned for service through the periods then ended related to option
grants. Had compensation expense for the Company's employee and director
stock option plans been determined based on the fair value at the grant
dates of awards under the plans, consistent with FAS 123, the Company's
net loss and net loss per common share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported $(10,868,000) $(9,412,000)
Pro forma $(11,221,000) $(9,412,000)
Net loss per common share:
As reported $(0.95) $(0.60)
Pro forma $(0.98) $(0.60)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for employee and director stock option
grants in 1995 and 1996: dividend yield of 0%; expected volatility of 53%;
risk-free interest rate of 7%; and expected life of 5 years. The weighted
average fair value of employee and director options granted during the
years ended December 31, 1995 and 1996 was $2.98 and $1.31 respectively.
The Company has a defined contribution profit sharing and savings plan
which qualifies under Section 401(k) of the Internal Revenue Code for
employees meeting certain service requirements. Participants may
contribute up to 30% of their gross wages, not to exceed in any given year
a limitation set by Internal Revenue Service regulations (such limitation
was $9,500 in 1996). The plan provides for discretionary matching
contributions, as determined by the Board of Directors, to be made by the
Company. There have been no discretionary amounts contributed to the plan
as of December 31, 1996.
Note 11 - Income Taxes:
The Company has incurred net losses since inception which have generated
net operating loss carryforwards of $43.9 million for federal income tax
purposes. These carryforwards are available to offset future taxable
income and begin to expire in the years 2008 and 1998 for federal and
state income tax purposes, respectively. These losses are subject to
limitation on future years utilization should certain ownership changes
occur.
The net operating loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and
income tax purposes result in a noncurrent deferred tax benefit at
December 31, 1995 and 1996 of $17.5 million and $21.1 million,
respectively. In consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize this deferred tax benefit in the
future, the Company has recorded a valuation allowance of an equal amount
on such dates to fully offset the deferred tax benefit amount.
F-14
<PAGE> 77
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the noncurrent deferred tax asset at December
31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 14,568,000 $ 18,256,000
Stock option compensation 2,904,000 2,566,000
Other 54,000 293,000
------------ ------------
Total deferred tax benefit 17,526,000 21,115,000
Valuation allowance (17,526,000) (21,115,000)
Net noncurrent deferred tax asset $ -- $ --
============ ============
</TABLE>
In 1994, 1995 and 1996 a statutory Federal income tax rate of 34% and a
state income tax rate of 7.6%, net of the Federal tax benefit, was
applicable to the Company. Due to the Company's taxable losses the
effective tax rate was nil in each year.
The financial statement income tax provision differs from income taxes
determined by applying the statutory Federal income tax rate to the
financial statement net loss for the years ended December 31, 1994, 1995
and 1996 as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Tax benefit at Federal statutory rate $ 3,835,000 $ 3,695,000 $ 3,200,000
State income tax benefit, net of
Federal tax charge 856,000 825,000 714,000
Net loss not providing current
year tax benefit (4,358,000) (4,428,000) (3,608,000)
Other (333,000) (92,000) (306,000)
----------- ----------- -----------
Provision for income taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Note 12 - Subsequent Events:
Sale of Senior Discount Notes and Warrants
On January 24, 1997, the Company completed the sale, in a private
offering, of 147,312 Units ("Units") consisting of $147,312,000 principal
amount at maturity of 13-1/4% Senior Discount Notes due February 1, 2004
(the "Notes") together with warrants to purchase an aggregate of 2,538,258
shares of Common Stock, at an exercise price of $5.23 per share,
exercisable from the period commencing on the first anniversary of closing
through February 1, 2004.
The Units were sold to investors at a price aggregating $100 million,
representing a yield to maturity on the Notes of 13-1/4%. No cash interest
will accrue on the Notes prior to February 1, 2000. Interest will be
payable thereafter on February 1 and August 1 of each year commencing
August 1, 2000. The Notes are non-callable prior to February 1, 2001. Upon
specified change in control events, each holder has the right to require
the Company to purchase its Note at a specified price. The net proceeds to
the Company approximated $95 million.
F-15
<PAGE> 78
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The indenture under which the Notes were issued places limitations on
operations and sales of assets by the Company or its subsidiaries,
requires maintenance of certain financial ratios in order for the Company
to incur additional indebtedness (subject to specified exceptions),
requires the delivery by the Company's subsidiaries of guaranties if
specified debt is subsequently incurred by such subsidiaries, and limits
the Company's ability to pay cash dividends or make other distributions to
the holders of its capital stock or to redeem such stock.
Increase in Authorized Shares of Common Stock
On January 13, 1997, the Company's stockholders voted to approve an
increase in the number of authorized shares of Common Stock from
25,000,000 to 35,000,000 shares.
F-16
<PAGE> 79
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 8,198 $101,927
Accounts receivable...................................... 1,061 1,051
Inventories.............................................. 821 645
Prepayments and other current assets..................... 232 371
----------- ------------
Total current assets................................... 10,312 103,994
Equipment..................................................... 2,444 2,643
Accumulated depreciation................................. (1,798) (1,930)
----------- ------------
Net equipment............................................ 646 713
----------- ------------
Other non-current assets...................................... 1,302 5,920
----------- ------------
Total assets.................................................. $ 12,260 $110,627
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.................... $ 1,548 $ 1,562
----------- ------------
Total current liabilities.............................. 1,548 1,562
Long-term debt ............................................... -- --
CDA Note, 7.4%........................................... 4,989 4,989
Senior Discount Notes, 13.25%............................ -- 97,447
----------- ------------
Total long-term debt................................... 4,989 102,436
----------- ------------
Common stock purchase warrants................................ -- 5,100
----------- ------------
Commitments................................................... -- --
----------- ------------
Stockholders' equity
Preferred stock (par value $1.00 per share, 2,000,000
shares authorized, none issued and outstanding)
Common stock (par value $1.00 per share 25,000,000 and
35,000,000 shares authorized, 21,047,106 and 21,078,206
shares issued and outstanding in 1996 and 1997)........ 210 211
Additional paid-in capital............................... 50,655 50,730
Accumulated deficit...................................... (45,142) (49,412)
----------- ------------
Total stockholders' equity............................. 5,723 1,529
----------- ------------
Total liabilities and stockholders' equity.................... $ 12,260 $110,627
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE> 80
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
------- -------
<S> <C> <C>
REVENUES
Product sales................................................ $ 1,048 $ 254
Maintenance.................................................. 173 266
------- -------
Total revenues............................................ 1,221 520
------- -------
COST OF GOODS SOLD
Product sales................................................ 1,244 323
Maintenance.................................................. 200 242
------- -------
Total cost of goods sold.................................. 1,444 565
------- -------
Gross profit (loss).......................................... (223) (45)
------- -------
OPERATING EXPENSES
Selling, general and administrative.......................... 1,696 2,017
Research and development..................................... 313 490
Depreciation and amortization................................ 42 41
------- -------
Total operating expenses.................................. 2,051 2,548
------- -------
Loss from operations......................................... (2,274) (2,593)
------- -------
OTHER INCOME (EXPENSES)
Interest income.............................................. 34 1,046
Interest expense............................................. (87) (2,723)
------- -------
Total other income (expenses)............................. (53) (1,677)
------- -------
NET LOSS..................................................... $(2,327) $(4,270)
======= =======
EARNINGS PER SHARE
Weighted average common shares outstanding................... 11,767 21,055
======= =======
Net loss per common share.................................... $ (0.22) $ (0.20)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE> 81
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss...................................................... $(2,327) $(4,270)
Other adjustments to reconcile net loss to net cash used in
operating activities.......................................... (244) 3,198
-------- --------
Cash used in operating activities........................... (2,571) (1,072)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures.......................................... (76) (199)
Capitalized product development costs......................... (223) (75)
-------- --------
Cash used in investing activities........................... (299) (274)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt.................. 1,650 89,900
Proceeds from issuance of common stock warrants............... -- 5,100
Proceeds from exercise of stock options....................... 1 75
-------- --------
Cash provided by financing activities....................... 1,651 95,075
-------- --------
Net (decrease) increase in cash and cash equivalents.......... (1,219) 93,729
-------- --------
Cash and cash equivalents at beginning of period.............. 3,210 8,198
-------- --------
Cash and cash equivalents at end of period.................... $1,991 $101,927
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE> 82
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Note 1 -- Basis of Consolidation:
Electronic Retailing Systems International, Inc. ("ERS" or the "Company"),
was incorporated in 1993 under the laws of the State of Delaware as a
holding company for the business and assets of Electronic Retailing
Systems International, Inc., incorporated in 1990 under the laws of
Connecticut, and an affiliated partnership. The condensed consolidated
financial statements include the accounts of the Company and all of its
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
Note 2 -- Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of
the results of the interim periods. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results
to be expected for the full year ending December 31, 1997. The
accompanying unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 1996, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Earnings (loss) per common share is computed using the weighted average
number of common shares and common share equivalents assumed to be
outstanding during the period. Common share equivalents consist of the
Company's common shares issuable upon exercise of stock options and stock
purchase warrants. The computation of earnings (loss) per common share
does not reflect common share equivalents that are anti-dilutive.
Note 3 -- Inventories:
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1996
consisted of $188,000 of materials and supplies and $633,000 of finished
goods. Inventories at March 31, 1997 consist of $143,000 of materials and
supplies and $502,000 of finished goods. Inventories in excess of expected
requirements due to new product introductions or product enhancements are
expensed currently.
F-20
<PAGE> 83
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Note 4 -- Sale of Senior Discount Notes and Warrants:
On January 24, 1997, the Company completed the sale, in a private offering
(the "Private Placement"), of 147,312 Units ("Units") consisting of
$147,312,000 principal amount at maturity of 13.25% Senior Discount Notes
due February 1, 2004 (the "Notes") together with warrants (the "Warrants")
to purchase an aggregate of 2,538,258 shares of Common Stock, at an
exercise price of $5.23 per share, exercisable from the period commencing
on the first anniversary of closing through February 1, 2004.
The Units were sold to investors at a price aggregating $100 million,
representing a yield to maturity on the Notes of 13.25%. No cash interest
will accrue on the Notes prior to February 1, 2000. Interest will be
payable thereafter on February 1 and August 1 of each year commencing
August 1, 2000. The Notes are non-callable prior to February 1, 2001. Upon
specified change in control events, each holder has the right to require
the Company to purchase its Notes at a specified price. The net proceeds
to the Company from the sale of the Units approximated $95 million, of
which $5.1 million was attributed to the Warrants based on an estimate of
their fair value.
The indenture under which the Notes were issued places limitations on
operations and sales of assets by the Company or its subsidiaries,
requires maintenance of certain financial ratios in order for the Company
to incur additional indebtedness (subject to specified exceptions),
requires the delivery by the Company's subsidiaries of guaranties if
specified debt is subsequently incurred by such subsidiaries, and limits
the Company's ability to pay cash dividends or make other distributions to
the holders of its capital stock or to redeem such stock.
Note 5 -- New Accounting Standard:
In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 128 "Earnings per Share" ("FAS 128") to
be effective for financial statements for periods ending after December
15, 1997.
The changes required by FAS 128 adjust the calculation of earnings per
share ("EPS") under generally accepted accounting principles in the U.S.
to be more consistent with international standards. Under the new
standard, companies will replace the reporting of "primary" EPS with
"basic" EPS. Basic EPS is calculated by dividing the income available to
common stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock
equivalents. "Fully diluted" EPS will be replaced by "diluted" EPS, which
will be similar to fully diluted EPS as previously computed.
Due to the Company's generation of losses there is no difference
anticipated between "primary" EPS as reported by the Company and "basic"
EPS as computed under FAS 128.
Note 6 -- Subsequent Event:
The Company has engaged Patricof & Co. in connection with certain
corporate finance services and, in addition to fees that become due if
certain transactions are consummated, Patricof's retainer includes
three-year warrants issued in the second quarter exercisable with respect
to 250,000 shares of Common Stock at an exercise price of $5.24 per share.
F-21
<PAGE> 84
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------
TABLE OF CONTENTS
PAGE
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 9
Use Of Proceeds........................................................... 17
Selling Security Holders.................................................. 17
Plan Of Distribution...................................................... 18
Price of Common Stock and Dividend Policy ................................ 19
Capitalization............................................................ 20
Selected Historical Consolidated Financial and
Certain Other Data ..................................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................... 24
Business.................................................................. 33
Management................................................................ 45
Description of the Warrants............................................... 46
Description of Capital Stock.............................................. 52
Certain Federal Income Tax Consequences................................... 53
Legal Matters............................................................. 56
Experts................................................................... 57
Index to Consolidated Financial Statements................................ F-1
================================================================================
ELECTRONIC
RETAILING SYSTEMS
INTERNATIONAL, INC.
WARRANTS TO PURCHASE
2,538,258 SHARES OF
COMMON STOCK AND
2,538,258 SHARES OF
COMMON STOCK, $.01 PAR
VALUE PER SHARE
PROSPECTUS
May , 1997
================================================================================
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the issuance and
distribution of the securities being registered (other than underwriting
accounts and commissions) are estimated to be as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Registration Fee........................................ $ 4,023
Printing Fees........................................... $ 15,000
Legal Fees and Expenses................................. $ 96,000
Accounting Fees and Expenses............................ $ 25,000
Other Fees and Expenses................................. $ 5,000
--------
Total.......................................... $145,023
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the provisions of Paragraph Sixth of the Certificate of
Incorporation of the Company, as amended, and Section 145 of the Delaware
General Corporation Law, the Company is required to indemnify a director or
officer of the Company for expenses arising out of legal proceedings in which
the director or officer became involved by reason of his position as a director
or officer of the Company, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful. In a proceeding to procure a judgment in the
Company's favor, a director or officer may be indemnified for expenses incurred
by him in connection with the defense or settlement of the suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, except that no indemnification shall be permitted
without a court order in respect of any claim, issue, or matter as to which such
director or officer shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company. Indemnification of a
director or officer as provided above, unless court-ordered, shall be made by
the Company only upon a determination that indemnification is proper in a
specific case because the conduct of such director or officer meets the
standards set forth above. Such determination shall be made (i) by a vote of the
majority of a quorum consisting of directors who were not parties to the
proceeding involved, (ii) by independent counsel in a written opinion, or (iii)
by the stockholders of the Company.
Paragraph Seventh of the Certificate of Incorporation of the Company,
as amended, eliminates the personal liability of a director of the Company to
the Company or to any of its stockholders for monetary damages for a breach of
his fiduciary duty as a director, except in the case where the director breached
his duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment of a dividend or
approved a stock repurchase in violation of Delaware corporate law, or obtained
an improper personal benefit.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein:
II-1
<PAGE> 86
Exhibit Number Description
- -------------- -----------
1.1 Purchase Agreement dated as of January 20, 1997 between the
Company and the Initial Purchasers (incorporated by reference
to Exhibit 1.1 to the Company's Registration Statement on Form
S-4 No. 333-21893).
4.1 Warrant Agreement, dated as of January 24, 1997, between the
Company and The American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-4 No. 333-21893).
4.2 Form of Warrant (contained in Warrant Agreement filed as
Exhibit 4.1)
5.1 Opinion of Krugman Chapnick & Grimshaw LLP as to the legality
of the securities being registered hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Principal Subsidiary, Norton Garfinkle, The G/N
Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z. Failing,
Robert D. Power and John Stevens (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Partnership, the Principal Subsidiary, and the
limited partners of the Partnership (incorporated by reference
to Exhibit 10.4 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha, Bruce
F. Failing, Jr., Hanseatic Corporation and Garfinkle Limited
Partnership II (incorporated by reference to Exhibit 5(c) of
the Company's Current Report on Form 8-K dated July 24, 1995).
10.7 Registration Rights Agreement dated as of July 24, 1995 among
the Company, Donald E. Zilkha, Bruce F. Failing, Jr., Hanseatic
Corporation and Garfinkle Limited Partnership II (incorporated
by reference to Exhibit 5(d) of the Company's Current Report on
Form 8-K dated July 24, 1995).
10.8 Lease dated as of June 8, 1992 between the Company (as
assignee) and Wilton Office Associates Limited Partnership
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 33-59486).
II-2
<PAGE> 87
Exhibit Number Description
- -------------- -----------
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc. (incorporated
by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company
and Telepanel Systems, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12, 1994
among the Company, the Principal Subsidiary and the Connecticut
Development Authority (incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.12 7.4% Convertible Note dated August 12, 1994 executed by the
Company and the Principal Subsidiary to the Connecticut
Development Authority (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by the
Company to the Connecticut Development Authority (incorporated
by reference to Exhibit 10(c) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994).
10.14 Conditional Assignment and Security Agreement dated August 12,
1994 among the Company, the Principal Subsidiary and the
Connecticut Development Authority (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995
between the Company and the lenders named in Annex 1
(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited
(incorporated by reference to Exhibit 5(c) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2,
1996 between the Company and Henderson Crosthwaite
Institutional Brokers Limited (incorporated by reference to
Exhibit 5(d) to the Company's Current Report on Form 8-K dated
July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K dated July 11, 1996).
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.20 Indenture, dated as of January 24, 1997, between the Company
and United States Trust Company of New York (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 No. 333-21893).
II-3
<PAGE> 88
Exhibit Number Description
- -------------- -----------
10.21 Form of Note (contained in Indenture filed as Exhibit 10.20)
10.22 Promissory Note dated October 7, 1992 of Paul M. Patrick in
favor of the Company (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.23 Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan. (incorporated by reference to Exhibit 10.23
to the Company's Registration Statement on Form S-4 No.
333-21893)
10.24 Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan. (incorporated by reference to Exhibit 10.24
to the Company's Registration Statement on Form S-4 No.
333-21893)
11.1 Statement of Computation of Net Loss Per Common Share
(incorporated by reference to Exhibit 11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Exhibit 12.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Krugman Chapnick & Grimshaw LLP (included in
Exhibit 5.1 filed herein).
24.1** Power of Attorney.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
- ----------
** Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
II-4
<PAGE> 89
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(2)(ii) above do not apply
if the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Company pursuant to section 13 or section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Wilton, State of Connecticut, on May 22, 1997.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By: /s/ William B. Fischer
-------------------------------------------
William B. Fischer, Vice President, Finance
and Principal Financial Officer and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Vice Chairman of the Board and May 22, 1997
- --------------------------------- Principal Executive Officer
Bruce F. Failing, Jr.
/s/ William B. Fischer Vice President, Finance and May 22, 1997
- --------------------------------- Principal Financial Officer and
William B. Fischer Accounting Officer
* Director May 22, 1997
- ---------------------------------
Paul A. Biddelman
* Director May 22, 1997
- ---------------------------------
David Diamond
* Director May 22, 1997
- ---------------------------------
Norton Garfinkle
* Director May 22, 1997
- ---------------------------------
George B. Weathersby
* Director May 22, 1997
- ---------------------------------
Donald E. Zilkha
</TABLE>
By /s/ William B. Fischer *
--------------------------------------
(William B. Fischer, Attorney-in-fact)
II-6
<PAGE> 91
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1.1 Purchase Agreement dated as of January 20, 1997 between the
Company and the Initial Purchasers (incorporated by reference
to Exhibit 1.1 to the Company's Registration Statement on Form
S-4 No. 333-21893).
4.1 Warrant Agreement, dated as of January 24, 1997, between the
Company and The American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-4 No. 333-21893).
4.2 Form of Warrant (contained in Warrant Agreement filed as
Exhibit 4.1)
5.1 Opinion of Krugman Chapnick & Grimshaw LLP as to the legality
of the securities being registered hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Principal Subsidiary, Norton Garfinkle, The G/N
Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z. Failing,
Robert D. Power and John Stevens (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among the
Company, the Partnership, the Principal Subsidiary, and the
limited partners of the Partnership (incorporated by reference
to Exhibit 10.4 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha, Bruce
F. Failing, Jr., Hanseatic Corporation and Garfinkle Limited
Partnership II (incorporated by reference to Exhibit 5(c) of
the Company's Current Report on Form 8-K dated July 24, 1995).
10.7 Registration Rights Agreement dated as of July 24, 1995 among
the Company, Donald E. Zilkha, Bruce F. Failing, Jr., Hanseatic
Corporation and Garfinkle Limited Partnership II (incorporated
by reference to Exhibit 5(d) of the Company's Current Report on
Form 8-K dated July 24, 1995).
E-1
<PAGE> 92
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.8 Lease dated as of June 8, 1992 between the Company (as
assignee) and Wilton Office Associates Limited Partnership
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc. (incorporated
by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company
and Telepanel Systems, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12, 1994
among the Company, the Principal Subsidiary and the Connecticut
Development Authority (incorporated by reference to Exhibit
10(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.12 7.4% Convertible Note dated August 12, 1994 executed by the
Company and the Principal Subsidiary to the Connecticut
Development Authority (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by the
Company to the Connecticut Development Authority (incorporated
by reference to Exhibit 10(c) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994).
10.14 Conditional Assignment and Security Agreement dated August 12,
1994 among the Company, the Principal Subsidiary and the
Connecticut Development Authority (incorporated by reference to
Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995
between the Company and the lenders named in Annex 1
(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited
(incorporated by reference to Exhibit 5(c) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2,
1996 between the Company and Henderson Crosthwaite
Institutional Brokers Limited (incorporated by reference to
Exhibit 5(d) to the Company's Current Report on Form 8-K dated
July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K dated July 11, 1996).
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on
Form 8-K dated July 11, 1996).
E-2
<PAGE> 93
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.20 Indenture, dated as of January 24, 1997, between the Company
and United States Trust Company of New York (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 No. 333-21893).
10.21 Form of Note (contained in Indenture filed as Exhibit 10.20)
10.22 Promissory Note dated October 7, 1992 of Paul M. Patrick in
favor of the Company (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.23 Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan. (incorporated by reference to Exhibit 10.23
to the Company's Registration Statement on Form S-4 No.
333-21893)
10.24 Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan. (incorporated by reference to Exhibit 10.24
to the Company's Registration Statement on Form S-4 No.
333-21893)
11.1 Statement of Computation of Net Loss Per Common Share
(incorporated by reference to Exhibit 11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Exhibit 12.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996).
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Krugman Chapnick & Grimshaw LLP (Included in
Exhibit 5.1 filed herein).
24.1** Power of Attorney.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
- -------------
** Previously filed.
E-3
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Krugman Chapnick & Grimshaw LLP)
May 22, 1997
Electronic Retailing Systems
International, Inc.
372 Danbury Road
Wilton, Connecticut 06897
Dear Sirs:
We have acted as counsel for Electronic Retailing Systems International,
Inc., a Delaware corporation (the "Company"), in connection with the
registration statement on Form S-2 (No. 333-21879) (the "Registration
Statement") filed under the Securities Act of 1933 with respect to: (i) the sale
by selling security holders of up to 147,312 warrants (the "Warrants") to
purchase an aggregate of 2,538,258 shares (the "Warrant Shares") of the
Company's common stock, $.01 par value (the "Common Stock"), issued by the
Company pursuant to a warrant agreement dated as of January 24, 1997 (the
"Warrant Agreement") between the Company and American Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent"), and (ii) the issuance of the
shares of Common Stock upon exercise of the Warrants.
In connection with the Registration Statement, we have examined
originals or copies, certified or otherwise identified to our satisfaction, of
such documents and such questions of law as we have deemed necessary or
appropriate for purposes of this opinion. On the basis of such examination, we
advise you that in our opinion:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware;
(ii) The Warrants have been duly and validly authorized and,
<PAGE> 2
assuming issuance thereof and payment therefor in accordance with
resolutions duly adopted by the Board of Directors of the Company and
the terms of the Warrant Agreement, are duly and validly issued and
constitute valid and binding obligations of the Company entitled to the
benefits provided in the Warrant Agreement; and
(iii) The Warrant Shares initially exercisable upon the
exercise of Warrants have been duly and validly authorized and reserved
for issuance upon such exercise and, when issued upon such exercise in
accordance with the terms of the Warrants and the Warrant Agreement and
at the purchase price therein provided for, will be duly and validly
issued, fully paid and non-assessable;
This opinion is not rendered with respect to any laws other than the
laws of the State of New York, the General Corporation Law of the State of
Delaware and the federal laws of the United States.
We express no opinion herein as to the applicability or effect of (i)
any bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, or (ii) general
principles of equity, including, without limitation, concepts of
reasonableness, materiality, good faith and fair dealing and the possible
unavailability of specific performance, injunctive relief or other equitable
remedies, regardless of whether enforceability is considered in a proceeding in
equity or at law.
Notwithstanding any other matter set forth herein, we express no
opinion herein with respect to or under the Investment Company Act of 1940 or
any "blue sky" or state securities laws, or any rules and regulations
thereunder, or the effects of any such provision.
To the extent that matters of fact are involved in the conclusions
expressed in the opinions set forth above, such opinions are based upon
certificates and statements of public officials and of officers of the Company,
without independent investigation by us. In rendering the foregoing opinions,
we have also assumed the genuineness of all signatures on documents not signed
in our presence, the authenticity of all documents submitted to us as
originals, the conformity with the originals submitted to us as copies, and the
due authorization, execution and delivery of the Warrant Agreement by the
Warrant Agent.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement.
Very truly yours,
Krugman Chapnick & Grimshaw LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-2 of Electronic Retailing Systems
International, Inc. (the "Company") of our report dated March 20, 1997 relating
to the consolidated financial statements of the Company, which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Stamford, Connecticut
May 22, 1997
