<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO BE EXERCISE PRICE PER AGGREGATE EXERCISE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED WARRANT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Warrants each to purchase 17.23 147,312 Warrants $90.11 $13,274,284.32 $4,023(1)
shares of Common Stock, par value
$.01 per share......................
------------------------------------- -------------------- -------------------- -------------------- --------------------
Common Stock, par value $.01 per 2,538,258(2) -- -- (3)
share...............................
------------------------------------- -------------------- -------------------- -------------------- --------------------
</TABLE>
(1) Calculated pursuant to Rule 457(g). The Warrants have an exercise price
of $5.23 per share.
(2) Subject to adjustment pursuant to anti-dilution provisions.
(3) Pursuant to Rule 457(g), no separate registration fee is required for the
securities to be issued upon the exercise of the Warrants.
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
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> 3
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> 4
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 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.
The date of this Prospectus is March ___, 1997.
<PAGE> 5
2
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,
1995, as amended by Amendment No. 1 thereto;
(ii) the Company's Quarterly Reports on Form 10-Q, respectively, for the three
months ended March 31, 1996, the six months ended June 30, 1996 and, as amended
by Amendment No. 1 thereto, the nine months ended September 30, 1996; and
(iii) the Company's Current Reports on Form 8-K dated, respectively, June 20,
1996, July 11, 1996, December 18, 1996, December 20, 1996, January 24, 1997 and
February 7, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents.
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> 6
3
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 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
to replace paper price tags on retail shelves with electronic liquid crystal
display units and to provide 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. 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 a
supermarket with 15,000 ESLs that changes 2,500 to 4,500 prices per week could,
under the Company's proposed Tolling Plan (as defined), realize annual net cost
savings and benefits of approximately $40,000 to approximately $240,000 per
store through the anticipated level of usage of the full suite of applications
afforded by the ERS ShelfNet System. However, there can be no assurance that any
such cost savings or benefits will be realized by any customer. See "Risk
Factors -- Use of Assumptions to Estimate Net Cost Savings and Benefits".
As of November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including stores owned by such leading supermarket chains as
The Vons Companies, Inc. ("Vons"), Stop & Shop Supermarket Company, H.E. Butt
Grocery Co. ("HEB"), Big Y Foods, Inc., Shaw's Supermarkets, Inc. ("Shaw's"),
Lucky
<PAGE> 7
4
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 September 30,
1996, of the approximately 29,800 supermarkets in the United States,
approximately 115 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 plans in the first quarter
of 1997 to introduce enhancements to the ERS ShelfNet System that provide 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, ERS
has signed a non-binding letter of intent (the "Letter of Intent") with the
Overwaitea Food Group, a leading Canadian supermarket operator, providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. The Letter of Intent is subject to numerous conditions,
including negotiation and execution of a definitive contract.
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. As a result, the Company believes that retailers have
compared potential investments in the ERS ShelfNet System to alternative uses of
capital, such as store acquisitions and improvements. The Company now intends
also to offer the ERS ShelfNet System on a fee based, or "tolling", arrangement
(the "Tolling 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. As a result, the Company
believes that the Tolling Plan will increase market acceptance of the ERS
ShelfNet System.
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
The Company plans to introduce enhancements to the ERS ShelfNet System
that provide 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
ERS has signed a non-binding Letter of Intent with the Overwaitea Food
Group providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997. The Company also is pursuing other such
arrangements with other leading U.S. supermarket operators. The Letter of Intent
is, and all such additional arrangements, if any, will be, subject to numerous
conditions, including negotiation and execution of definitive contract terms.
See "Business -- Marketing and Sales" for a description of the terms to be
proposed initially by the Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock and
the contemporaneous private placement of Common Stock to subscribers, including
members of the Company's Board of Directors (the "Board of Directors") and their
affiliates. In January
<PAGE> 8
5
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 to focus its initial marketing efforts under the Tolling Plan on the
supermarket sector of the retail industry, to continue to reduce the
manufacturing costs of the system to improve the Company's profitability and to
continue to enhance, develop and support value-added applications of the ERS
ShelfNet System.
- Tolling Plan. The Company believes that its Tolling 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 a portion of the
proceeds from the Private Placement (as defined) to install
the ERS ShelfNet System in the supermarkets covered by the
Letter of Intent and for other retailers under the Tolling
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 the installed base of the ERS ShelfNet
System in supermarkets, as well as 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
September 30, 1996, of the approximately 29,800 supermarkets
in the United States, approximately 115 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 Tolling 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 enhanced system (and
install additional systems), the Company intends to develop
additional 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> 9
6
THE OFFERING
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
10.67% 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 February 14, 1997, 147,312
Warrants were outstanding.
Common Stock Outstanding................ As of February 12, 1997,
21,254,756 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.
For additional information concerning the Warrants, see "Description of the
Warrants."
<PAGE> 10
7
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
8
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect summary historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following summary historical consolidated statement of operations
data, insofar as it relates to each of the years 1991-1995, has been derived
from audited annual consolidated financial statements, including the
consolidated statement of operations for the three years ended December 31, 1995
and the notes thereto included elsewhere in this Prospectus. The summary
historical consolidated statement of operations data for the nine months ended
September 30, 1995 and 1996 and the summary historical consolidated balance
sheet data as of September 30, 1996 have been derived from unaudited condensed
consolidated financial statements also included elsewhere in this Prospectus and
which, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the unaudited interim periods. The unaudited interim period results are not
necessarily indicative of the results to be expected for the full year. For a
discussion of factors affecting the comparability of this data, see "Selected
Historical Consolidated Financial and Certain Other Data".
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ------------------------------
1991 1992 1993(1) 1994 1995 1995 1996
------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues ........................ $ 102 $ 941 $ 1,122 $ 2,376 $ 2,973 $ 1,903 $ 4,270
Loss from operations ............ (5,685) (9,420) (16,518) (11,324) (10,717) (8,159) (6,424)
Net loss(2) ..................... (6,206) (9,533) (15,997) (11,278) (10,868) (8,295) (6,528)
Net loss per common share(3) .... -- -- (1.40) (0.97) (0.95) (0.72) (0.47)
Weighted average number of common
shares outstanding(4) ........
-- -- 11,461 11,682 11,743 11,741 14,528
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
ACTUAL AS ADJUSTED(5)
--------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital $12,091 $107,091
Total assets...... 14,465 114,465
Long-term debt.... 4,987 99,887
Warrants to purchase common stock -- 5,100
Stockholders' equity 8,596 8,596
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- --------------------
1991 1992 1993(1) 1994 1995 1995 1996
------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6)....................... $(5,556) $ (8,371) $(15,290) $(10,839) $(10,114) $ (7,735) $ (5,706)
Cash flows from operating (5,267) (8,133) (11,855) (10,026) (11,160) (8,253) (6,327)
activities...................
Cash flows from investing (449) (324) (8,641) 6,737 100 662 (758)
activities...................
Cash flows from financing 5,633 12,866 18,606 1,901 13,139 11,935 13,526
activities...................
Depreciation and amortization... 140 240 367 374 463 337 539
Capital expenditures............ 449 324 574 303 452 287 245
Deficiency of earnings to fixed
charges(7)...................
(6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
Pro forma deficiency of earnings
to fixed charges(8).......... -- -- -- -- (26,000) -- (17,767)
Stores with ERS ShelfNet System
installed at end of period...
-- 7 13 21 42 33 64
</TABLE>
<PAGE> 12
9
- ---------------------------
(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. See Note
3 of the Notes to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
(2) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(3) Net loss per common share data for periods prior to December 31, 1993 has
not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common share equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not reflect
common share equivalents that are anti-dilutive.
(5) As adjusted to give effect to the Private Placement and the application of
the net proceeds therefrom.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because the Company believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of the
operating performance of the Company or other consolidated operations or
cash flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
For the years ended December 31, 1993 and 1994, EBITDA included non-cash
charges for stock option compensation expense of $7.5 million and $1.1
million, respectively; for the year ended December 31, 1995 and for the
nine months ended September 30, 1995 and 1996, such amounts were not
material.
(7) For purposes of determining the deficiency of earnings to fixed charges,
"earnings" consist of earnings before fixed charges and "fixed charges"
consist of interest on all debt and that portion of rental expense that the
Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to
give effect to the Private Placement and the application of the net
proceeds therefrom.
<PAGE> 13
10
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 ENHANCED SYSTEM
In December 1996, ERS announced that, in the first quarter of 1997, it
plans to introduce enhancements to the ERS ShelfNet System that provide spread
spectrum microwave transmission of data directly to wireless ESLs. Although
laboratory testing of the enhanced system is complete and field testing of the
enhanced system hardware has been initiated, there can be no assurance that the
enhanced ERS ShelfNet System will be introduced as proposed, 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. In addition, although laboratory testing of the value-added
applications of the enhanced system has been completed, there can be no
assurance that such applications will function in actual retail usage. If the
enhanced 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 planned introduction of the enhanced 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. Although the unrecoverable amount of such assets is not
currently known, it may represent a significant portion of the Company's present
inventories.
USE OF ASSUMPTIONS TO ESTIMATE NET COST SAVINGS AND BENEFITS
As noted above, demand for the ERS ShelfNet System will be affected by,
among other things, the actual savings and benefits experienced by the
individual stores using the ERS ShelfNet System. Estimates of the potential for
such savings and benefits used in this Prospectus are based on a number of
assumptions made by the Company, including, for example, the assumed average
cost of labor, other assumed average supermarket operating data and the assumed
usage of the system's applications by retailers. Because the market for ESL
systems is in the development stage, these estimates are based on information
and studies which may not be representative of the overall retail market for ESL
systems and may overstate the cost savings and benefits that retailers are able
to achieve in actual practice. Moreover, these estimates are not based on actual
results obtained by any particular retailer using the ERS ShelfNet System and
are inherently subject to business and economic uncertainties. There can be no
assurance, therefore, that the estimated cost savings and benefits will actually
be achieved by any particular
<PAGE> 14
11
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
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 September
30, 1996, the Company had a cumulative net loss of approximately $62.9 million
(which includes non-cash charges in the amount of $8.6 million for stock option
compensation expense). See "Selected Historical Consolidated Financial and
Certain Other Data". Losses and negative cash flow from operations will continue
while the Company concentrates on such activities and until it has established a
sufficient revenue-generating customer base, if ever. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" regarding anticipated decreases in revenue for
the fourth quarter of 1996. 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 a majority of the proceeds of the
Private Placement to provide the capital necessary to permit the Company to
offer the ERS ShelfNet System pursuant to the Tolling 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, the
Letter of Intent is not a binding obligation and, in any case, is subject to
numerous conditions, including the negotiation and execution of a definitive
contract. There can be no assurance that the arrangements contemplated by the
Letter of Intent will be consummated.
Even if the Company provides the ERS ShelfNet System to the stores
contemplated by the Letter of Intent, the Company may not be able to obtain
other customers or install systems in more stores pursuant to the Tolling Plan
or otherwise. In addition, under the Tolling Plan a customer may elect to
terminate its usage of the ERS ShelfNet System after only one year. If the
Company is not able to consummate the arrangements contemplated by the Letter of
Intent or if the Company is not able to obtain other significant contracts to
provide the ERS ShelfNet System or if the use of the ERS ShelfNet System is
terminated by its customers after only an initial period, the Company's business
and results of operations will be materially adversely affected.
SUBSTANTIAL LEVERAGE; DEBT SERVICE REQUIREMENTS
As a result of the Private Placement, the Company is highly leveraged
with indebtedness that is substantial in relation to its stockholders' equity.
On a pro forma basis as of September 30, 1996, the Company had an estimated
total outstanding indebtedness of approximately $99.9 million, including $94.9
million with respect to the Notes, and the Company would have had total
stockholders' equity of $8.6 million. On a pro forma basis, after giving effect
to the Private Placement as if the Private Placement had occurred on January 1,
1995, for the year ended December 31, 1995, and on January 1, 1996, for the nine
months ended September 30, 1996, the Company's earnings would have been
insufficient to cover fixed charges by $26.0 million and $17.8 million,
respectively.
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
<PAGE> 15
12
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".
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
<PAGE> 16
13
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 September 30, 1996, after giving pro forma effect to
the Private Placement, the Company's subsidiaries (including the Principal
Subsidiary, as co-borrower under the CDA Note) had in aggregate $5.0 million of
long-term indebtedness outstanding (exclusive of (i) the Notes and (ii)
indebtedness to the Company in the amount of $37 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 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
<PAGE> 17
14
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, 1995, 83% of the Company's revenues
was attributable to purchases by three supermarket chains, and, in 1993 and
1994, 82% and 81%, respectively, of the Company's revenues were attributable to
purchases by two supermarket chains (aggregating four 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. The Company's prior arrangements with a principal customer with respect
to proposed sales of the ERS ShelfNet System expired during the fourth quarter
of 1996. Although the Company is engaged in discussions regarding a new
arrangement with such customer and the replacement of an additional supermarket
arrangement relating to system sales, there can be no assurance that any such
arrangements will be consummated. Additionally, customers who account for
significant portions of the Company's revenues may have the ability to negotiate
prices for the Company's products and services that are more favorable to such
customers and that result in lower profit margins for the Company. See "Business
- -- Customers".
ABILITY TO MANAGE GROWTH
If the ERS ShelfNet System is installed in the stores contemplated by
the Letter of Intent and the Company is able to obtain significant orders from
other large retailing chains, the Company will experience rapid growth, which in
turn will place significant pressure on the Company's managerial, operational
and financial resources. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base, and any inability of the Company to attract and
retain the executive and managerial personnel required by its expanding business
could have a material adverse effect on the Company's business operating results
and financial condition. The Company will also be required to develop and manage
multiple relationships with various customers, business partners and other third
parties. The Company's systems, procedures or controls may not be adequate to
support the Company's operations, and Company management may not be able to
achieve the rapid expansion necessary to exploit potential market opportunities
for the Company's products and services. The Company's future operating results
will also depend on its ability to expand its sales and marketing, and research
and development, organizations, to implement and manage new distribution
channels, to penetrate markets and to expand its support organization.
Furthermore, there can be no assurance that the Company will be successful in
procuring expanded third party sources for the manufacture and assembly of the
components of the ERS ShelfNet System, in expanding the capabilities of its
personnel and subcontractors engaged in the installation and servicing of its
system or in lowering the costs of manufacturing, installing or maintaining its
system. In addition, any anticipated expansion of the Company's marketing
efforts outside of the United States will expose the Company to the economic,
political and regulatory environments within the countries in which the
Company's new and potential customers are located, which may be more restrictive
or burdensome than those in the United States and with which the Company may be
unfamiliar.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on its ability to recruit, retain and motivate
high quality personnel, including technical employees, competition for whom is
intense. Any inability of new management to adjust quickly to, and perform as
expected in, their respective roles within the Company, or any inability of the
Company to attract and retain personnel with the requisite skills, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management".
<PAGE> 18
15
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.
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 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 September 30, 1996, the Company had net operating loss
carryforwards ("NOLs") of approximately $42 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
<PAGE> 19
16
"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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" regarding anticipated
decreases in revenue for the fourth quarter of 1996. 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. In the event the Tolling Plan is implemented
as proposed, the Company does not anticipate that it will be able to maintain
$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
<PAGE> 20
17
provisions of the 1940 Act. Since the filing of the Application, the Company has
automatically been exempt from regulation under the 1940 Act, and will continue
to be exempt for a period of 60 days from such filing, as provided under Section
3(b)(2) of the 1940 Act. The Company does not intend to register as an
investment company in reliance upon this temporary exemption and in the
expectation that an exemptive order will be granted. However, there is no
assurance that any such order will be granted or if granted will be granted
prior to the expiration of such 60 day period. The staff of the SEC 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 following the expiration
of the 60 day automatic exemption if a Company's bona fide application for an
exemptive order is pending.
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 SEC 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.
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 - Tolling 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.
<PAGE> 21
18
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
Company's outstanding warrants that were acquired in the Private Placement and
the Common Stock issuable upon the exercise of such warrants 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:
<TABLE>
<CAPTION>
COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS WARRANTS
- -----------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
BENEFICIALLY OWNED BENEFICIALLY BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME OF SELLING PRIOR TO THIS OFFERED OWNED AFTER PRIOR TO THIS OFFERED AFTER THIS OFFERING
SECURITYHOLDER OFFERING FOR SALE THIS OFFERING OFFERING FOR SALE
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
SHARES OF SHARES OF SHARES
SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
[To be filed by amendment.]
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.
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> 22
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 January 20, 1997, the number of record holders of the
Company's Common Stock was 357.
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
1996 HIGH LOW
First Quarter................................... $ 3.25 $ 1.63
Second Quarter.................................. 2.38 1.63
Third Quarter................................... 4.13 1.63
Fourth Quarter.................................. 4.25 2.63
1997 HIGH LOW
First Quarter (through January 20, 1997)........ $ 4.94 $ 3.38
</TABLE>
On February 12, 1997 the reported closing price per share was $6.25.
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.
<PAGE> 23
20
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of the Company as of September 30, 1996, and as adjusted to give
effect to the Private Placement and the application of the net proceeds
therefrom. The table should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------
AS
ACTUAL ADJUSTED
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................... $ 9,651 $ 104,651
======== =========
Long-term debt
$ 4,987 $ 4,987
CDA Note.................................
13 1/4% Senior Discount Notes Due 2004... -- 94,900
-------- ---------
Total long-term debt..................... 4,987 99,887
-------- ---------
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;
25,000,000 shares authorized; 21,034,195
issued and outstanding)(2)(3).......... 210 210
Additional paid-in capital............... 50,644 50,644
Accumulated deficit...................... (42,258) (42,258)
-------- ---------
Total stockholders' equity............. 8,596 8,596
-------- ---------
Total capitalization................. $ 13,583 $ 113,583
======== =========
</TABLE>
- ---------------------------
(1) Reflects the $5.1 million ascribed to the Warrants issued in connection
with the Private Placement. No assurance can be given that the value
allocated to the Warrants is indicative of the price at which the Warrants
may actually trade.
(2) In January 1997, the stockholders of the Company authorized an amendment to
the Company's certificate of incorporation increasing the number of
authorized shares of Common Stock from 25,000,000 shares to 35,000,000
shares.
(3) On December 17, 1996, the Company had 21,047,106 shares of Common Stock
outstanding, which did not include (i) 2,538,258 shares of Common Stock
initially reserved for issuance upon exercise of the Warrants, (ii)
1,047,492 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) 816,993 shares of Common
Stock (computed as of January 20, 1997) issuable upon conversion of the CDA
Note (as defined); and (v) 50,000 shares of Common Stock subject to
purchase through June 1998 upon the exercise of additional warrants issued
by the Company.
<PAGE> 24
21
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 1991-1995,
has been derived from audited annual consolidated financial statements,
including the consolidated balance sheet at December 31, 1994 and 1995 and the
related consolidated statement of operations for the three years ended December
31, 1995 and the notes thereto included elsewhere in this Prospectus. The
selected historical consolidated statement of operations data for the nine
months ended September 30, 1995 and 1996 and the selected historical
consolidated balance sheet data as of September 30, 1996 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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
SEPTEMBER 30,
-------- -------- --------- --------- --------- --------- ---------
1991 1992 1993(1) 1994 1995 1995 1996
-------- -------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues........................... $ 102 $ 941 $ 1,122 $ 2,376 $ 2,973 $ 1,903 $ 4,270
Cost of goods sold................. 878 2,373 1,718 3,822 4,113 2,763 4,673
-------- -------- --------- --------- --------- -------- --------
Gross profit (loss)............. (776) (1,432) (596) (1,446) (1,140) (860) (403)
-------- -------- --------- --------- --------- -------- --------
Operating expenses:
Selling, general and 3,207 4,628 5,966 6,039 6,952 5,044 5,080
administrative................
Research and development........ 1,627 2,503 2,325 2,571 2,491 2,094 786
Stock option compensation(2).... -- -- 7,454 1,119 27 80 32
Patent license fee.............. -- 700 -- -- -- -- --
Depreciation and amortization... 75 157 177 149 107 81 123
-------- -------- --------- --------- --------- -------- --------
Total operating expenses...... 4,909 7,988 15,922 9,878 9,577 7,299 6,021
-------- -------- --------- --------- --------- -------- --------
Loss from operations.......... (5,685) (9,420) (16,518) (11,324) (10,717) (8,159) (6,424)
-------- -------- --------- --------- --------- -------- --------
Other income (expenses):
Interest income................. -- 44 438 288 134 82 179
Interest expense................ (510) (922) (340) (65) (291) (223) (283)
Gain (loss) on short-term -- -- -- (177) 6 5 --
investments.....................
Other........................... (11) (66) -- -- -- -- --
Total other income (expenses). (521) (944) 98 46 (151) (136) (104)
-------- -------- --------- --------- --------- -------- --------
Loss before minority interest in (6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
consolidated affiliate........
Minority interest in loss of -- 831 423 -- -- -- --
consolidated affiliate........
Net loss(3)................... $ (6,206) $ (9,533) $ (15,997) $ (11,278) $ (10,868) $ (8,295) $ (6,528)
======== ======== ========= ========= ========= ======== ========
Earnings per share:
Weighted average number of
common shares outstanding(4).. 11,461 11,682 11,743 11,741 14,528
========= ========= ========= ======== ========
Net loss per common share(5)....... $ (1.40) $ (0.97) $ (0.95) $ (0.72) $ (0.47)
========= ========= ========= ======== ========
</TABLE>
<PAGE> 25
22
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------
1991 1992 1993(1) 1994 1995 1996
------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital (deficiency)... $ (670) $ 2,800 $ 11,642 $ 3,452 $ 5,283 $ 12,091
Total assets....................... 1,082 5,445 13,241 5,195 8,316 14,465
Long-term debt..................... 8,996 14,199 -- 1,981 3,335 4,987
Minority interest in consolidated -- 8,531 -- -- -- --
affiliate..........................
Stockholders' equity (deficiency).. (9,230) (19,374) 12,405 2,268 3,215 8,596
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
SEPTEMBER 30,
-------- -------- --------- --------- --------- -------- --------
1991 1992 1993(1) 1994 1995 1995 1996
-------- -------- --------- --------- --------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6).......................... $ (5,556) $ (8,371) $ (15,290) $ (10,839) $ (10,114) $ (7,735) $ (5,706)
Cash flows from operating activities (5,267) (8,133) (11,855) (10,026) (11,160) (8,253) (6,327)
Cash flows from investing activities (449) (324) (8,641) 6,737 100 662 (758)
Cash flows from financing activities 5,633 12,866 18,606 1,901 13,139 11,935 13,526
Depreciation and amortization...... 140 240 367 374 463 337 539
Capital expenditures............... 449 324 574 303 452 287 245
Deficiency of earnings to fixed
charges(7)......................
(6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
Pro forma deficiency of earnings to
fixed charges(8)................
-- -- -- -- (26,000) -- (17,767)
Stores with ERS ShelfNet System
installed at end of period......
-- 7 13 21 42 33 64
</TABLE>
- ---------------------------
(1) Reflects the consummation of the Combination immediately prior to the
closing of the Initial Public Offering.
(2) The non-cash compensation expense recognized for 1993 included compensation
earned for services prior to the Combination and compensation earned for
the period subsequent to the Combination through December 31, 1993.
Compensation expense recognized in 1994 and 1995 and the first nine months
of 1996 related to services provided by employees during those periods.
(3) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common stock equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not reflect
common share equivalents that are anti-dilutive.
(5) Net loss per common share data for periods prior to December 31, 1993 has
not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because the Company believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of the
operating performance of the Company or other consolidated operation or
cash flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
For the years ended December 31, 1993 and 1994, EBIDTA included non-cash
charges for stock option compensation expense of $7.5 million and $1.1
million, respectively; for the year
<PAGE> 26
23
ended December 31, 1995 and for the nine months ended September 30, 1995
and 1996, such amounts were not material.
(7) For purposes of determining the deficiency of earnings to fixed charges,
"earnings" consist of earnings before fixed charges and "fixed charges"
consist of interest on all debt and that portion of rental expense that the
Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to
give effect to the Private Placement and the application of the net
proceeds therefrom.
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 September 30, 1996, approximately 115 stores in the United
States were operating such systems, out of a potential market in excess of
100,000 supermarkets and other stores. Large supermarket chains have tested the
productivity benefits as well as the technical functionality of ESL systems in
pilot stores, as a result of which the Company believes they are in a position
to consider rolling out the systems. The Company's objective is to be the
worldwide leader in the emerging ESL system market as product adoption and
penetration increases.
Because the market for ESL systems is in the development stage, market
acceptance of and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at and extent to
which retailers choose to install ESL systems throughout their stores. The
initial acceptance and rate of installation by retailers may be affected by
numerous factors beyond the Company's control, including the customer's
assessment of the benefits of and the need for ESL systems and the customer's
available capital resources.
Since its inception in April 1990, the Company has been engaged
primarily in the development, design, market testing and, more recently, sale of
the ERS ShelfNet System. The Company subcontracts to third parties the
manufacture and assembly of the components comprising the ERS ShelfNet System.
In addition, the Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued development of the ERS
ShelfNet System. Since inception and through September 30, 1996, the Company has
generated cumulative revenues of $11.8 million, and has incurred a cumulative
net loss of approximately $62.9 million, which includes non-cash charges in the
amount of $8.6 million for stock option compensation expense.
The Company historically has marketed the ERS ShelfNet System for sale
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for capital-constrained retailers, which they have compared to
alternative uses of capital. The Company now intends also to market its ERS
ShelfNet System on a fee based, or "tolling", 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 Tolling 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 Tolling Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers. Also, under the Tolling 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
<PAGE> 27
24
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
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. The Company's revenues were $4,270,000 for the nine months
ended September 30, 1996, compared to $1,903,000 for the corresponding period in
1995. The increase in revenues was primarily attributable to greater product
sales in 1996, including software license fees in the second quarter. For the
first nine months of 1996 and all of 1995, product sales were to five customers
within the supermarket industry.
Cost of goods sold. Cost of goods sold consists of the cost of hardware
components of the ERS ShelfNet System, system installation costs, depreciation
of tools and dies owned by the Company and utilized in the manufacturing of
hardware components, amortization of capitalized software costs, warranty and
maintenance costs, freight and inventory obsolescence.
Cost of goods sold was $4,673,000 for the nine months ended September
30, 1996, compared to $2,763,000 for the nine months ended September 30, 1995.
Cost of goods sold for the nine months ended September 30, 1996 included
warranty and maintenance expenses of $718,000, compared to $381,000 in the
corresponding 1995 period. The increase in warranty and maintenance costs
reflected the growing installation base for the ERS ShelfNet System. The Company
anticipates that system enhancements implemented in 1995 and 1996 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 personnel costs associated with selling and
administrative staff, overhead, market research and development, and customer
service personnel. Selling, general and administrative costs were $5,080,000 in
the nine months ended September 30, 1996, compared to $5,044,000 in the
corresponding period in 1995.
Research and Development. Research and development expenses were
$786,000 for the nine months ended September 30, 1996, compared to $2,094,000
for the corresponding period in the previous year. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were $763,000
for the nine month period ended September 30, 1996, compared to $1,189,000 for
the same period in 1995, which reflected reduced payments to third parties for
development activities. During the nine month period ended September 30, 1996,
the Company capitalized $513,000 of product development costs that will be
amortized over the shorter of the estimated useful life of the related software
product or process or three years. During the nine month period ended September
30, 1995, the Company capitalized $78,000 of product development costs.
Stock Option Compensation. The Company recorded $32,000 in non-cash
compensation expense for the nine month period ended September 30, 1996,
compared to $80,000 for the corresponding period in 1995. Non-cash compensation
expense resulted from the Company's issuance of stock options to its employees
at exercise prices below the fair market value at date of grant and has been
recognized as an expense over the employees' respective service periods.
Interest Income. Interest income increased to $179,000 for the nine
month period ended September 30, 1996, compared to $82,000 for the same period
in 1995, due to increased cash and cash equivalents available for investment.
Interest Expense. Interest expense was $283,000 for the nine month
period ended September 30, 1996, compared to $223,000 for the corresponding
period in 1995. Interest expense in 1996 represents interest on amounts borrowed
from the CDA and, in 1995, on amounts borrowed from the CDA and pursuant to a
revolving credit facility between the Company and certain members of the Board
of Directors and their affiliates.
<PAGE> 28
25
Income Taxes. Through September 30, 1996, the Company incurred net
losses since inception which generated net operating loss carryforwards for U.S.
federal income tax purposes of approximately $42 million, which NOLs are
generally available to offset future taxable income and expire at various times
from 2008 through 2011 for U.S. federal income tax purposes.
Section 382 of 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 amount of the NOL which may be utilized on an annual basis following such an
ownership change would be equal to the product of the value of the outstanding
stock of the Company immediately prior to the ownership change (reduced by
certain contributions to the Company's capital made in the two years prior to
the ownership change) multiplied by the "long-term tax-exempt rate" which is
determined monthly (5.64% for an ownership change occurring in December 1996).
Although the Company does not believe that it has experienced an
ownership change since the closing of the Initial Public Offering, 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, as a result of the
Private Placement or as a result of additional actions, such as transfers of
Common Stock by certain stockholders or the issuance of additional stock. In
addition, the NOLs are subject to examination by the IRS, and are thus subject
to adjustment or disallowance resulting from any such IRS examination. See "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. In connection with the Combination, the
Company issued to its employees, in replacement for outstanding performance
units, options for the purchase of 725,104 shares of its Common Stock at
<PAGE> 29
26
an exercise price of $.01 per share. As a result, and taking into account
subsequent additional below-market option issuances and option terminations, the
Company recorded non-cash compensation expense of $27,000 in 1995 and $1,119,000
in 1994.
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 12 of the notes to consolidated financial statements included
herein and "Risk Factors -- Potential Loss of NOLs".
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. The Company's revenues were $2,376,000 in 1994, compared to
$1,122,000 in 1993. The increase of $1,254,000 in 1994 was attributable to an
increase of $1,153,000 in product sales. The total increase in revenue also
reflected a $101,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues were attributable to sales to customers in
the supermarket industry. Approximately 67% of revenues in 1994 and 58% of
revenues in 1993 were attributable to a single customer.
Cost of Goods Sold. Cost of goods sold was $3,822,000 in 1994, compared
to $1,718,000 in 1993, reflecting increased product sales in 1994. The Company
realized lower hardware component costs on installations during 1994 as compared
to 1993, reflecting an increase in the use of high volume low cost suppliers.
Additionally, included in cost of goods sold in 1994 was $300,000 of product
performance-related costs expected to be non-recurring. Cost of goods sold in
1994 included warranty and maintenance expenses of $206,000, excluding such
special product performance-related costs. The comparable costs in 1993 were
$111,000. 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 $73,000, to $6,039,000 in 1994, compared to
$5,966,000 in 1993. The Company's 1993 results included non-recurring costs of
approximately $176,000 for consulting services related to the Company's
continuing effort to seek further manufacturing and installation cost reduction
measures. The increase in selling, general and administrative costs of less than
5% in 1994 compared to the prior period (excluding such non-recurring costs)
primarily reflected efforts in 1993 to build an organization sufficient to
sustain a larger customer base and anticipated sales growth in 1994.
Research and Development. Research and development expenses were
$2,571,000 in 1994, compared to $2,325,000 in 1993. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were $989,000
in 1994, compared to $829,000 in 1993, 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 $1,582,000 in 1994, compared to $1,496,000 in 1993, due to expansion
of the Company's internal software development activities and resources.
<PAGE> 30
27
Stock Option Compensation. The Company recorded non-cash compensation
expense of $1,119,000 in 1994, compared to $7,454,000 in 1993. The decrease in
stock option compensation expense reflected increased expirations of the service
periods during which such compensation would have been earned.
Interest Income. Interest income decreased to $288,000 in 1994,
compared to $438,000 in 1993, due to the decrease in the level of short-term
investments. Short-term investments were sold during 1994 to fund the Company's
operating cash requirements.
Interest Expense. Interest expense of $65,000 in 1994 represented
interest at the rate per annum of 7.4% on the principal amount borrowed from the
CDA in August 1994. Interest expense in 1993 consisted of interest on notes
payable to stockholders and interest accrued on compensation owed to the
Company's then President. The interest rate on the notes payable to such
stockholders averaged 8% in 1993. In connection with the Combination, such notes
payable to stockholders and accrued interest thereon were contributed to capital
and all accrued compensation and interest thereon was paid from a portion of the
proceeds of the Initial Public Offering.
Gain (Loss) on Short-Term Investments. During 1994, pursuant to the
Company's adoption of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
recognized $177,000 in losses on the market value of short-term investments. 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. The impact of the new accounting standard
on short-term investments held at December 31, 1993 was not material.
Minority Interest in Loss of Consolidated Affiliate. During July 1992,
the Company organized the Partnership, whose purpose was to further develop and
market the Company's ESL system. Prior to the Combination, the Company was the
controlling partner of the Partnership, and accordingly, the accounts of the
Partnership were consolidated with those of the Company. In 1993 the minority
interest in the loss of the Partnership was $423,000. Effective upon the
Combination, the Partnership interests were contributed to Common Stock and
additional paid-in capital.
Income Taxes. In consideration of the Company's accumulated losses and
the uncertainty of its ability to utilize any tax benefits from these losses,
the impact of the potential tax benefit of its net operating loss carryforwards
has been eliminated in the Company's Consolidated Financial Statements as of
December 31, 1994 and 1993. See "Risk Factors -- Potential Loss of NOLs".
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("FAS 121"), which is effective for fiscal years beginning after December 15,
1995. FAS 121 requires that an impairment loss be recognized when circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of FAS 121 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In October 1995, the FASB 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. The Company adopted FAS 123 effective January 1, 1996 and has chosen
to continue its use of the intrinsic value based method of accounting, but will
present all required FAS 123 disclosures in its Annual Report on Form 10-K for
the year ended December 31, 1996.
<PAGE> 31
28
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had net working capital of
$12,091,000, reflecting cash and cash equivalents of $9,651,000, compared to net
working capital of $5,283,000, reflecting cash and cash equivalents of
$3,210,000 at December 31, 1995. The increase in net working capital and in cash
and cash equivalents resulted primarily from the offshore public offering and
contemporaneous private placement of Common Stock in July 1996. Net cash used in
operations was $6,327,000 for the nine months ended September 30, 1996, compared
to net cash of $8,253,000 used in operating activities in the corresponding 1995
period. Although, during the first three quarters of 1996, the Company has had
successively larger quarterly revenues, the Company anticipates quarterly
revenues during the last quarter of 1996 in a substantially lesser amount than
the prior quarter, as a result, among other factors, of the transition to its
new marketing and product plans.
On July 11, 1996, the Company completed: (i) the offshore public
offering (the "Regulation S Transaction") of an aggregate of 4,963,500 shares of
its Common Stock, in accordance with Regulation S under the Securities Act, as a
result of which the Company received gross proceeds of approximately $11.2
million, and (ii) the contemporaneous private placement (the "1996 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, as a
result of which the Company received gross proceeds of approximately $2.1
million. The effective price per share of Common Stock in such transactions was
approximately $2.25.
In connection with completion of such transactions, holders of all
125,556 outstanding shares of the Company's Series A Cumulative, Convertible
Preferred Stock, $1.00 par value (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
"Preferred Stock Payments"). Following completion of such transactions,
including the issuance of 218,957 shares (the "Commission Shares") of Common
Stock as commissions in the Regulation S Transaction, the Company had
outstanding 21,033,062 shares of Common Stock.
The aggregate net proceeds to the Company in such transactions were in
the estimated amount of approximately $12 million (approximately $10.2 million
in the Regulation S Transaction and approximately $2.0 million in the 1996
Private Placement, in the aggregate net of the Preferred Stock Payments). Net
expenses do not reflect non-cash expenses represented by the Commission Shares
but reflect finder's fees in the amount of $199,000, which were applied to the
acquisition of shares in the Regulation S Transaction.
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 September 30, 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.
The Company's capital expenditures were $245,000 and $287,000 for the
nine months ended September 30, 1996 and 1995, respectively. The Company
anticipates that capital expenditures will approximate
<PAGE> 32
29
$400,000 in 1996. For the nine months ended September 30, 1996 and 1995, the
Company also capitalized $513,000 and $78,000, respectively, of product
development costs.
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 Tolling
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 --
Tolling Agreements" below for a description of fixed and variable charges
proposed by the Company under the Tolling Plan. As a result, the Company will
have substantial manufacturing and carrying costs attendant to introduction of
the Tolling 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 Tolling 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 Preferred Stock to members of the Board of Directors and their
affiliates, the Regulation S Transaction, the 1996 Private Placement and the
Private Placement. The Company will utilize the proceeds from the Private
Placement in connection with the anticipated expansion of its operations,
including for manufacturing and carrying costs attendant to the Tolling Plan,
and for general corporate purposes, including the funding of the Company's
ongoing engineering and development efforts. The Company believes that the
proceeds of the Private Placement, together with existing cash and cash
equivalents, will be sufficient to meet the Company's currently anticipated
operating and capital expenditure requirements for the foreseeable future.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and related
arrangements, and the Company may consider additional transactions, consistent
with the provisions of the Indenture, that will further enhance its liquidity.
The Company has not reached any determination with respect to the size or nature
of any such transaction or whether any such transaction will be undertaken, and
there can be no assurance that any such transaction will be effected.
<PAGE> 33
30
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 to replace
paper price tags on retail shelves with electronic liquid crystal display units
and to provide 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. 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 November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including stores owned by such leading supermarket chains as
Vons, Stop & Shop Supermarket Company, HEB, Big Y Foods, Inc., 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 September 30, 1996, of the
approximately 29,800 supermarkets in the United States, approximately 115 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 plans in the first quarter
of 1997 to introduce enhancements to the ERS ShelfNet System that provide 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, ERS
has signed the Letter of Intent with the Overwaitea Food Group providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. Such arrangements are subject to numerous conditions,
including the negotiation and execution of a definitive contract.
<PAGE> 34
31
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. As a result, the Company believes that retailers have
compared potential investments in the ERS ShelfNet System to alternative uses of
capital, such as store acquisitions and improvements. The Company now intends
also to offer the ERS ShelfNet System on a fee based, or "tolling", 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. As a result, the Company believes that the Tolling Plan
will increase market acceptance of the ERS ShelfNet System.
Management estimates that, under the Tolling 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 enhanced system proposed by ERS. For example, management
estimates, based on studies conducted in collaboration with the Company's
current customers, that a supermarket with 15,000 ESLs that changes 2,500 to
4,500 prices per week could, under the Company's proposed Tolling Plan, realize
annual net cost savings and benefits of approximately $40,000 to approximately
$240,000 per store through the anticipated level of usage of the full suite of
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
The Company plans to introduce enhancements to the ERS ShelfNet System
that provide 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
ERS has signed a non-binding Letter of Intent with the Overwaitea Food
Group providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997. The Company also is pursuing other such
arrangements with other leading U.S. supermarket operators. The Letter of Intent
is, and all such additional arrangements, if any, will be, subject to numerous
conditions, including negotiation and execution of definitive contract terms.
See "-- Marketing and Sales" below for a description of the terms to be proposed
initially by the Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock in
accordance with Regulation S under the Securities Act and the contemporaneous
private placement of Common Stock to subscribers, including members of the Board
of Directors and their affiliates. In January 1997, the Company raised
approximately $95 million in net proceeds as a result of the Private Placement.
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends to focus its initial marketing efforts under the Tolling Plan on the
supermarket sector of the retail industry, to continue to reduce the
manufacturing costs of the system to increase the
<PAGE> 35
32
Company's profitability and to continue to enhance, develop and support
value-added applications of the ERS ShelfNet System.
- Tolling Plan. The Company believes that its Tolling 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 a portion of the
proceeds from the Private Placement to install the ERS ShelfNet
System in the supermarkets covered by the Letter of Intent and
for other retailers under the Tolling 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 the installed base of the ERS ShelfNet
System in supermarkets, as well as 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
September 30, 1996, of the approximately 29,800 supermarkets in
the United States, approximately 115 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 Tolling 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 enhanced system (and install additional
systems), the Company intends to develop additional 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, 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..................... 29,800
Discount mass merchandisers...... 9,455
Chain drug stores................ 20,366
Convenience stores............... 56,000
-------
Total 115,621
=======
</TABLE>
Source: Progressive Grocer Annual Report, April 1996; MMR Annual Report,
April 29, 1996.
The Company believes that many of its target retailers are capital
constrained and have compared potential investments in the ERS ShelfNet System
to alternative capital expenditures. Such alternative uses of capital include
purchasing additional stores, remodeling and refurbishing existing stores,
making acquisitions and investing in technology, including ESL systems. The
Company's Tolling Plan is designed to eliminate a retailer's upfront cash
<PAGE> 36
33
cost to install the ERS ShelfNet System, instead assessing tolling 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
competitive, productivity, cost and merchandising issues for retailers 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 to
reflect increases in wholesale costs, 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,
which has come under increased scrutiny by customers and governmental entities.
Stores with inaccurate prices risk customer dissatisfaction as well as fines and
penalties levied by governmental agencies. According to Supermarket News,
February 5, 1996, over 90% of supermarket executives surveyed rate the issue of
pricing verification as extremely or highly important. As a result, supermarket
operators incur significant expense in auditing pricing integrity and correcting
pricing inaccuracies.
MERCHANDISING MANAGEMENT
Supermarkets actively promote products at the shelf with a variety of
merchandising materials such as "hangers" or "bibs", which are affixed to the
shelf or a product's price label and alert consumers to pricing or promotional
activities. Supermarkets install and remove bibs manually, with employees
generally walking the aisle
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34
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 the prescribed shelfset, 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 as 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,
Integrated Electronic Pricing, QuickP.O.P.(TM), AccuStock(TM) and ShelfSet
Audit.
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
Manual Price Changes.................. Instant Response Pricing. The ERS ShelfNet System allows retailers to
implement price changes almost instantaneously from the store's central
computer or directly from corporate or regional headquarters, which the
Company believes facilitates significant labor savings from manual
implementation of price changes. In addition, electronic price changes
are significantly faster to implement, which the Company believes leads
to increased margins as prices may be increased promptly following
special promotions or increases in wholesale prices.
Pricing Integrity..................... Integrated Electronic Pricing. The ERS ShelfNet System electronically
links a store's POS systems and its ESLs, virtually eliminating
discrepancies between prices displayed on the store shelves and prices
charged at checkout. This assurance of pricing integrity permits
retailers to reduce or eliminate manual pricing audits and fines paid to
governmental entities for pricing inaccuracies. In addition, such
pricing accuracy can result in fewer price checks and errors at
checkout, can result in faster checkout times, improved cashier
productivity and increased customer satisfaction.
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 causing the ESL to flash, indicating
products that require the addition or removal of bibs or hangers. This
is intended to eliminate the time-consuming and potentially inaccurate
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
</TABLE>
<PAGE> 38
35
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
allow authorized store personnel to change ESLs from a price display
to an out-of-stock message and to replace 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 Tolling Plan, its anticipated supermarket
customers using the ERS ShelfNet System (including the full suite of its
applications at the anticipated level of usage) could realize annual net cost
savings and benefits ranging from approximately $40,000 to approximately
$240,000 per store. 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 current system utilizes a
communications hub to transmit data to controllers on each aisle wired to the
ESLs. The Company plans to introduce enhancements to its system which permit 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 enhanced system
consists of the following components:
ELECTRONIC SHELF LABEL
Each ESL is a mini data transceiver contained in a plastic case, which
displays price and other information by means of a wide-angle view liquid
crystal display window. The ESL is also able to display pricing and other
promotional information for the consumer and inventory and reorder information
for store employees, and is equipped with two buttons designed to allow store
staff to interact with the store computers from the ESL on the shelf. The
Company offers four different sizes and types of ESLs for use in different
applications, such as SKUs for coolers and freezers. The Company's currently
installed ESLs are powered through the rails to which they are connected,
whereas the wireless ESLs which the Company plans to introduce in the first
quarter of 1997 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 antennas
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.
<PAGE> 39
36
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 Tolling Plan, whereby the Company will own the system
and, with no upfront cash cost to the retailer, furnish the system to retailers
who will pay monthly fees to the Company based largely on their actual usage of
the system.
The Company will continue to focus its marketing efforts on major
national and regional supermarket chains. The Company believes that each
supermarket chain will typically choose a single supplier of ESL systems to
maximize chainwide efficiency. Therefore, the Company's marketing strategy is to
make installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such installations by
installing systems through the rest of the chain's stores. In response to
retailing trends, the Company has also increased its marketing efforts to mass
merchandisers.
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:
<PAGE> 40
37
- 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.
TOLLING AGREEMENTS
The Company has signed a non-binding Letter of Intent providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. The Letter of Intent is subject to numerous conditions,
including negotiation and execution of a definitive contract.
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, calculated on the basis of
average weekly changes over the prior three months, 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, subject to monthly maximum applications surcharges and also to
initial periods during which no such surcharge, or a discounted surcharge, will
be billed. The Company intends to use such initial discounts to encourage
retailers to use such applications.
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.
ORGANIZATION
The Company currently markets its products directly to major retail
chains through a marketing and sales force which, with sales support staff,
consists of ten employees. 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.
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 enhanced
system.
<PAGE> 41
38
CUSTOMERS
As of November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including those owned by such leading supermarket chains as
Vons, The Stop & Shop Supermarket Company, HEB, Big Y Foods, Inc., 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, 1993, Vons and Lucky accounted for
58% and 24%, respectively, of the Company's consolidated revenues; 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.
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
enhanced 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 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 Tolling Plan will
commit the Company to a standard maintenance contract, at no additional charge,
with extended maintenance services available at additional charges to the
customer.
MANUFACTURING
The Company utilizes third parties to manufacture and assemble the
components comprising the ERS ShelfNet System. The Company's ESLs currently
incorporate a microprocessor which is supplied solely by Sanyo. However, the
Company believes that other suppliers could produce equivalent microprocessors
within approximately four months. The Company's policy is to maintain an
inventory of microprocessors sufficient to meet substantially all of its
requirements during any such period. The Company intends to evaluate, from time
to time, establishing relationships with other manufacturers of microprocessors
to provide a second source of supply for its ESLs.
The Company intends to maintain its practice of utilizing manufacturing
subcontractors, and has a supply arrangement with Surface Mount Technology Ltd.,
of Hong Kong, for the assembly of ESLs. The Company also continues to utilize
Modulus, Inc. as a domestic source for the assembly of its ESLs. The Company has
not experienced interruptions or delays in the manufacture or assembly of its
systems, and believes that alternative sources of system components are readily
available.
ENGINEERING AND DEVELOPMENT
The Company's principal engineering and development efforts have been
conducted through software and hardware development groups located at its
facilities in Connecticut and Massachusetts. These groups focus on improvements
to current technology and also on new applications of existing technology. The
Company's engineering staff also generates the functional specifications and
development schedules for each of the Company's
<PAGE> 42
39
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, 1993, 1994 and 1995, the Company
incurred expenses for research and development activities of, respectively,
$2,325,000, $2,571,000 and $2,491,000. During the year ended December 31, 1995,
the Company capitalized an aggregate of $475,000 in costs of internal labor and
outside services associated with product development. During the nine months
ended September 30, 1995 and 1996, the Company incurred expenses for research
and development of $2,094,000 and $786,000, respectively, and capitalized an
aggregate of $78,000 and $513,000, respectively, of 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 eleven United States patents and has six additional
United States patent applications pending, one pending provisional patent
application and eleven foreign patent applications pending. The Company also has
other applications under preparation and intends to continue to file patent
applications on its novel products and systems. Certain of these patents and
patent applications are directed to salient features of the Company's ESL
system, in particular relating to the ESL and associated hardware, and the
communications network linking the components of the system.
The Company's wholly-owned subsidiary, Amacrine International, Inc.
("Amacrine"), is entitled to use, and to grant sublicenses with respect to,
certain Telepanel patents directed to an alphanumeric display module and radio
frequency communications system, which Amacrine designed and developed for
Telepanel under a technical services agreement which existed between such
companies. The Company has become aware of certain statements made by Telepanel,
which the Company believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents.
The Company attempts to protect certain computer software and service
applications through the use of copyright and trade secret law. The Company
relies on non-disclosure agreements with its employees, customers, consultants,
and strategic partners.
In 1993 in connection with the settlement of certain litigation, the
Company was granted a limited non-exclusive license in the United States,
Canada, the United Kingdom, Australia, Japan and Germany covering certain United
States and foreign patents, of which Telepanel is the exclusive licensee, in
consideration of a $700,000 payment made by the Company to Telepanel. During
1994, the United States patent underlying Telepanel's patent rights applicable
to such license expired.
See "Risk Factors -- Protection of Intellectual Property" for a
description of certain risks involving the Company's intellectual property.
COMPETITION
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel, Pricer and, recently, NCR. Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the Telepanel
system. See "-- Intellectual
<PAGE> 43
40
Property" above for a description of the settlement in January 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 November 1, 1996, the Company had 59 full-time employees,
consisting of 24 engaged in engineering and development and manufacturing
support, ten in marketing and sales activities, 18 in customer services and
seven in general administrative and executive functions. At such date, the
Company had an additional 29 part-time employees, engaged primarily in customer
service functions. The Company does not have a collective bargaining agreement
with any of its employees and considers its relationship with its employees to
be excellent.
FACILITIES
The Company's executive offices are located at 372 Danbury Road,
Wilton, Connecticut, where the Company leases approximately 14,700 square feet
of space (exclusive of space subleased to an affiliate). The Company's lease
expires in July 1997 and requires payment of annual rent (net of sublease
payments) in the amount of approximately $241,000 (in addition to increases in
operating expenses and real estate taxes). Of the Company's space in Wilton,
approximately 1,900 square feet is devoted to office and administrative uses,
approximately 6,600 square feet to engineering and development activities, and
approximately 6,200 square feet to marketing, sales and customer service
functions.
The Company leases an additional space of approximately 5,000 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 7 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
<PAGE> 44
41
"item pricing" (which require the marking of prices on individual consumer
packages for some or all products in the retail store). The existence of item
pricing laws applicable to any of the Company's intended customers increases
such customers' costs of providing price information to consumers and may
decrease or eliminate some of the potential benefits of implementation of the
ERS ShelfNet System. In some of the states that have item pricing laws, such
pricing is not required if the price is clearly presented on the shelf and
consumers are offered the means by which to mark individual items. In the State
of Connecticut, the item pricing law allows the State's Department of Consumer
Protection to exempt from item pricing requirements stores employing an approved
ESL system.
The United States Federal Communications Commission has established
standards for radio frequency emissions from computer products, and certain
components utilized in the Company's ESL system must comply with such criteria.
All components currently incorporated into the ERS ShelfNet System comply with
such standards, and the Company does not anticipate any material delays in
securing any required certification for components under development by the
Company. Certain foreign countries also regulate radio frequency emissions.
<PAGE> 45
42
MANAGEMENT
The executive officers and directors of the Company, and their
respective ages and positions with the Company, are as follows:
NAME AGE POSITION
Norton Garfinkle(1)(2)(3)(4) 65 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
Michael R. Valiton............. 35 Senior Vice President, Technology
and Operations
William B. Ames................ 52 Vice President, Manufacturing
William B. Fischer............. 45 Vice President, Finance
James M. Nolan, Jr............. 41 Vice President, New Product
Development
Paul M. Patrick................ 44 Vice President
Paul A. Biddelman(1)(2)(4)..... 50 Director
David Diamond.................. 38 Director
Donald E. Zilkha(1)(2)(4)...... 45 Director
- ---------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Director Stock Option Committee.
(4) Member of Audit Committee.
Each director holds office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each executive
officer serves at the discretion of the Board of Directors.
Mr. Garfinkle, a founder of the Company and its Chairman of the Board,
has been a director of the Company since its inception in April 1990. Since
1970, Mr. Garfinkle has also been the Chairman of Cambridge Management
Corporation, which manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as Chairman of its
affiliates, including Oxford Management Corporation, which specialize in the
research and development of new technologies. From 1985 to 1988, Mr. Garfinkle
was Chairman of Oral Research Laboratories, Inc., a manufacturer of dental
hygiene products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to 1988. In December
1995, pursuant to an agreement with New York State authorities, Mr. Garfinkle
admitted to a misdemeanor relating to his 1989 New York State tax return and
paid all taxes required by the agreement.
Mr. Failing, a founder of the Company and its Vice Chairman of the
Board and Chief Executive Officer, has been a director of the Company since its
inception and served as President through February 1997. In 1973, Mr. Failing
co-founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive Officer of Actmedia,
Inc. until its sale in 1989.
Mr. Weathersby, the Chairman of the Executive Committee of the Board of
Directors, has been President of the Company since February 1997 and a director
of the Company since April 1996. Mr. Weathersby has been Vice Chairman of
Cambridge Management Corporation and its affiliates including Oxford Management
<PAGE> 46
43
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. 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 1991 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 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.
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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 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
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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 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
<PAGE> 49
46
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.
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
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47
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
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.
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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 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.
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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 January 20, 1997, there were 21,047,106 shares of Common Stock
outstanding, held of record by 357 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.
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
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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.
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.
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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.
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
<PAGE> 55
52
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 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
<PAGE> 56
53
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, Saddle Brook,
New Jersey.
EXPERTS
The consolidated financial statements of Electronic Retailing Systems
International, Inc. as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 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.
With respect to the unaudited condensed consolidated financial
information of Electronic Retailing Systems International, Inc. for the
nine-month periods ended September 30, 1995 and 1996, included in this
Prospectus, Price Waterhouse LLP reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report dated November 14, 1996
<PAGE> 57
54
appearing herein, states that they did not audit and they do not express an
opinion on that unaudited condensed consolidated financial information. Price
Waterhouse LLP has not carried out any significant or additional audit tests
beyond those which would have been necessary if their report had not been
included. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied. Price Waterhouse LLP has not carried out any significant or
additional audit tests beyond those which would have been necessary if their
report had not been included. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. Price Waterhouse LLP is not subject to the
liability provisions of section 11 of the Securities Act of 1933 for their
report on the unaudited condensed consolidated financial information because
that report is not a "report" or a "part" of the registration statement prepared
or certified by Price Waterhouse LLP within the meaning of sections 7 and 11 of
the Act.
<PAGE> 58
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheet as of December 31, 1994 and 1995........................... F-3
Consolidated Statement of Operations for the Year Ended December 31, 1993, 1994 and
1995................................................................................ F-4
Consolidated Statement of Cash Flows for the Year Ended December 31, 1993, 1994 and
1995................................................................................ F-5
Consolidated Statement of Changes in Stockholders' Equity for the Year Ended December
31, 1993, 1994 and 1995............................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants on Interim Condensed Consolidated Financial
Information......................................................................... F-15
Condensed Consolidated Balance Sheet as of December 31, 1995 and September 30, 1996
(unaudited)......................................................................... F-16
Condensed Consolidated Statement of Operations for the Nine Months Ended September 30,
1995 and 1996 (unaudited)........................................................... F-17
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30,
1995 and 1996 (unaudited)........................................................... F-18
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-19
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors 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 (the
"Company") at December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, 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.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated March 27,
1996, which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 13,
completed an offshore public offering and contemporaneous private placement
resulting in the receipt of net proceeds of approximately $12 million.
Therefore, the conditions that raised substantial doubt about whether the
Company will continue as a going concern no longer exist.
PRICE WATERHOUSE LLP
Stamford, Connecticut
March 27, 1996, except for Note 13, as to which
the date is July 11, 1996
F-2
<PAGE> 60
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2)................................... $ 1,131 $ 3,210
Short-term investments (Note 2)...................................... 950 --
Accounts receivable -- net of allowance for doubtful accounts of $64
in 1994 and $88 in 1995........................................... 504 1,356
Receivables from affiliates (Note 4)................................. 27 8
Installations in progress............................................ 120 522
Inventories -- net of reserves of $102 in 1994 and $195 in 1995 (Note
2)................................................................ 1,376 1,874
Prepayments and other current assets................................. 290 79
-------- --------
Total current assets.............................................. 4,398 7,049
-------- --------
Equipment (Note 2)..................................................... 1,667 2,047
Accumulated depreciation............................................. (1,003) (1,365)
-------- --------
Net equipment........................................................ 664 682
-------- --------
Other non-current assets............................................... 133 585
-------- --------
Total assets........................................................... $ 5,195 $ 8,316
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................ $ 691 $ 1,549
Accrued salaries and benefits........................................ 140 217
Upgrade obligations.................................................. 115 --
-------- --------
Total current liabilities......................................... 946 1,766
-------- --------
Long-term debt (Note 7)................................................ 1,981 3,335
-------- --------
Commitments (Note 9)................................................... -- --
-------- --------
Stockholders' equity
Preferred stock, undesignated (par value $1.00 per share; 1,860,000
shares authorized, none outstanding)
Series A Cumulative, Convertible Preferred Stock (140,000 shares
authorized; 123,246 shares issued and outstanding in 1995,
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; 11,720,466 and 11,748,232 shares issued and
outstanding in 1994 and 1995, respectively)....................... 117 117
Additional paid-in capital........................................... 26,457 38,474
Accumulated deficit (Note 3)......................................... (24,306) (35,499)
-------- --------
Total stockholders' equity................................... 2,268 3,215
-------- --------
Total liabilities and stockholders' equity............................. $ 5,195 $ 8,316
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 61
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Product sales............................................ $ 1,074 $ 2,227 $ 2,663
Maintenance.............................................. 48 149 310
-------- -------- --------
Total revenues................................... 1,122 2,376 2,973
-------- -------- --------
COST OF GOODS SOLD
Product sales............................................ 1,607 3,316 3,552
Maintenance.............................................. 111 506 561
-------- -------- --------
Total cost of goods sold......................... 1,718 3,822 4,113
-------- -------- --------
Gross profit (loss)...................................... (596) (1,446) (1,140)
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative (including amounts to
related parties of $523 in 1993, $76 in 1994 and $91
in 1995) (Note 4)..................................... 5,966 6,039 6,952
Research and development (including amounts to related
parties of $26 in 1993) (Note 10)..................... 2,325 2,571 2,491
Stock option compensation (Note 11)...................... 7,454 1,119 27
Depreciation and amortization............................ 177 149 107
-------- -------- --------
Total operating expenses......................... 15,922 9,878 9,577
-------- -------- --------
Loss from operations..................................... (16,518) (11,324) (10,717)
-------- -------- --------
OTHER INCOME (EXPENSES)
Interest income.......................................... 438 288 134
Interest expense (including amounts to related parties of
$315 in 1993 and $52 in 1995) (Note 5)................ (340) (65) (291)
Gain (loss) on short-term investments (Note 2)........... -- (177) 6
-------- -------- --------
Total other income (expenses).................... 98 46 (151)
-------- -------- --------
Loss before minority interest in consolidated
affiliate............................................. (16,420) (11,278) (10,868)
-------- -------- --------
Minority interest in loss of consolidated affiliate (Note
3)....................................................... 423 -- --
-------- -------- --------
Net loss.............................................. $(15,997) $(11,278) $(10,868)
======== ======== ========
EARNINGS PER SHARE
Weighted average common shares outstanding............... 11,461 11,682 11,743
======== ======== ========
Net loss per common share................................ $ (1.40) $ (0.97) $ (0.95)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 62
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(15,997) $(11,278) $(10,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 367 374 463
Provision for inventory obsolescence..................... 104 93 94
Provision for doubtful accounts.......................... 56 38 82
Stock option compensation................................ 7,454 1,119 27
Minority interest in loss of consolidated affiliate...... (423) -- --
Accounts receivable...................................... (729) 179 (935)
Inventories.............................................. (889) (534) (591)
Other current and non-current assets..................... 51 (127) (252)
Accrued liabilities and deferred compensation............ (1,849) 110 820
-------- -------- --------
Net cash used in operating activities............ (11,855) (10,026) (11,160)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales or maturities of short-term 2,559 7,040 1,027
investments...........................................
Capital expenditures..................................... (574) (303) (452)
Capitalized software costs............................... -- -- (475)
Purchases of short-term investments...................... (10,626) -- --
-------- -------- --------
Cash (used in) provided by investing (8,641) 6,737 100
activities.....................................
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit.......................... -- -- 3,000
Net proceeds from the issuance of preferred stock........ -- -- 8,789
Net proceeds from the issuance of long-term note and -- 1,899 1,350
warrant...............................................
Net proceeds from the issuance of common stock........... 18,606 2 --
-------- -------- --------
Cash provided by financing activities............ 18,606 1,901 13,139
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....... (1,890) (1,388) 2,079
-------- -------- --------
Cash and cash equivalents at beginning of period........... 4,409 2,519 1,131
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 2,519 $ 1,131 $ 3,210
======== ======== ========
</TABLE>
There were no cash payments for income taxes in the years 1993, 1994 and
1995. Cash payments for interest expense were $126, $45 and $262 in 1993, 1994
and 1995, respectively, including payments of $126 and $52 made to related
parties in 1993 and 1995. In 1995, preferred stock was issued in a non cash
exchange for surrender of $3 million of debt held by preferred stock
subscribers.
See accompanying notes to consolidated financial statements
F-5
<PAGE> 63
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, 1992..................... $ -- $ -- $ 188 $ (19,562)
---- ---- ------- --------
Issuance of 8,500,050 common shares for
outstanding shares of Predecessor
Corporation.................................. 85 (85)
Issuance of 1,421,250 common shares for limited
partner interests in consolidated
affiliate.................................... 14 (14)
Contribution of limited partnership interest in
consolidated affiliate....................... 8,108
Capitalization of deficits accumulated prior to
Reorganization............................... (22,531) 22,531
Contribution of stockholders' loans and accrued
interest thereon............................. 13,608
Proceeds from issuance and sale of 1,600,000
common shares................................ 16 18,590
Vesting of previously issued stock options...... 7,454
Net loss for year............................... (15,997)
---- ---- ------- --------
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)
==== ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 64
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Electronic Retailing Systems International, Inc., was incorporated in 1993
under the laws of the State of Delaware ("ERS") to serve as a holding company
for the business and assets of Electronic Retailing Systems International, Inc.,
incorporated in 1990 under the laws of Connecticut (the "Predecessor
Corporation"), and ERS Associates Limited Partnership (the "Partnership"), which
was organized in Connecticut in 1992. The combination of ERS, the Predecessor
Corporation, and the Partnership was effected immediately prior to the closing
on May 7, 1993 of ERS's initial public offering of Common Stock (the "Initial
Public Offering"), and is referred to herein as the "Reorganization" (see Note
3). References herein to the operations and historical financial information of
the "Company" prior to the date of Reorganization refer to the operations and
historical financial information of the Predecessor Corporation and its
subsidiaries. Unless the context otherwise requires, all other references herein
to the "Company" refer to ERS.
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 operates
in North America.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company,
the Predecessor Corporation and the Partnership (see Note 3). 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 deposits 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, 1994 and 1995 include deposits of
$179,000 and $440,000, respectively, held as interest bearing collateral for
irrevocable letters of credit of the same amount relating to future inventory
purchases. Letters of credit in place at December 31, 1995 expire at various
dates in 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.
At December 31, 1994, short-term investments of $1,027,000 were classified
as trading securities and recorded net of a market valuation allowance for
unrealized losses of $77,000. During 1994, realized and
F-7
<PAGE> 65
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. During
1995, realized gains of $6,000 were recognized on short-term investments.
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, 1994 consisted of
approximately $631,000 of materials and supplies and $745,000 of finished goods.
Inventories at December 31, 1995 consist of approximately $674,000 of materials
and supplies and $1,200,000 of finished goods. Inventories in excess of expected
requirements due to new product introductions are expensed currently.
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, unamortized capitalized costs of $468,000 are included as non-current
assets. Amortization expense totaled $7,000 for 1995. There were no amounts
capitalized or amortized in 1993 and 1994.
Revenue Recognition
Revenue is recognized when the product is shipped or upon completion of
installation of a trial electronic shelf label system, provided that no
significant obligations remain and collection of the resulting receivable is
deemed probable. Revenue from providing installation services to customers is
recognized upon the completion of an installation. Maintenance revenue for
services provided under maintenance contracts is recognized over the service
contract period. Other revenue for parts and services is recognized when
provided.
Income Taxes
Prior to the Reorganization, the stockholders of the Predecessor
Corporation had elected to be treated as an "S Corporation" for Federal income
tax purposes as provided for under Section 1362(a) of the Internal Revenue Code.
The election resulted in each stockholder being responsible for his pro-rata
share of the Predecessor Corporation's taxable income. Effective May 7, 1993, in
conjunction with the Reorganization, ERS became subject to taxation as a C
Corporation.
ERS has adopted 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
F-8
<PAGE> 66
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Pursuant to the requirements of the Securities and Exchange Commission,
stock options granted and shares issued by the Company within one year prior to
the completion of the Initial Public Offering on May 7, 1993, at prices below
the offering price, are included in the calculation of weighted average shares
outstanding through such date. Subsequent to May 7, 1993, the computation of net
loss per common share does not reflect common share equivalents that are
anti-dilutive.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which is effective for fiscal years beginning after December 15, 1995. FAS 121
requires that an impairment loss be recognized when circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of FAS 121
is not expected to have a material impact on the Companys consolidated financial
position or results of operations.
In October 1995, the FASB issued FAS No. 123 Accounting for Stock-Based
Compensation, 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 (APB) No. 25 Accounting for
Stock Issued to Employees. The Company has not determined which accounting
method will be implemented, but believes adoption of the new accounting standard
will not have a material impact on the financial position or results of
operations of the Company.
NOTE 3 -- INITIAL PUBLIC OFFERING AND REORGANIZATION:
On May 7, 1993, ERS completed the Initial Public Offering of 1,902,145
shares of Common Stock, registered under the Securities Act of 1933, as amended,
1,600,000 shares of which were sold by ERS and the remainder of which were sold
by selling stockholders. As a result of this transaction, proceeds net of
underwriting discounts, commissions and other expenses of approximately $18.6
million were realized, including amounts used to discharge amounts owed to the
President of the Company (see Note 4).
Immediately prior to the closing of the Initial Public Offering, the
Company restructured. Pursuant to reorganization agreements between the limited
partners of the Partnership and the stockholders of the Predecessor Corporation,
ERS was incorporated in February 1993 as a holding company and (i) issued
8,500,050 shares of its common stock for all outstanding stock of the
Predecessor Corporation, (ii) issued 1,421,250 shares of its Common Stock for
all limited partnership interests in the Partnership, (iii) contributed the
limited partnership interest in the Partnership to the Predecessor Corporation,
and (iv) liquidated the Partnership and transferred ownership of all assets and
liabilities of the Partnership to the Predecessor Corporation.
NOTE 4 -- RELATED PARTY TRANSACTIONS:
Prior to March 1993, certain common costs such as rent of office space
under sublease from an affiliate, telephone and insurance, were paid on behalf
of the Company by an affiliate. The affiliate and the Company
F-9
<PAGE> 67
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have common majority ownership. These costs were allocated to the Company based
on its pro-rata share of such costs as determined using factors such as
headcount, floor space occupied or other representative reasonable factors. For
the year ended December 31, 1993, the Company reimbursed an affiliate $400,000,
which represents essentially all of the common costs incurred on behalf of the
Company.
Subsequent to March 1993, the Company incurs certain common costs on behalf
of affiliates, which are reimbursed by the affiliates. Additionally, the lease
on the Company's headquarters facility was assumed by the Company, at which time
the Company commenced subleasing a portion of its headquarters facility to an
affiliate. Such common costs, including sublease payments, amounted to $76,000,
$184,000 and $112,000 in 1993, 1994 and 1995, respectively (see Note 9). Unpaid
amounts are included in receivables from affiliates at December 31, 1994 and
1995.
The President of the Company, who is a stockholder, previously had a
deferred compensation arrangement with the Company whereby compensation earned
by the President from inception of the Company (April 18, 1990) through July 1,
1992 including accrued interest was to be deferred until the Company generated
positive cash flow from operations. Salaries earned subsequent to July 1, 1992
were currently payable. All deferred and current compensation amounts then owed,
including accrued interest thereon, totaling $1,070,000, were paid in May 1993
to the President with proceeds from the Initial Public Offering (see Note 3).
Interest expense was $22,000 for the year ended December 31, 1993. Interest on
deferred compensation was based on the prime rate plus 1% adjusted for
fluctuations in the prime rate at six month intervals and averaged 8% in 1993.
Additionally, included in accounts payable and accrued expenses at December 31,
1995 is $37,000 due to an entity controlled by the President for reimbursement
of expenses incurred in the year on behalf of the Company.
The Company has received consulting services and paid a current member of
its Board of Directors fees of $68,000, $38,000 and $34,000 in 1993, 1994 and
1995, respectively. The Company also received consulting services and paid fees
to a former member of the Board of Directors of $81,000, $38,000 and $20,000 in
1993, 1994 and 1995, respectively.
NOTE 5 -- RELATED PARTY INTEREST EXPENSE:
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 6), $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.
Prior to the formation of the Partnership, loans from stockholders were the
Company's primary source of operating funds. Interest on the stockholder notes
was based on the prime rate plus 1%, adjusted for fluctuations in the prime rate
at six month intervals. Interest expense for 1993 averaged 8% and totaled
$293,000. These loans and accrued, but unpaid, interest thereon were contributed
to common stock and additional paid-in capital as a result of the Reorganization
(see Note 3).
NOTE 6 -- 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 ("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.
F-10
<PAGE> 68
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the aforementioned private sale, an affiliate of the
Company's Chairman of the Board, and one of the subscribers, acquired 35,000
additional shares of Preferred Stock at a purchase price per share of $100.
Each share of Preferred Stock entitles the holder to a dividend of $7.50
per annum, payable quarterly, which will cumulate if not paid. Dividends are
payable by the Company, at its election, in either cash or in the form of
additional shares of Preferred Stock valued at $100 per share. On October 1,
1995 and January 1, 1996, the regular quarterly dividends on the Preferred Stock
were paid, on a pro rata basis for the period during which such shares were
outstanding, to holders of record of such stock on, respectively, September 30,
1995 and December 31, 1995, in the form of additional shares of Preferred Stock
(aggregating 3,246 shares).
Each share of Preferred Stock, valued at $100, is convertible into shares
of the Company's Common Stock, $.01 par value, at a conversion price of $4.00
(subject to certain adjustments), and is subject to redemption, at the option of
the Company, at a price of $100 in the event certain conditions are met. Holders
of Preferred Stock will vote together with holders of Common Stock, each share
carrying one vote, and are entitled to a liquidation preference of $100 per
share.
On the basis of the current conversion price in effect, the 123,246 shares
of Preferred Stock issued and outstanding as of December 31, 1995 are
convertible into an aggregate of 3,081,150 shares of Common Stock.
NOTE 7 -- 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.
During 1995, the Company also entered into agreements with the CDA, which
became effective upon consummation of the initial sale of the Company's
Preferred Stock (see Note 6), 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 8 -- CUSTOMER INFORMATION:
All of the Company's sales are to customers in the retail food market
industry. During 1993, 1994 and 1995, sales of $654,000, $1,580,000, and
$793,000, respectively, were to a single customer. Sales of $321,000 and
$905,000 in 1994 and 1995, respectively, were to a second retail customer. A
third customer accounted for sales of $272,000 in 1993 and sales of $758,000 in
1995 were to a fourth retail customer.
F-11
<PAGE> 69
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LEASES:
The Company leases its facilities under operating lease agreements. During
1993, 1994 and 1995, rental expense amounted to approximately $260,000, $258,000
and $295,000, respectively.
Future minimum lease payments on a calendar year basis under non-cancelable
leases, as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
TOTAL
COMMITMENTS
-----------
<S> <C>
1996.................................................... $ 330,000
1997.................................................... 196,000
--------
$ 526,000
========
</TABLE>
In March 1993, the Company assumed the lease for its headquarters facility
which prior to such date had been subleased from an affiliate. The Company
subleases a portion of the same facility to an affiliate for which sublease
payments were $54,000 in 1995. Future sublease amounts from its affiliate are
$54,000 and $32,000 in 1996 and 1997, respectively.
NOTE 10 -- RESEARCH AND DEVELOPMENT:
Research and development activities were a major component of the Company's
expenditures and efforts during 1993, 1994 and 1995. The Company's research and
development expenses (including the allocation of salaries) during 1993, 1994
and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Hardware development........................... $ 829,000 $ 989,000 $1,523,000
Software development........................... 1,496,000 1,582,000 968,000
---------- ---------- ----------
Total research and development................. $2,325,000 $2,571,000 $2,491,000
========== ========== ==========
</TABLE>
During 1994 and 1995, the Company had research and development contracts
with unaffiliated parties for both hardware and software elements of its
electronic shelf labeling system. The Company reimbursed these contractors
generally based on milestone achievements or satisfactory performance.
NOTE 11 -- STOCK OPTION AND DEFINED CONTRIBUTION PLAN:
In connection with the Initial Public Offering, the Company implemented an
employee stock option plan whereby options to purchase up to 850,005 shares of
common stock may be granted to key employees of the Company. In June 1994, 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. Options
granted under the plan typically vest over a period of three years, but become
exercisable over a period of five to ten years. The consolidated statement of
operations for the years ended December 31, 1993, 1994 and 1995 include noncash
compensation expense of $7,454,000, $1,119,000, and $27,000, respectively,
representing compensation earned for service through the periods then ended
related to option grants. Based upon the vesting of these options (net of
subsequently terminated options), the Company will record non-cash compensation
expense totaling $43,000 in 1996, assuming no additional terminated options.
F-12
<PAGE> 70
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of all options activity pursuant to the employee stock option
plan is as follows:
<TABLE>
<CAPTION>
PRICE RANGE OPTIONS
---------------- --------
<S> <C> <C>
Options granted pursuant to the Reorganization......... $.01 725,104
Other option grants in 1993.......................... $5.875 - $6.00 42,633
Options exercised.................................... $.01 (5,666)
Options canceled..................................... $.01 (64,093)
--------
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 - $5.875 (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 - $5.875 917,729
--------
</TABLE>
Additionally, in connection with the Reorganization, the Company
implemented a director stock option plan under which options covering up to
50,000 shares may be granted to directors of the Company. During 1993 and 1994,
25,000 and 7,500 options, respectively, were granted to directors of the Company
to purchase an equal number of common shares pursuant to this plan at an option
prices of $6.75. All such options remain outstanding as of December 31, 1995.
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 $9,240 in 1995). 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, 1995.
NOTE 12 -- INCOME TAXES:
The Company has incurred net losses since inception which have generated
net operating loss carryforwards of $35.0 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, 1994
and 1995 of $13.2 million and $17.5 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-13
<PAGE> 71
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the noncurrent deferred tax asset at December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 9,926,000 $ 14,568,000
Stock option compensation....................... 2,997,000 2,904,000
Other........................................... 264,000 54,000
------------ ------------
Total deferred tax benefit...................... 13,187,000 17,526,000
Valuation allowance............................. (13,187,000) (17,526,000)
------------ ------------
Net noncurrent deferred tax asset............. $ -- $ --
============ ============
</TABLE>
In 1993, 1994 and 1995 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, 1993, 1994 and 1995 as a
result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate....... $ 5,439,000 $ 3,835,000 $ 3,695,000
State income tax benefit, net of Federal tax
charge.................................... 1,214,000 856,000 825,000
Exclusion of 1993 losses prior to the
Reorganization............................ (1,318,000) -- --
Net loss not providing current year tax
benefit................................... (5,213,000) (4,358,000) (4,428,000)
Other....................................... (122,000) (333,000) (92,000)
----------- ----------- -----------
Provision for income taxes............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
NOTE 13 -- OFFSHORE PUBLIC OFFERING AND CONTEMPORANEOUS PRIVATE PLACEMENT:
On July 11, 1996, the Company completed the offshore public offering of an
aggregate of 4,963,500 shares of Common Stock, $.01 par value, 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.
In connection with the completion of these transactions, holders of the
Company's Preferred Stock, $1.00 par value, 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.
F-14
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Electronic Retailing Systems International, Inc.
We have reviewed the accompanying interim condensed consolidated financial
information of Electronic Retailing Systems International, Inc. (the "Company")
as of September 30, 1996, and for the nine-month periods ended September 30,
1995 and 1996. This interim condensed consolidated financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim condensed consolidated financial
information for it to be in conformity with generally accepted accounting
principles.
PRICE WATERHOUSE LLP
Stamford, Connecticut
November 14, 1996
F-15
<PAGE> 73
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................ $ 3,210 $ 9,651
Accounts receivable.............................................. 1,356 1,611
Inventories...................................................... 1,874 1,505
Prepayments and other current assets............................. 609 206
-------- --------
Total current assets.......................................... 7,049 12,973
-------- --------
Equipment.......................................................... 2,047 2,292
Accumulated depreciation......................................... (1,365) (1,683)
-------- --------
Net equipment.................................................... 682 609
-------- --------
Other non-current assets........................................... 585 883
-------- --------
Total assets............................................. $ 8,316 $ 14,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................ $ 1,766 $ 882
-------- --------
Total current liabilities..................................... 1,766 882
-------- --------
Long-term debt..................................................... 3,335 4,987
-------- --------
Commitments........................................................ -- --
-------- --------
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 shares and no shares authorized; 123,246 shares and
no shares issued and outstanding in 1995 and 1996)............ 123 --
Common stock (par value $0.01 per share; 25,000,000 shares
authorized; 11,748,232 and 21,034,195 shares issued and
outstanding in 1995 and 1996)................................. 117 210
Additional paid-in capital....................................... 38,474 50,644
Accumulated deficit.............................................. (35,499) (42,258)
-------- --------
Total stockholders' equity.................................... 3,215 8,596
-------- --------
Total liabilities and stockholders' equity............... $ 8,316 $ 14,465
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-16
<PAGE> 74
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
REVENUES
Product Sales.................................................. $ 1,718 $ 3,675
Maintenance.................................................... 185 595
------- -------
Total revenues......................................... 1,903 4,270
------- -------
COST OF GOODS SOLD
Product Sales.................................................. 2,382 3,955
Maintenance.................................................... 381 718
------- -------
Total cost of goods sold............................... 2,763 4,673
------- -------
Gross profit (loss)............................................ (860) (403)
------- -------
OPERATING EXPENSES
Selling, general and administrative (including amounts to
related parties of $85 and $28 during the nine months ended
September 30, 1995 and 1996)................................ 5,044 5,080
Research and development....................................... 2,094 786
Depreciation and amortization.................................. 81 123
Stock option compensation...................................... 80 32
------- -------
Total operating expenses............................... 7,299 6,021
------- -------
Loss from operations........................................... (8,159) (6,424)
------- -------
OTHER INCOME (EXPENSES)
Interest income................................................ 82 179
Interest expense (including amounts to related parties of $52
during the nine months ended September 30, 1995)............ (223) (283)
Gain on short-term investments................................. 5 --
------- -------
Total other income (expenses).......................... (136) (104)
------- -------
Net loss.................................................... $(8,295) $(6,528)
======= =======
EARNINGS PER SHARE
Average common shares outstanding.............................. 11,741 14,528
======= =======
Net loss per common share...................................... $ (0.72) $ (0.47)
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-17
<PAGE> 75
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
NET CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss................................................................. $(8,295) $(6,528)
Other adjustments to reconcile net loss to net cash...................... 42 201
------- -------
Cash used in operating activities...................................... (8,253) (6,327)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (287) (245)
Capitalized product development costs.................................... (78) (513)
Proceeds from sales of short-term investments............................ 1,027 --
------- -------
Cash provided by (used in) investing activities........................ 662 (758)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............................... -- 12,111
Net proceeds from issuance of long term note............................. 1,350 1,650
Payment upon conversion of preferred stock............................... -- (235)
Net proceeds from issuance of preferred stock............................ 10,585 --
------- -------
Cash provided by financing activities.................................. 11,935 13,526
------- -------
Net increase in cash and cash equivalents.............................. 4,344 6,441
------- -------
Cash and cash equivalents at beginning of period......................... 1,131 3,210
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 5,475 $ 9,651
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-18
<PAGE> 76
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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 nine month period ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1996. 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, 1995.
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
loss per common share does not reflect common share equivalents that are
anti-dilutive.
Cash and cash equivalents at December 31, 1995 include deposits of
approximately $440,000 held as interest bearing collateral for irrevocable
letters of credit of the same amounts relating to future inventory purchases.
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, 1995 consisted of
$674,000 of materials and supplies and $1,200,000 of finished goods. Inventories
at September 30, 1996 consist of $622,000 of materials and supplies and $883,000
of finished goods. Inventories in excess of expected requirements due to new
product introductions or product enhancements are expensed currently.
NOTE 4 -- ADOPTION OF NEW ACCOUNTING STANDARD:
ERS has adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123"). 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. 15 "Accounting for Stock Issued to
Employees". The Company has chosen to continue its use of the intrinsic value
based method of accounting, but will present required financial statement
disclosures it its Annual Report on Form 10-K for the year ending December 31,
1996.
F-19
<PAGE> 77
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, $.01 par value ("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.
In connection with the completion of these transactions, holders of the
Company's Series A Cumulative Convertible Preferred Stock, $1.00 par value,
("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.
F-20
<PAGE> 78
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............................... 3
Risk Factors..................................... 10
Use Of Proceeds.................................. 17
Selling Security Holders......................... 18
Plan Of Distribution............................. 18
Capitalization................................... 20
Selected Historical Consolidated Financial and
Certain Other Data ............................ 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations . 23
Business......................................... 30
Management....................................... 42
Description of the Warrants...................... 43
Description of Capital Stock..................... 49
Certain Federal Income Tax Consequences.......... 50
Legal Matters.................................... 53
Experts.......................................... 53
Index to Financial Statements.................... F-1
[LOGO]
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
MARCH ______, 1997
<PAGE> 79
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........................................... $ *
Legal Fees and Expenses................................. $ *
Accounting Fees and Expenses............................ $ *
Other Fees and Expenses................................. $ *
---------
Total.......................................... $ *
=========
</TABLE>
- ---------------------
* To be filed by amendment.
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> 80
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-________________).
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-______________).
4.2 Form of Warrant (contained in Warrant Agreement filed as
Exhibit 4.1)
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the legality of
the securities being registered hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Principal Subsidiary, Norton Garfinkle, The
G/N Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z.
Failing, Robert D. Power and John Stevens (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Partnership, the Principal Subsidiary, and
the limited partners of the Partnership (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha, Bruce
F. Failing, Jr., Hanseatic Corporation and Garfinkle Limited
Partnership II (incorporated by reference to Exhibit 5(c) of
the Company's Current Report on Form 8-K dated July 24, 1995).
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
II-2
<PAGE> 81
Exhibit Number Description
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).
10.20 Indenture, dated as of January 24, 1997, between the Company
and United States
II-3
<PAGE> 82
Exhibit Number Description
Trust Company of New York (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-4 No. 333-___________).
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-_______________ )
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-_____________)
11.1 Statement of Computation of Per Share Earnings (incorporated
by reference to Exhibit 11 to the Company's Form 10-Q for the
quarter ended September 30, 1996, as amended).
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Exhibit 12.1 to the Company's
Registration Statement on Form S-4 No. 333-____________).
15.1 Letter from Price Waterhouse LLP re unaudited interim
financial information.
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimshaw.
24.1 Power of Attorney (appearing on Signature Page).
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Form 10-Q for the quarter ended September
30, 1996, as amended).
- ---------------------
* To be filed by amendment.
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-4
<PAGE> 83
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(2)(ii) above do not apply
if the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those 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> 84
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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wilton, State of Connecticut, on February 14, 1997.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By: /s/ Bruce F. Failing, Jr.
--------------------------------------------
Bruce F. Failing, Jr., Vice Chairman of the
Board and Principal Executive Officer
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature
appears below constitutes and appoints Norton Garfinkle, Bruce F. Failing, Jr.
and William B. Fischer, and each of them, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and revocation,
for such person and in such person's name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any other documents and instruments
incidental thereto, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Bruce F. Failing, Jr. Vice Chairman of the Board and February 14, 1997
- ------------------------------------- Principal Executive Officer
Bruce F. Failing, Jr.
/s/ William B. Fischer Vice President, Finance and February 14, 1997
- ------------------------------------- Principal Financial Officer and
William B. Fischer Accounting Officer
/s/ Paul A. Biddelman Director February 14, 1997
- -------------------------------------
Paul A. Biddelman
/s/ David Diamond Director February 14, 1997
- -------------------------------------
David Diamond
/s/ Norton Garfinkle Director February 14, 1997
- -------------------------------------
Norton Garfinkle
/s/ George B. Weathersby Director February 14, 1997
- -------------------------------------
George B. Weathersby
/s/ Donald E. Zilkha Director February 14, 1997
- -------------------------------------
Donald E. Zilkha
</TABLE>
II-6
<PAGE> 85
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-______________).
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-_____________).
4.2 Form of Warrant (contained in Warrant Agreement filed
as Exhibit 4.1)
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the
legality of the securities being registered
hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993
among the Company, the Principal Subsidiary, Norton
Garfinkle, The G/N Garfinkle Trust, Bruce F. Failing,
Jr., The Failing Trust, Elizabeth Z. Failing, Robert
D. Power and John Stevens (incorporated by reference
to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12,
1993 among the Company, Norton Garfinkle, The G/N
Garfinkle Trust, Bruce F. Failing, Jr., The Failing
Trust, Elizabeth Z. Failing, Robert D. Power and John
Stevens (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 No.
33-59486).
10.3 Form of Restated Stockholders' Agreement dated March
12, 1993 among Norton Garfinkle, The G/N Garfinkle
Trust, Bruce F. Failing, Jr., The Failing Trust and
Elizabeth Z. Failing (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement
on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993
among the Company, the Partnership, the Principal
Subsidiary, and the limited partners of the
Partnership (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12,
1993 among the Company and the limited partners of
the Partnership (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24,
1995, between the Company and, respectively, Donald
E. Zilkha, Bruce F. Failing, Jr., Hanseatic
Corporation and Garfinkle Limited Partnership II
(incorporated by reference to Exhibit 5(c) of the
Company's Current Report on Form 8-K dated July 24,
1995).
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).
<PAGE> 86
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).
<PAGE> 87
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-__________).
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-________________)
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-________________)
11.1 Statement of Computation of Per Share Earnings
(incorporated by reference to Exhibit 11 to the
Company's Form 10-Q for the quarter ended September
30, 1996, as amended).
12.1 Statement of Computation of Ratio of Earnings to
Fixed Charges (incorporated by reference to Exhibit
12.1 to the Company's Registration Statement on Form
S-4 No. 333-______________).
15.1 Letter from Price Waterhouse LLP re unaudited interim
financial information.
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimhaw.
24.1 Power of Attorney (appearing on Signature Page).
27.1 Financial Data Schedule (incorporated by reference to
Exhibit 27 to the Company's Form 10-Q for the quarter
ended September 30, 1996, as amended).
- ---------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 15.1
[PRICE WATERHOUSE LLP LETTERHEAD]
February 14, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Electronic Retailing Systems International, Inc. has included
our report dated November 14, 1996 (issued pursuant to the provisions of
Statement on Auditing Standards No. 71) in the Prospectus constituting part of
its Registration Statement on Form S-2 to be filed on or about February 14,
1997. We are also aware of our responsibilities under the Securities Act of
1933.
Yours very truly,
Price Waterhouse 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 27, 1996, except
for Note 13, as to which the date is July 11, 1996, 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
February 14, 1997
