As filed with the Securities and Exchange Commission on April 25, 2001.
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
eRoomSystem Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 3570 87-0540713
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(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Address and telephone number of principal executive offices)
Gregory L. Hrncir, General Counsel
3770 Howard Hughes Parkway, Suite 175, Las Vegas, Nevada 89109, (800) 316-3070
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(Name, address and telephone number of agent for service)
Copies to:
Michael J. Bonner
John C. Jeppsen
Robert C. Kim
Kummer Kaempfer Bonner & Renshaw
3800 Howard Hughes Parkway, 7th Floor
Las Vegas, Nevada 89109
(702) 792-7000
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Aggregate
Securities to be Registered Number of Shares Offering Price(1) Amount of Registration Fee
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Common stock, $0.001 par value 200,000 shares $350,000 $93(2)
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Common stock, $0.001 par value 341,180 shares $597,065 $158(3)
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Common stock, $0.001 par value 121,875 shares $152,344 $39
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(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) promulgated under the Securities Act.
(2) In accordance with Rule 429, the filing fee for these shares was
previously paid in conjunction with the Registration Statement on Form
SB-2/A, as declared effective on August 2, 2000 (File No. 333-34882).
(3) In accordance with Rule 429, the filing fee for these shares was
previously paid in conjunction with the Registration Statement on Form
SB-2, as declared effective on February 8, 2001 (File No. 33-52656)
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Pursuant to Rule 429 promulgated under the Securities Act of 1933, as amended,
the prospectus that constitutes part of this Registration Statement is a
combined prospectus and also relates to an aggregate of 541,180 shares of our
common stock which were previously registered for sale in a Registration
Statement on Form SB-2 , Registration No. 333-52656. This Registration Statement
also constitutes post-effective amendment no. 1 to Registration Statement No.
333-52656. This post-effective amendment shall become effective concurrently
with the effectiveness of this Registration Statement in accordance with Section
8(c) of the Securities Act of 1933, as amended.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act in 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission acting pursuant
to such Section 8(a) may determine.
The information in this preliminary prospectus is not complete and may be
changed. eRoomSystem Technologies, Inc. may not sell these securities until
the registration statement filed with the Securities and Exchange Commission
is effective. This preliminary prospectus is not an offer to sell these
securities, and it is not seeking an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 25, 2001
PROSPECTUS
321,875 SHARES OF COMMON STOCK ON BEHALF OF SELLING STOCKHOLDERS
341,180 SHARES OF COMMON STOCK ON BEHALF OF WARRANT HOLDERS
[LOGO]
This prospectus relates to the registration of an aggregate of 663,055
shares of the common stock of eRoomSystem Technologies, Inc., 321,875 shares of
common stock on behalf of selling stockholders and 341,180 shares of common
stock on behalf of warrants holders. Selling stockholders and warrant holders,
upon exercise of their warrants, may from time to time offer to sell their
respective shares of common stock.
We are not selling any shares of common stock on behalf of selling
stockholders or warrant holders and will not receive any cash or other proceeds
in connection with the sale of shares by selling stockholders or warrant
holders. If all of the warrants held by warrant holders are exercised through
the payment of cash, we will receive proceeds of $910,950 from such exercises.
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eRoomSystem Technologies' common stock is traded on the Nasdaq SmallCap
Market under the symbol "ERMS." On April 19, 2001, the last reported sale price
of eRoomSystem Technologies' common stock was $1.25.
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THESE SECURITIES ARE SPECULATIVE. INVESTING IN OUR COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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______________, 2001
[INSIDE FRONT COVER]
[This page will be blank in the final prospectus]
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
"RISK FACTORS" AND OUR FINANCIAL STATEMENTS BEFORE MAKING AN INVESTMENT
DECISION.
OUR BUSINESS
eRoomSystem Technologies is a Nevada corporation incorporated on August
31, 1999. The core business of eRoomSystem Technologies is the development and
installation of an intelligent, in-room computer platform and communications
network, or the eRoomSystem, for the lodging industry. The eRoomSystem is a
computerized platform and processor-based system designed to collect and control
data. The eRoomSystem supports our fully-automated and interactive eRoomServ
Refreshment Centers, or Refreshment Centers, electronic room safes, or
eRoomSafes, and other proposed applications. These other applications will
include information management services, in-room energy management capabilities,
credit card/smart card capabilities for direct billing, and remote engineering
and maintenance services.
Our interactive Refreshment Centers provide hotel guests with a
selection of up to 33 different beverages and snacks and offer the lodging
industry an opportunity to capture additional in-room revenues and reduce
operating costs. Our eRoomSafes have sufficient storage space for large items
such as laptop computers, video cameras and briefcases and generate additional
revenue. Our products interface with the hotel's property management system
through our eRoomSystem communications network. The hotel's property management
system posts usage of our products directly to the hotel guest's room account.
The solutions offered by our eRoomSystem and related products have
allowed us to install our products and services in several premier hotel chains,
including Marriott International, Hilton Hotels, Doubletree Hotels and Bass
Hotels. We believe that our hotel relationships will continue to provide us with
the opportunity to install our eRoomSystem and related products worldwide.
One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
fourteen million room-nights of data. Through our eRoomSystem, we are able to
collect information regarding the usage of our products on a real-time basis. We
use this information to help our customers increase their operating
efficiencies. Upon the establishment of our core business, we also intend to
market this information to suppliers of goods sold in our Refreshment Centers
and to other users desiring information on the buying patterns of hotel guests
for goods and services.
We believe that our eRoomSystem and developing technologies will
provide a foundation for expansion into the healthcare and time-share
industries. We propose to offer healthcare facilities with a comprehensive room
information and management system that will allow these facilities to provide
patients with a wide array of in-room amenities not available to them in the
past. These amenities include Refreshment Centers, eRoomSafes, direct dial long
distance, on-demand movies and other products and services commonly found in a
hotel room. Similar opportunities exist in the time-share industry. By offering
a direct credit card billing system, a healthcare or time-share facility can
offer similar services available in hotels.
OUR OFFICES
We maintain offices at 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada 89109 and 390 North 3050 East, St. George, Utah 84790. Our
telephone number is (800) 316-3070.
1
THE OFFERING
Common stock offered by selling stockholders: 321,875 shares
Common stock offered by warrant holders: 341,180 shares
Common stock to be outstanding after the offering: 7,407,199 shares
Use of proceeds: eRoomSystem Technologies will not receive
any of the proceeds from the sale of common
stock by either the selling stockholders or
warrant holders.
Nasdaq SmallCap Market symbol: "ERMS"
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The number of shares of common stock to be outstanding after the
offering is based on the number of shares outstanding as of April 6, 2001 and
includes the 341,180 shares of common stock underlying the warrants held by
warrant holders. The number of shares of common stock to be outstanding after
the offering does not include 2,919,470 shares of common stock issuable upon
exercise of outstanding stock options and warrants as of April 6, 2001, with a
weighted average exercise price of $5.46 per share.
All of the shares are being offered by selling stockholders and warrant
holders, who must deliver a copy of this prospectus to persons who buy such
shares. Selling stockholders and warrant holders will probably sell the shares
at prevailing market prices, through broker-dealers, although they are not
required to do so. Selling stockholders and warrant holders will retain all of
the proceeds of their sales, except for commissions they may pay to
broker-dealers. Although we will not receive any of the proceeds from the sale
of common stock by either selling stockholders or warrant holders, we will
receive the proceeds from the exercise of the warrants to the extent that
warrant holders exercise their respective warrants through the payment of cash
rather than through cashless exercise. We will receive a maximum of $910,950
from such exercises for cash.
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Unless otherwise noted, all information contained in this prospectus
assumes that:
o All of the shares of common stock held by selling stockholders
will be sold in this offering;
o All of the warrants held by warrant holders will be immediately
exercised and all of the resulting shares of common stock will be
sold in this offering;
o All stock certificates for our shares of Series A, Series B and
Series C convertible preferred stock have been surrendered to us
and exchanged for stock certificates for our shares of common
stock; and
o All promissory notes previously issued by us have been paid in
full or funds relating to such repayment have been placed in a
separate account.
2
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial information for our
business. The summary financial information set forth below should be read in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31,
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1998 1999 2000
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Revenue.......................................... $ 1,011 $ 541 $ 2,984
Cost of revenue.................................. 793 363 2,156
Gross margin (deficit)........................... 218 178 828
Loss from operations............................. (2,128) (2,586) (4,061)
Net loss......................................... (4,145) (3,672) (5,702)
Dividends related to convertible preferred stock. (19) (607) (5,604)
Loss attributable to common stockholders......... (4,164) (4,279) (11,306)
Basic and diluted loss per common share.......... (1.37) (1.33) (2.73)
Basic and diluted weighted average common shares
outstanding.................................... 3,029 3,221 4,137
AS OF DECEMBER 31, 2000
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BALANCE SHEET DATA:
Cash................................... $ 2,811
Working capital........................ 2,388
Total assets........................... 7,815
Long-term liabilities.................. 28
Total stockholders' equity............. 5,599
3
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AS WE ARE CONSIDERED TO BE
IN UNSOUND FINANCIAL CONDITION. YOU SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE YOU PURCHASE
ANY SHARES OF OUR COMMON STOCK. THE FOLLOWING RISKS, IF ANY ONE OR MORE OCCURS,
COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS OF
OPERATIONS. IF THAT OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE,
AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO EROOMSYSTEM TECHNOLOGIES
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND ANTICIPATE
CONTINUED OPERATING LOSSES, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY
We have a history of significant operating losses and anticipate
continued operating losses for the foreseeable future. For the years ended
December 31, 1999 and 2000, we have incurred losses attributable to common
stockholders of $4,279,444 and $11,306,295, respectively, and our operations
have used $2,304,807 and $4,285,183 of cash, respectively. As of December 31,
1999 and 2000, we had accumulated deficits of $13,684,041 and $24,990,336,
respectively.
If our revenues decline or grow at a slower rate than we anticipate, or
if our spending levels exceed our expectations or cannot be adjusted to reflect
slower revenue growth, our business would be severely harmed. We cannot assure
you that revenues will grow in the future or that we will generate sufficient
revenues for profitability, or that profitability, if achieved, can be sustained
on an ongoing basis.
GIVEN OUR RECURRING LOSSES AND ACCUMULATED DEFICITS, WE MAY BE
UNABLE TO CONTINUE AS A GOING CONCERN
Our independent auditors issued a report on their audit of our
consolidated financial statements for the years ended December 31, 1999 and
2000. Their report contains an explanatory paragraph in which they state that
our history of recurring losses and our working capital and stockholders'
deficits raise substantial doubt regarding our ability to continue as a going
concern. In addition, we continue to experience significant operating losses. If
we continue to generate significant losses from our operations, we may be unable
to continue as a going concern.
SINCE OUR REVENUE SHARING PROGRAM INCREASED OUR NEED FOR LONG-TERM
FINANCING, OUR ABILITY TO INCREASE REVENUE OR ACHIEVE PROFITABILITY IS DEPENDENT
UPON THE SATISFACTION BY OUR CUSTOMERS OF MINIMUM PERFORMANCE CRITERIA DURING A
90-DAY SEASONING PERIOD BEFORE AMRESCO LEASING CORPORATION WILL FUND ANY
INDIVIDUAL LOANS UNDER OUR LONG-TERM FINANCING ARRANGEMENT WITH THEM
The emphasis of our business model on a revenue sharing program
significantly increases our need for long-term financing because we offer our
products at little or no upfront cost to our customers. In order to address our
long-term capital needs, we have entered into an exclusive post-installation
financing arrangement with AMRESCO. Under the financing arrangement, AMRESCO
will finance up to 150% of our costs for the Refreshment Centers and eRoomSafes
installed at a property upon the completion of a 90-day seasoning period
following installation and the satisfaction of pre-funding requirements. Our
first funding from AMRESCO in the principal amount of $294,220.08 occurred on
March 22, 2001.
Prior to submitting a preliminary application for funding to AMRESCO,
we attempt to identify properties that satisfy minimum performance, occupancy
and liquidity requirements. Once an appropriate property is identified, we enter
into a lease with the property, install our products and submit a preliminary
application for funding. If our preliminary application is approved by AMRESCO
and after a 90-day seasoning period, we must submit a final application for
funding to AMRESCO. In order to obtain final approval for funding, the property
must have maintained its initial performance, occupancy and liquidity standards
and must have retained a minimum of 20% of the gross daily revenue on a per unit
basis, per day, during the seasoning period.
If our customers fail to meet AMRESCO's requirements or if AMRESCO were
to delay or refuse to provide our required financing, we cannot assure you that
other long-term financing will be available in sufficient amounts or on terms
acceptable to us, or at all. Our inability to obtain long-term financing may
prevent us from placing additional products under our revenue sharing program or
manufacturing products for sale. In addition to our long-term financing
4
arrangement and the proceeds of our initial public offering, we may require
additional short-term financing to cover the costs of the production and
installation of our products until the completion of the 90-day seasoning
period.
IN SHIFTING OUR BUSINESS MODEL FROM SALES TO A REVENUE SHARING PROGRAM,
WE MAY BE UNABLE TO INCREASE OUR REVENUES OR ACHIEVE PROFITABILITY IF WE CANNOT
SUCCESSFULLY IMPLEMENT OUR REVENUE SHARING PROGRAM OR IF THE PARTICIPATING
PROPERTIES DO NOT COMPLY WITH THE COVENANTS REGARDING THE PLACEMENT OF OUR
PRODUCTS AND COMPETING VENDING MACHINES
We have traditionally relied upon the sale of our products. Recently,
we shifted the focus of our business model from product sales to our revenue
sharing program. Our business model is new and our ability to generate revenues
or profits is unproven. Under our revenue sharing program, we offer our products
at little or no upfront cost to our customers and share the revenue generated by
our products over a seven-year period. Our success under our revenue sharing
program is dependent upon the participating hotel's compliance with covenants
regarding the placement of our Refreshment Centers, the location in the hotel
and quantity of competing vending machines that sell goods similar to those in
our Refreshment Centers, the price of goods sold through the vending machines
and the total number of products placed under our revenue sharing program. We
cannot assure you that our portion of the revenues generated will be sufficient
to cover the costs to produce, install, maintain and finance our products.
THE INTEREST RATE FOR OUR LONG-TERM FINANCING WITH AMRESCO WILL RESULT
IN A HIGHER INTEREST RATE THAN WE MAY HAVE BEEN ABLE TO NEGOTIATE IF WE WERE
STRONGER FINANCIALLY WHICH WILL RESULT IN REDUCED OPERATING AND PROFIT MARGINS
The financing arrangement we negotiated with AMRESCO will result in an
interest rate higher than the interest rate we may have been able to negotiate
if we were stronger financially. Due to the exclusive nature of this financing
arrangement in the domestic lodging industry, our ability to obtain financing
for revenue sharing agreements at more advantageous interest rates during the
seven-year term of the financing arrangement will be contractually restricted.
The funds obtained through our financing arrangement will initially bear an
interest rate equal to the seven-year treasury rate plus 12.5% that, upon
reaching thresholds of funds outstanding, may be subsequently reduced to the
seven-year treasury rate plus 6.5%.
WE MAY EXPERIENCE REDUCED SALES IF WE ARE UNABLE TO CONTINUOUSLY MODIFY
AND UPDATE OUR SOFTWARE SO THAT IT IS COMPATIBLE WITH THE PROPERTY MANAGEMENT
SYSTEMS OF OUR CURRENT AND FUTURE CLIENTS
Our eRoomSystem, Refreshment Centers and eRoomSafes directly interface
with the hotel's property management system. As a result, we must continuously
monitor and update our proprietary software so that the software remains stable
and works smoothly with the relevant property management system. If our software
is incompatible or has problems interacting with a hotel's property management
system, we may experience reduced sales.
WE MAY EXPERIENCE REDUCED OPERATING MARGINS AND LOSS OF MARKET SHARE
DUE TO THE INTENSE COMPETITION FROM COMPANIES WITH LONGER OPERATING HISTORIES,
GREATER RESOURCES AND MORE ESTABLISHED BRAND NAMES THAT MARKET IN-ROOM AMENITIES
TO THE LODGING INDUSTRY
The market for in-room amenities in the lodging industry is
competitive, and we expect competition to intensify in the future. Our
competitors vary in size and in the scope and breadth of the products and
services they offer. Our competitors include Bartech, Inc., Dometic Corporation,
MiniBar America, Inc. and ElSafe, Inc. We have been advised that Bartech, who
offers an automated minibar and a software-based network system, was recently
selected by MGM Mirage, Inc. to install its products at certain of its
properties after a successful test installation at The Bellagio - The Resort.
Our competitors have longer operating histories, larger customer bases, greater
brand recognition, and substantially greater capital, research and development,
manufacturing, marketing, service, support, technical and other resources than
we do. As a result, our competitors may be able to devote greater resources to
marketing campaigns, adopt more aggressive pricing policies or devote
substantially more resources to customer and business development than we can.
We also anticipate additional competition from new entrants into the
room management and related aspects of our business. In addition, we may, from
time to time, make pricing, service or marketing decisions, or acquisitions as a
strategic response to changes in the competitive environment. Our response to
this increased competition may result in reduced operating margins and loss of
market share.
5
WE HAVE RECEIVED A CLAIM FOR SEVERANCE AND OTHER PAYMENTS FROM OUR
FORMER CHIEF EXECUTIVE OFFICER AND MAY RECEIVE ADDITIONAL CLAIMS RELATED TO THE
TERMINATION OF FIFTEEN EMPLOYEES ON JANUARY 26, 2001, AND, IF ANY OF THESE
CLAIMS ARE SUCCESSFUL, WE MAY BE REQUIRED TO MAKE PAYMENTS TO THESE FORMER
EMPLOYEES
On January 26, 2001, we terminated the employment of fifteen employees
in an effort to maximize operational efficiencies and reduce monthly expenses.
In addition, we terminated our former chief executive officer, Steven L.
Sunyich, with cause. On March 28, 2001, we received a claim for severance and
other payments from Mr. Sunyich. It is possible that other employees may make a
claim for severance and other payments. If Mr. Sunyich's claim is successful, as
well as any other claim made by a terminated employee, we may be liable for
severance and other payments, which could have a material adverse effect upon
our financial condition and results of operation.
OUR FAILURE TO MAINTAIN OUR CURRENT RELATIONSHIPS WITH HOTEL CHAINS, TO
DEVELOP NEW RELATIONSHIPS WITH OTHER HOTEL CHAINS AND TO ENTER INTO DEFINITIVE
AGREEMENTS WITH THE FRANCHISEES OF THESE HOTEL CHAINS MAY RESULT IN OUR
INABILITY TO INCREASE REVENUES OR ACHIEVE PROFITABILITY
Although we are a vendor of interactive computerized Refreshment
Centers for a number of premier hotel chains, these arrangements may not
generate any sales or placements of our products. Due to the
franchisor-franchisee relationship between many hotel chains and their hotel
properties, even if we establish an exclusive or preferred vendor relationship
with a hotel chain, we must also enter into definitive agreements with the
franchisees of the hotel chain for the sale or placement of our products into
the actual hotel properties. Further, our relationships with the hotel chains
are arrangements that are subject to change. The failure to maintain our current
relationships with hotel chains, secure additional relationships with hotel
chains and enter into definitive agreements with franchisees of these hotel
chains will harm our ability to install additional products and services and may
result in our inability to increase revenues or achieve profitability.
OUR ABILITY TO ESTABLISH TWO OR MORE THIRD PARTY TURNKEY MANUFACTURING
SOURCES TO MEET OUR PROJECTED DEMAND IS DEPENDENT UPON OUR LIMITED EXPERIENCE IN
DEALING WITH TURNKEY MANUFACTURERS AND MAY AFFECT THE NUMBER OF INSTALLATIONS
UNDER OUR REVENUE SHARING PROGRAM
Our Refreshment Centers require a limited amount of assembly at our St.
George, Utah facility. Since our existing facility is not sufficient to meet our
projected growth, we will either have to establish two or more third party
turnkey manufacturing sources, expand our assembly facility or hold orders for
our products unfulfilled. We presently intend to establish third party turnkey
manufacturing sources to meet our projected demand.
If our installations increase significantly, our ability to establish
sufficient turnkey manufacturing sources will be critical to our future success.
The selection of suitable turnkey manufacturers is subject to our limited
experience in dealing with turnkey manufacturers and is dependent upon our
ability to identify turnkey manufacturers who can assemble our products on a
timely basis and in a quality manner. We have had preliminary discussions with
several third parties to establish turnkey manufacturing arrangements, but we
have not agreed to any of the terms of such arrangements. We cannot assure you
that we will be able to locate satisfactory turnkey manufacturing sources and,
if located, that the additional costs of such turnkey manufacturing sources will
not erode our ability to achieve profitability.
WE WILL BE UNABLE TO DELIVER AND INSTALL OUR PRODUCTS TO MEET OUR
PROJECTED GROWTH UNLESS WE SUCCESSFULLY EXPAND OUR EXISTING INFRASTRUCTURE AND
RECRUIT ADDITIONAL PERSONNEL FROM THE SMALL LABOR MARKET OF SOUTHERN UTAH
By utilizing our financing arrangement with AMRESCO, we intend to
expand our customer base for our current products and to develop and market new
products and services. If we are successful, our business will require the
implementation of expanded operational and financial systems, procedures and
controls, billing functions, the training of a larger employee base, and
increased coordination among our software, hardware, accounting, finance,
marketing, sales and field service staffs. We will be unable to deliver and
install our products to meet our projected growth unless we expand our existing
infrastructure on a timely basis.
Our assembly and service and installation departments are presently
insufficient to assemble, install, manage and service our projected growth.
While we are actively recruiting personnel for our assembly and service and
installation departments to meet our future needs, southern Utah has a
relatively small population base from which to hire qualified employees. If we
cannot recruit additional personnel to meet our projected growth, we will not be
able to deliver and install our products on a timely basis.
6
WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS TO THE
HEALTHCARE AND TIME-SHARE INDUSTRIES AS WE HAVE HISTORICALLY OPERATED IN THE
LODGING INDUSTRY
We have traditionally focused our marketing efforts on the lodging
industry. We are proposing to expand the marketing of our eRoomSystem,
Refreshment Centers and eRoomSafes to the healthcare and time-share industries.
As we have little or no experience in these new industries, we may not be
successful in marketing our products and services outside of the lodging
industry. As a result, we will be confronted with challenges and competition
that we have never faced before. We cannot assure you that we will be able to
meet the new challenges and competitors associated with these new industries.
WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS AS WE HAVE
LITTLE OR NO EXPERIENCE WITH RESPECT TO OUR PROPOSED NEW PRODUCTS AND SERVICES,
SUCH AS IN-ROOM ENERGY MANAGEMENT AND COORDINATION OF HOUSEKEEPING AND
ENGINEERING ACTIVITIES
Part of our growth strategy consists of expanding our offerings to
include products and services we have not provided in the past. For example,
following the establishment of our core business, we plan to offer new products
and services, such as in-room energy management and coordination of housekeeping
and engineering activities. As we have little or no experience with respect to
these new products and services, we may not be successful in expanding our
product offerings. As a result, we cannot assure you that we will be successful
in expanding our products and services or that we will be able to meet the new
challenges and competitors associated with the expansion of our products and
services.
ALTHOUGH WE HAVE ENTERED INTO CONFIDENTIALITY AND NON-COMPETE
AGREEMENTS WITH MOST OF OUR EMPLOYEES AND CONSULTANTS, IF WE ARE UNABLE TO
PROTECT OUR PROPRIETARY INFORMATION, SUCH AS THE SOFTWARE AND THE HARDWARE FOR
OUR EROOMSYSTEM AND THE INFORMATION COLLECTED BY OUR EROOMSYSTEM, AGAINST
UNAUTHORIZED USE BY OTHERS, OUR COMPETITIVE POSITION COULD BE HARMED
We believe our proprietary information, including the software and the
hardware for our eRoomSystem and the information collected by our eRoomSystem,
is important to our competitive position and is a significant aspect of the
products and services we provide. If we are unable to protect our proprietary
information against unauthorized use by others, our competitive position could
be harmed. We generally enter into confidentiality or non-compete agreements
with most of our employees and consultants, and control access to and
distribution of our documentation and other proprietary information. Despite
these precautions, we cannot assure you that these strategies will be adequate
to prevent misappropriation of our proprietary information. We could be required
to expend significant amounts to defend our rights to proprietary information.
OUR ABILITY TO MARKET OUR EROOMSYSTEM SUCCESSFULLY TO THE INTERNATIONAL
LODGING INDUSTRY IS SUBJECT TO OUR INEXPERIENCE WITH, AND LACK OF KNOWLEDGE OF,
THE INTERNATIONAL LODGING INDUSTRY, THE RELATIONSHIPS ESTABLISHED BY OUR
COMPETITORS WITH HOTEL OPERATORS IN EUROPE AND THE POTENTIAL DIFFICULTIES
ASSOCIATED WITH THE INSTALLATION OF OUR PRODUCTS
Part of our growth strategy is to expand into the international lodging
market. Our ability to initiate and maintain successful operations in
international markets include, among others, compliance with foreign laws and
regulations, fluctuations in foreign currency, general political and economic
trends, and language and cultural differences. As the international lodging
market represents only a small portion of our current business, we will have to
allocate significant resources in order to promote our products internationally.
Revenues from our current operations, let alone revenues from our proposed
international operations, may not offset the expense of establishing and
maintaining these international operations.
We do not have sufficiently experienced management or sales personnel
with relationships in international markets or a knowledge of the respective
laws, political and economic environment, language and cultural differences or
buying patterns of customers in those markets to effectively market and sell our
products in international markets. For example, Bartech, Inc. and MiniBar
America, Inc. have become the leaders in the minibar industry in Europe through
their established relationships with numerous hotels. We may be required to
enter into distributorship or other similar agreements for particular geographic
areas. If so, we cannot assure you that we will be successful in soliciting the
best distributors, or that if distributors are selected, that the additional
costs of such distributors will not erode our ability to achieve profitable
sales or revenue sharing arrangements for the placement of our products.
7
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK HAS TRADED PUBLICLY ONLY SINCE AUGUST 3, 2000 ON THE
NASDAQ SMALLCAP MARKET AND, AS A RESULT, THERE CAN BE NO ASSURANCE THAT AN
ACTIVE OR LIQUID TRADING MARKET WILL DEVELOP OR, IF DEVELOPED, WILL BE SUSTAINED
Prior to August 3, 2000, there was no public market for our common
stock. In conjunction with our initial public offering, our common stock was
accepted for listing on the Nasdaq SmallCap Market. Although our common stock is
currently quoted on the Nasdaq SmallCap Market, there can be no assurance that
an active or liquid trading market in our common stock will develop or, if
developed, be sustained. Further, if the minimum bid price of our common stock
falls below $1.00 per share for more than 30 consecutive business days, our
common stock may be delisted from the Nasdaq SmallCap Market.
In addition to the minimum requirements for continued listing, we
received a letter dated April 4, 2001 from The Nasdaq Stock Market, Inc.
requesting additional information with respect to the report to our financial
statements for the year ended December 31, 2000 in which our independent
auditors stated that our recurring losses and use of cash in operations raise
substantial doubt as to our ability to continue as a going concern. We intend to
address the concerns raised by The Nasdaq Stock Market, Inc. regarding our
listing.
OUR EXECUTIVE OFFICERS AND MEMBERS OF OUR BOARD OF DIRECTORS
BENEFICIALLY OWN APPROXIMATELY 18.9% OF THE OUTSTANDING SHARES OF OUR COMMON
STOCK AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED TO A VOTE OF
STOCKHOLDERS
Our executive officers and members of our board of directors
beneficially own 1,503,966 shares of common stock, or approximately 18.9% of the
outstanding shares of our common stock. These stockholders will have the power
to influence all matters requiring approval by our stockholders, including the
election of directors and approval of mergers and other significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of eRoomSystem Technologies.
OUR STOCK PRICE MAY FALL AS A RESULT OF THE 5,869,878 SHARES OF COMMON
STOCK, OR APPROXIMATELY 79.2% OF OUR OUTSTANDING COMMON STOCK, THAT IS CURRENTLY
ELIGIBLE FOR SALE
Sales of a substantial number of shares of common stock in the public
market could cause the market price for our common stock to decline. Upon the
assumption that all of the shares of common stock registered pursuant to this
offering are sold, there will be 7,407,199 outstanding shares of common stock,
of which 663,055 shares have been registered pursuant to this offering and
1,800,000 shares were sold in our initial public offering which closed on August
9, 2000. All of these shares, representing approximately 33.3% of our
outstanding shares of common stock, are immediately available for resale.
In addition to these shares and in light of existing lock-up
arrangements, up to 3,172,958 shares, or approximately 42.8% of our outstanding
shares of common stock, will be immediately available for resale in accordance
with Rule 144(k) under the Securities Act. Further, 233,865 shares of common
stock are eligible for sale in the public market, subject to volume limitations,
pursuant to Rule 144. These shares, along with the shares of common stock sold
in our initial public offering and the shares registered in this offering,
represent approximately 79.2% of our outstanding shares of common stock. As
result, a total of 5,869,878 shares of common stock are currently eligible for
sale in the public market. On May 2, 2001, a nine-month lock-up will expire and
890,985 shares of common stock will be available for sale in the public market,
subject to volume limitations, pursuant to Rule 144. On August 2, 2001, a
twelve-month lock-up will expire with respect to 167,828 shares of common stock,
all of which will be eligible for sale in the public market, subject to volume
limitations, pursuant to Rule 144.
Further, we have options and warrants outstanding to purchase 2,919,470
shares of our common stock, of which options and warrants to purchase 2,385,858
shares are immediately exercisable. The underlying shares of common stock will
be available for sale one year after the date of exercise subject to the
restrictions set forth in Rule 144 under the Securities Act, excluding options
issued under our 2000 Stock Option and Incentive Plan which will be registered
on Form S-8 and may be exercised on a cashless basis.
8
The sale of a substantial number of shares of our common stock within a
short period of time could cause our stock price to fall. In addition, the sale
of these shares could impair our abilities to raise capital through the sale of
additional common stock.
DUE TO THE OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE 2,919,470
SHARES OF COMMON STOCK, INCLUDING OPTIONS GRANTED TO OUR CURRENT AND FORMER
EXECUTIVE OFFICERS TO PURCHASE 1,520,566 SHARES OF COMMON STOCK, THE SALES OF
THE SHARES RECEIVED UPON THE EXERCISE OF SUCH OPTIONS AND WARRANTS, OR THE
PROSPECT OF SUCH SALES, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK
We have outstanding options and warrants to purchase 2,919,470 shares
of common stock at exercise prices ranging from $1.00 to $16.00 per share. Of
this amount, in 2000 and 2001, we issued to current and former executive
officers options to purchase 1,520,566 shares of common stock at exercise prices
ranging from $1.51 to $9.60. To the extent that all or a portion of those
options and warrants are exercised, the sales of such shares in the public
market, or the prospect of such sales, could adversely affect the market price
of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, the following:
- the implementation of our operating and growth strategy; and
- our projected capital expenditures.
These statements may be found under "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Determination of Offering Price," "Dividend
Policy," "Selling Stockholders and Warrant Holders," "Plan of Distribution,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Forward-looking statements typically are identified
by use of terms such as "may," "will," "would," "expect," "anticipate,"
"estimate" and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in forward-looking statements due to a number of
factors, including:
- our ability to finance our products effectively and profitably;
- our ability to maintain and expand our revenue sharing program;
- our ability to compete effectively in the lodging industry;
- our ability to achieve corporate contracts with large hotel chains
and definitive agreements with franchisees;
- our successful management of new product development;
- our ability to continuously modify and update our software;
- our ability to outsource the manufacture and assembly of our
products effectively;
- our ability to successfully diversify into the international,
healthcare and time-share markets;
- our ability to manage expansion effectively; and
- general economic and business conditions in our markets and
industry.
You should also consider carefully the statements under "Risk Factors"
and other sections of this prospectus, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements.
9
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of our
common stock by selling stockholders or by warrant holders. To the extent that
the warrant holders elect to exercise their warrants through the payment of cash
instead of through a cashless exercise procedure, we will receive maximum
proceeds in the amount of $910,950 from such exercises. There is no assurance
that any of the warrants will be exercised or, if exercised, exercised through
the payment of cash. To the extent that a portion of the warrants are exercised
through the payment of cash, the proceeds received will be used for general
working capital purposes.
Although we have agreed to bear the expenses of the registration of the
shares of common stock registered pursuant to this registration statement, we
will not be responsible for any commissions and discounts of agents or
broker-dealers and transfer taxes, if any, incurred by selling stockholders or
warrant holders.
DETERMINATION OF OFFERING PRICE
Our common stock is quoted and traded on the Nasdaq SmallCap Market
under the trading symbol "ERMS" since August 3, 2000. The following table sets
forth the high and low closing sale prices of our common stock, as reported by
the Nasdaq SmallCap Market, during the periods indicated.
CALENDAR QUARTER ENDED LOW HIGH
- ------------------------------------------------- ----------------- ------------------
September 30, 2000 $4.5000 $6.3750
December 31, 2000 $1.3125 $4.8750
March 31, 2001 $0.8750 $2.8750
June 30, 2001 (through April 19, 2001) $0.6875 $1.4000
The last reported sale price of our common stock on the Nasdaq SmallCap
Market on April 19, 2001 was $1.25 per share. We are not aware of any public
market for the warrants held by warrant holders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
Our board presently, and for the foreseeable future, intends to retain all of
our earnings, if any, for the development of our business. The declaration and
payment of cash dividends in the future will be at the discretion of our board
and will depend upon a number of factors, including, among others, our future
earnings, operations, funding requirements, restrictions under our credit
facility, our general financial condition and any other factors that our board
considers important. Investors should not purchase our common stock with the
expectation of receiving cash dividends.
The terms of our Series A convertible preferred stock, Series B
convertible preferred stock and Series C convertible preferred stock provided
for annual cumulative dividends of 8%, 6% and 7%, respectively. Upon the
consummation of our initial public offering on August 9, 2000, $250,124,
$275,677 and $15,016 in dividends on our Series A, Series B and Series C
convertible preferred stock, respectively, were due and payable. In addition,
the previously outstanding shares of Series A convertible preferred stock,
Series B convertible preferred stock and Series C convertible preferred stock
were converted into shares of our common stock. All remaining accrued dividends
of shares of common stock have been paid and all accrued dividends of cash will
be paid upon the receipt from the remaining holders of the stock certificates
for Series A convertible preferred stock and Series C convertible preferred
stock for conversion into shares of common stock.
10
SELLING STOCKHOLDERS AND WARRANT HOLDERS
The following table sets forth the name of each selling stockholder and
warrant holder, the aggregate number of shares of common stock beneficially
owned by each selling stockholder and warrant holder as of December 1, 2000, the
aggregate number of shares of common stock that each selling stockholder and
warrant holder may offer and sell pursuant to this prospectus and the percentage
ownership of the outstanding shares of our common stock for each selling
stockholder and warrant holder, including shares issuable upon the exercise of
warrants.
Because each selling stockholder or warrant holder may offer all or a
portion of the shares of common stock offered by this prospectus at any time,
and from time to time after the date hereof, no estimate can be made of the
number of shares that each selling stockholder or warrant holder may retain upon
completion of this offering. However, assuming all of the shares offered by this
prospectus are sold after completion of this offering, none of the selling
stockholders will own more than one percent of the shares of common stock
outstanding, other than DayStar Partners, L.P.
The beneficial ownership is calculated based on 7,066,019 shares of our
common stock outstanding as of April 6, 2001 and 7,407,199 shares of our common
stock outstanding after the offering. Beneficial ownership is determined in
accordance with the rules of the Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment power,
or shares voting and investment power with his or her spouse, with respect to
all shares of capital stock listed as owned by such person. Shares issuable upon
the exercise of options that are currently exercisable, or become exercisable
within sixty days of December 1, 2000, are considered outstanding for the
purpose of calculating the percentage of outstanding shares of our common stock
held by the individual, but not for the purpose of calculating the percentage of
outstanding shares of our common stock held by another individual. The
information with respect to beneficial ownership of common stock held by each
person is based upon record ownership data provided by our transfer agent,
information as supplied or confirmed by selling stockholders or warrant holders
or based upon our actual knowledge. Percentage ownership of less than 0.01% is
indicated with an asterisk (*).
Within the past three years, none of the selling stockholders or
warrant holders have held any position or office with us or entered into a
material relationship with us, with the exception of Royal W. Minson II, who
served as our president and chief operating officer from 1997 to 1998, and the
remaining selling stockholders who provided us with a bridge loan in the
principal amount of $1,500,000 on April 13, 2000. We repaid the loan from the
proceeds of our initial public offering.
PERCENTAGE
OWNERSHIP OF
NUMBER OF SHARES NUMBER OF SHARES OUTSTANDING
NAME BENEFICIALLY OWNED OFFERED HEREBY SHARES
- ------------------------------------------------------------ --------------------- ------------------- ------------------
SELLING STOCKHOLDERS
566768 Ontario Limited 33,333 shares 33,333 shares *
B.H. Capital Investments, L.P. 33,333 shares 33,333 shares *
Myra Heller 19,335 shares 19,335 shares *
Rachelle Heller 20,000 shares 20,000 shares *
Plazacorp Investments Limited 13,333 shares 13,333 shares *
Queens Centre Corner Limited 66,666 shares 66,666 shares *
Jay Smith 14,000 shares 14,000 shares *
Bankruptcy Estate of Royal W. Minson II 121,875 shares 121,875 shares *
SUB-TOTAL 321,875 SHARES 321,875 SHARES *
WARRANT HOLDERS
Charles Aikins 750 shares 750 shares *
Dennis Arey, Jr. 2,105 shares 1,650 shares 0.01%
Barrington L. Barisic 42,979 shares 3,300 shares 0.54%
Jerry T. Bellon 3,300 shares 3,300 shares *
Leonard Brusseau 1,875 shares 1,875 shares *
Harold Burton 188 shares 188 shares *
11
Capitol Bay Securities 25,947 shares 23,627 shares 0.03%
Shu E. Chen, M.D. 21,069 shares 6,600 shares 0.20%
Georgia C. Chou 27,479 shares 6,600 shares 0.28%
Crist, Griffins, Schultz & Biorn Pension Fund 14,048 shares 3,300 shares 0.15%
Benjamin G. Davidian 2,166 shares 1,650 shares 0.01%
DayStar Partners, L.P. 157,216 shares 33,000 shares 1.67%
Rick B. Delamarter 12,656 shares 9,900 shares 0.04%
Shoba Mohinani de Mirani 39,271 shares 16,500 shares 0.31%
DeWitt Land and Investment Co. 4,086 shares 3,300 shares 0.01%
Timothy L. Eide 4,223 shares 3,300 shares 0.01%
David W. and Linda C. Ellis 3,645 shares 3,300 shares *
Richard From 3,938 shares 3,938 shares *
Jeffrey W. Gardiner 16,950 shares 16,950 shares *
Jerry Giles 7,847 shares 7,425 shares 0.01%
Golden Pheasant Ltd. 57,909 shares 18,150 shares 0.54%
Harris & Eide Profit Sharing Plan FBO Donald K. Harris 4,230 shares 3,300 shares 0.01%
Harris & Eide Profit Sharing Plan FBO Gregory M. Eide 4,042 shares 3,300 shares 0.01%
Todd and Wendy Heldt 3,589 shares 3,300 shares *
Mindy Holmquist 375 shares 375 shares *
Hunter Family Trust 7,666 shares 6,600 shares 0.01%
Grant and Jean Hunter 3,536 shares 3,300 shares *
Stephen A. Hunter 7,776 shares 7,050 shares 0.01%
ICB International Commodities Brokers Ltd. 3,751 shares 3,300 shares 0.01%
T. Steven Ichishita IRA 5,192 shares 1,650 shares 0.05%
T. Steven and Virgina Ichishita 10,314 shares 3,300 shares 0.09%
J & L Weststeyn 1996 Family Trust 4,297 shares 3,300 shares 0.01%
Jain Family Trust DTD 12/11/95 3,572 shares 3,300 shares *
Saurabh Jain 4,232 shares 3,300 shares 0.01%
Jet Resources, Inc. 25,275 shares 8,250 shares 0.23%
Brett L. Johnson 1,729 shares 1,650 shares *
Larry R. and Rosaleen L. Kamper 10,516 shares 3,300 shares 0.10%
Kashkooli Family Trust DTD 6/27/91 10,403 shares 3,300 shares 0.10%
Steven Kay IRA 6,559 shares 6,300 shares *
Larry Kelley 3,750 shares 3,750 shares *
Joyce Kircher 188 shares 188 shares *
Stephen C. Kircher 18,750 shares 18,750 shares *
Jerry D. Krug, Jr. 1,768 shares 1,650 shares *
Dan and Marcella Line 5,335 shares 3,300 shares 0.03%
Peter Liu 750 shares 750 shares *
Sean McBratney 4,125 shares 4,125 shares *
Elizabeth McCarger 1,875 shares 1,875 shares *
Marla J. Modine-Solomon Revocable Trust 7,919 shares 6,600 shares 0.02%
Lloyd Moseby 375 shares 375 shares *
Raghunath Mulukutla 4,200 shares 3,300 shares 0.01%
Nyman Family Trust DTD 6/7/96 8,024 shares 7,425 shares 0.01%
Robert G. Parrish 14,005 shares 3,300 shares 0.14%
12
Dario M. Passalalpi 1,773 shares 1,650 shares *
Anthony Pescetti 5,315 shares 1,650 shares 0.05%
Robert Pirtlen IRA 8,056 shares 3,300 shares 0.06%
Rossini Family Trust 8,250 shares 8,250 shares *
Rupp Family Trust 1,872 shares 1,650 shares *
Richard Scott 375 shares 375 shares *
Susan Stanberry 750 shares 750 shares *
Dalel Tartak 4,122 shares 1,650 shares 0.03%
Gregory J. Vislocky 7,659 shares 6,788 shares 0.01%
Kathy A. Wickard 2,073 shares 1,650 shares 0.01%
Michael J. Wiechers 3,642 shares 3,300 shares *
William & Carolyn Peterson Family Trust 3,607 shares 3,300 shares *
Arlene Wilson 188 shares 188 shares *
Al Woods 375 shares 375 shares *
Gregory Yankovsky 938 shares 938 shares *
Jim R. Yates II 3,536 shares 3,300 shares *
Takashi Yoshida, M.D. 10,383 shares 3,300 shares 0.10%
Zimbrich Family Trust 10,506 shares 3,300 shares 0.10%
John D. and Cheryl Zimbrich 10,506 shares 3,300 shares 0.10%
SUB-TOTAL 721,691 SHARES 341,180 SHARES 4.61%
TOTAL 1,043,566 SHARES 663,055 SHARES 8.95%
13
PLAN OF DISTRIBUTION
We are registering the shares of common stock offered for sale by this
prospectus on behalf of selling stockholders and warrant holders. As used in
this section, "selling stockholders" and "warrant holders" include donees,
pledgees, distributees, transferees or other successors-in-interest, including,
without limitation, their respective affiliates and limited or general partners,
all of which are referred to as a group below as transferees. Selling
stockholders and warrant holders will act independently of us in making
decisions with respect to the timing, manner and size of each sale.
We will pay all costs, expenses and fees in connection with the
registration of the shares. Selling stockholders and warrant holders will pay
all brokerage commissions, underwriting discounts, commissions, transfer taxes
and other similar selling expenses, if any, associated with the sale of the
shares of common stock by them. Shares of common stock may be sold by selling
stockholders or warrant holders, from time to time, in one or more types of
transactions (which may include block transactions) on the Nasdaq SmallCap
Market or on any other market on which our common stock may, from time to time,
be trading, in the over-the-counter market, in privately-negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of such shares, or a combination of such methods of sale, at
market prices prevailing at the time of sale, fixed prices, varying prices
determined at the time of sale or at negotiated prices.
Selling stockholders and warrant holders will have the sole discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time. Such transactions
may, or may not, involve brokers or dealers. To the best of our knowledge,
selling stockholders or warrant holders have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of shares of common stock offered by
this prospectus; however, selling stockholders or warrant holders may enter into
agreements, understandings or arrangements with an underwriter or broker-dealer
regarding the sale of their shares in the future.
Selling stockholders and warrant holders may effect such transactions
by selling shares of common stock directly to purchasers or to or through
broker-dealers, which may act as agents or principals, or other agents. Such
broker-dealers or other agents may receive compensation in the form of
discounts, concessions, or commissions from selling stockholders and warrant
holders and/or the purchasers of shares of common stock for whom such
broker-dealers or other agents may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer or other
agent might be in excess of customary commissions). Market makers and block
purchasers purchasing the shares will do so for their own account and at their
own risk. It is possible that a selling stockholder or a warrant holder will
attempt to sell shares of common stock in block transactions to market makers or
other purchasers at a price per share which may be below the then market price.
There can be no assurance that all or any part of the shares offered hereby will
be sold by selling stockholders and warrant holders.
Selling stockholders and warrant holders may enter into hedging
transactions with broker-dealers or other financial institutions with respect to
the shares. In connection with these transactions, broker-dealers or other
financial institutions may engage in short sales of the shares in the course of
hedging the positions they assume with selling stockholders or warrant holders.
Selling stockholders and warrant holders may also sell the shares short and
redeliver the shares to close out the short positions. Selling stockholders and
warrant holders may also enter into option or other transactions with
broker-dealers or other financial institutions which require delivery of the
shares to the broker-dealer or other financial institutions. Selling
stockholders and warrant holders may also loan or pledge the shares to a
financial institution or a broker-dealer and the financial institution or the
broker-dealer may sell the shares loaned or upon a default the financial
institution or the broker-dealer may effect sales of the pledged shares. Selling
stockholders, warrant holders and any brokers, dealers or agents that
participate in connection with the sale of shares of common stock might be
deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by such brokers, dealers or agents and any profit on the
resale of the shares sold by them, while acting as principals, might be deemed
to be underwriting discounts or commissions under the Securities Act.
We have agreed to indemnify selling stockholders against certain
liabilities arising under the Securities Act with respect to any untrue
statement, alleged untrue statement, omission or alleged omission of any
material fact contained in, or required to be contained in, the registration
statement for their shares or this prospectus. Selling stockholders and warrant
holders may agree to indemnify any agent, dealer, broker-dealer or underwriter
that participates in transactions involving sales of the shares of common stock
offered pursuant to this prospectus against
14
certain liabilities, including liabilities arising under the Securities Act.
Because selling stockholders or warrant holders may be deemed to be
"underwriters" within the meaning of the Securities Act, selling stockholders
and warrant holders will be subject to the prospectus delivery requirements of
the Securities Act and the rules promulgated thereunder and they may be subject
to certain statutory liabilities under the Securities Act, including, but not
limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under
the Securities Exchange Act of 1934, as amended, or the Exchange Act. In
addition, selling stockholders, warrant holders and any other person
participating in the offering will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M
under the Exchange Act, which may limit the timing of purchases and sales.
These restrictions may affect the marketability of the common stock and the
ability of any person to engage in market-making activities with respect to the
common stock. Any shares of common stock covered by this prospectus which
qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under the terms of this prospectus. In addition,
subject to applicable state and foreign laws, selling stockholders or warrant
holders may sell their common stock outside the United States pursuant to Rules
903 and 904 of Regulation S under the Securities Act.
To comply with the securities laws of certain jurisdictions, the shares
of common stock offered by this prospectus may need to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with. If a selling stockholder or a warrant holder notifies us that any
material arrangement has been entered into with a broker-dealer for the sale of
shares of common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker, dealer or
underwriter, we will file a supplement to this prospectus, if required, pursuant
to Rule 424(b) under the Securities Act. In addition, to the extent required, we
will amend or supplement this prospectus to disclose other material arrangements
regarding the plan of distribution.
15
SELECTED FINANCIAL DATA
This section presents selected historical financial data of eRoomSystem
Technologies. You should read carefully the financial statements included in
this prospectus, including the notes to the financial statements. The selected
information in this section is not intended to replace the financial statements.
We derived the selected consolidated statement of operations data presented
below for each of our 1999 and 2000 fiscal years and the balance sheet data at
December 31, 1999 and 2000 from our audited consolidated financial statements
appearing elsewhere in this prospectus. We derived the selected consolidated
statement of operations data presented below for our 1998 fiscal year and the
balance sheet data at December 31, 1998 from our audited financial statements
not appearing in this prospectus.
YEARS ENDED DECEMBER 31,
1998 1999 2000
----------------- ------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales........................................... $ 917 $ 144 $ 2,553
Revenue sharing arrangements............................ 46 213 267
Maintenance fees........................................ 48 183 164
----------------- ------------------ ----------------
Total revenue........................................ 1,011 540 2,984
----------------- ------------------ ----------------
Cost of revenue:
Product sales........................................... 711 118 1,926
Revenue sharing arrangements............................ 21 166 92
Maintenance fees........................................ 61 78 138
----------------- ------------------ ----------------
Total cost of revenue................................ 793 362 2,156
----------------- ------------------ ----------------
Gross margin (deficit).................................... 218 178 828
----------------- ------------------ ----------------
Operating expenses:
Selling and general and administrative.................. 2,062 2,493 4,105
Restructuring costs..................................... - - 419
Research and development (exclusive of non cash
compensation).......................................... 284 271 365
----------------- ------------------ ----------------
Total operating expenses............................. 2,346 2,764 4,889
----------------- ------------------ ----------------
Loss from operations...................................... (2,128) (2,586) (4,061)
----------------- ------------------ ----------------
Other income (expense):
Interest expense........................................ (1,923) (1,445) (1,372)
Write-off of note receivable from stockholder........... - - (399)
Equity in income (loss) of unconsolidated, wholly owned
subsidiary............................................. - 148 (16)
Interest and other income............................... 313 211 146
----------------- ------------------ ----------------
Other income (expense), net.......................... (1,610) (1,086) (1,641)
----------------- ------------------ ----------------
Loss before extraordinary loss............................ (3,738) (3,672) (5,702)
Extraordinary loss, net of income taxes................... (407) - -
----------------- ------------------ ----------------
Net loss.................................................. $ (4,145) $ (3,672) $ (5,702)
================= ================== ================
Dividends related to convertible preferred stock.......... $ (19) $ (607) $ (5,604)
================= ================== ================
Loss attributable to common stockholders.................. $ (4,164) $ (4,279) $ (11,306)
================= ================== ================
Basic and diluted loss per common share................... $ (1.37) $ (1.33) $ (2.73)
================= ================== ================
Basic and diluted weighted average common shares outstanding 3,029 3,221 4,137
================= ================== ================
BALANCE SHEET DATA:
Cash...................................................... 2 113 2,811
Working capital (deficit)................................. (3,358) (2,651) 2,388
Total assets.............................................. 2,520 4,351 7,815
Long-term liabilities..................................... 63 867 28
Total stockholders' equity (deficit)...................... (2,428) (24) 5,599
Please see Note 2 of the notes to our consolidated financial statements
for an explanation of the determination of the number of shares used in
computing per share data.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and notes to our financial statements, included elsewhere
in this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those set forth under "Risk Factors," "Special Note Regarding
Forward-Looking Information" and elsewhere in this prospectus.
OVERVIEW
eRoomSystem Technologies, Inc. is a Nevada corporation incorporated on
August 31, 1999. Our core business is the development and installation of an
intelligent, in-room computer platform and communications network, or the
eRoomSystem, for the lodging industry. The eRoomSystem is a computerized
platform and processor-based system designed to collect and control data. The
eRoomSystem supports our fully-automated and interactive eRoomServ Refreshment
Centers, or Refreshment Centers, electronic room safes, or eRoomSafes, and other
proposed applications. These other applications will include information
management services, in-room energy management capabilities, credit card/smart
card capabilities for direct billing and remote engineering and maintenance
services.
Our interactive Refreshment Centers provide hotel guests with a
selection of up to 33 different beverages and snacks and offer the lodging
industry an opportunity to capture additional in-room revenues and reduce
operating costs. Our eRoomSafes have sufficient storage space for large items
such as laptop computers, personal video cameras and briefcases and generate
additional revenue. Our products interface with the hotel's property management
system through our eRoomSystem communications network. The hotel's property
management system posts usage of our products directly to the hotel guest's room
account.
The solutions offered by our eRoomSystem and related products have
allowed us to install our products and services in several premier hotel chains,
including Marriott International, Hilton Hotels, Doubletree Hotels and Bass
Hotels. We believe that our hotel relationships will provide us with the
opportunity to install our eRoomSystem and related products in premier hotels.
One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected over
fourteen million room-nights of data. Through our eRoomSystem, we are able to
collect information regarding the usage of our products on a real-time basis. We
use this information to help our customers increase their operating
efficiencies. Following the establishment of our core business, we also intend
to market this information to suppliers of goods sold in our Refreshment Centers
and to other users desiring information on the buying patterns of hotel guests
for goods and services.
We believe that our eRoomSystem and developing technologies will
provide a foundation for expansion into the healthcare and time-share
industries. We propose to provide healthcare facilities with a comprehensive
room information and management system that will allow these facilities to
provide patients with a wide array of in-room amenities not available to them in
the past. These amenities will include Refreshment Centers, eRoomSafes, direct
dial long distance, on-demand movies and other products and services commonly
found in a hotel room. Similar opportunities exist in the time-share industry.
By offering a direct credit card billing system, a healthcare or time-share
facility can offer similar services available in hotels.
DESCRIPTION OF REVENUES
We have received substantially all of our revenues from the sale or
placement under a revenue sharing program of our products in hotels, and we
expect that these revenues will account for a substantial majority of our
revenues for the foreseeable future. We also generate revenues from maintenance
and support services. Our dependence on the lodging industry, including their
guests, makes us vulnerable to downturns in the lodging industry caused by the
general economic environment. Such a downturn could result in some hotels
delaying or declining to purchase or place our products or failing to renew our
maintenance agreements, or it could result in fewer purchases by hotel guests of
goods and services from our products installed in hotels. Time spent by
individuals on travel and leisure is typically discretionary for consumers and
may be particularly affected by adverse trends in the general economy. The
success of our operations depends, in part, upon discretionary consumer spending
and economic conditions affecting disposable consumer income such as employment,
wages and salaries, business conditions, interest rates, availability of credit
and taxation.
17
Historically, we have been restricted in our ability to market our
products due to limited working capital. Prior to 1998, our marketing efforts
focused primarily on selling our products. In 1998, as a result of the
lodging industry's general lack of available financing or capital for the
purchase of equipment, we modified our business model to emphasize our
revenue sharing program as our primary product placement program. Although an
emphasis on placing our products through our revenue sharing program rather
than through sales may result in lower gross revenues and significantly
greater capital requirements, our revenue sharing program provides us with an
ongoing seven-year revenue stream under each revenue sharing agreement.
Our revenue sharing program is designed to address the limited
financial resources of many potential customers in the lodging industry to
purchase our products. Through our revenue sharing plan, we install our
products at little or no upfront cost to our customers and share in the
recurring revenues generated from sales of goods and services related to our
products. Ownership of the Refreshment Centers and eRoomSafes is retained by
us throughout the term of the revenue sharing agreements. We retain the right
to re-deploy any systems returned to us upon the expiration or earlier
termination of the revenue sharing agreements. We believe that our revenue
sharing program will increase future placements of our products; however, we
cannot assure you that we will be successful in this effort.
We have experienced substantial fluctuations in revenues from
period-to-period as a result of limited working capital to fund the assembly
of our products and to maintain sufficient component inventories. In addition
to limited working capital, fluctuations in revenues have partially resulted
from the transition to our revenue sharing program under which revenues are
recognized over the seven-year life of the contract instead of immediately
upon installation of the product. We anticipate that the majority of our
revenues will result from the placement of our products pursuant to our
revenue sharing program, followed by sales and, to a lesser extent, from
maintenance agreements. We project that we will receive approximately 60% of
the recurring revenues from the sale of goods and services generated by the
Refreshment Centers and eRoomSafes placed under the revenue sharing
agreements. Our customers receive the remainder of the recurring revenues.
AMRESCO will be paid from our portion of the revenues.
We have installed more than 13,500 Refreshment Centers and 5,500
eRoomSafes primarily in the United States, as well as in Brazil, Canada and the
Bahamas. We intend to continue to offer our products domestically and
internationally to the lodging industry, and will tailor our products and
services for introduction into the healthcare and time-share industries.
Following the establishment of our core business, we also plan to
increase our revenues by bundling additional products and services with our
current products, such as our in-room energy management system and
information management services. We anticipate that as the installation base
of our products increases, the marketability and value of the information we
collect and manage will increase. We also expect to generate revenue from the
packaging and marketing of our information-based data as our installation
base expands.
REVENUE RECOGNITION
Revenues from sales of our products are recognized upon completion
of installation and acceptance by the customer of our products. Revenues from
the placement of our Refreshment Centers and eRoomSafes under our revenue
sharing program are accounted for similar to an operating lease, with the
revenues recognized as earned over the term of the agreement. In some
instances, our revenue sharing agreements provide for a guaranteed minimum
daily payment by the hotel. We negotiate our portion of the revenues
generated under our revenue sharing program based upon the cost of the
equipment installed and the estimated daily sales per unit for the specific
customer. We seek a gross profit margin of 40% on the sale or the placement
through our revenue sharing program of Refreshment Centers and eRoomSafes.
We enter into installation, maintenance and license agreements with
our customers. Installation, maintenance and license revenues are recognized
as the services are performed, or pro rata over the service period. We defer
all revenue paid in advance relating to future services and products not yet
installed and accepted by our customers.
We anticipate profit margins will increase as a result of greater
placement of our products pursuant to our revenue share program. We also expect
to improve our future profit margins if we are successful in obtaining revenues
through the sale of higher-priced, higher-margin, value added products such as
our proposed in-room energy management system and our information management
services.
Maintenance fees are expected to constitute a greater percentage of
total revenues in the future due to our focus on revenues generated from our
revenue sharing program, which requires maintenance agreements. Our
installation, maintenance and license agreements stipulate that we collect a
maintenance fee per Refreshment Center per day to be paid monthly. We expect to
generate gross profit margins of approximately 40% from our maintenance-related
revenues. We base this expectation on our historical cost of maintenance of
approximately $0.04 per unit per day and, pursuant to our maintenance
agreements, our projected receipt of $0.08 per unit per day.
18
DESCRIPTION OF EXPENSES
Cost of product sales consists primarily of production, shipping and
installation costs. Cost of revenue sharing arrangements consists primarily
of depreciation of capitalized costs for the products placed in service. We
capitalize the production, shipping, installation and sales commissions
related to the Refreshment Centers and eRoomSafes placed under revenue
sharing agreements. Cost of maintenance fee revenues primarily consists of
expenses related to customer support and maintenance.
Selling, general and administrative expenses include selling
expenses consisting primarily of advertising, promotional activities, trade
shows and personnel-related expenses and general and administrative expenses
consisting primarily of professional fees, salaries and related costs for
accounting, administration, finance, human resources, information systems and
legal personnel. Restructuring costs represent a one-time charge resulting
from the modification of executive employment agreements and the obligation
to pay termination benefits related to our management's restructuring of our
operations. Research and development expenses consist of payroll and related
costs for hardware and software engineers, quality assurance specialists,
management personnel, and the costs of materials used by these employees in
the development of new or enhanced product offerings.
In accordance with Financial Accounting Standards Board, or FASB,
Statement of Financial Accounting Standards, or SFAS, No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
development costs incurred in the research and development of new software
products to be sold, leased or otherwise marketed are expensed as incurred
until technological feasibility in the form of a working model has been
established. Internally generated capitalizable software development costs
have not been material to date. We have charged our software development
costs to research and development expense in our consolidated statements of
operations.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data
as a percentage of total revenues for the years indicated:
Year ended December 31,
1999 2000
------------------ ------------------
Statement of Operations Data:
Revenue:
Product sales................................................................ 26.7% 85.6%
Revenue share arrangements................................................... 39.5 8.9
Maintenance fees............................................................. 33.8 5.5
------------------ ------------------
Total revenue............................................................. 100.0 100.0
------------------ ------------------
Cost of revenue:
Product sales................................................................ 21.8 64.5
Revenue share arrangements................................................... 30.7 3.1
Maintenance.................................................................. 14.6 4.6
------------------ ------------------
Total cost of revenue..................................................... 67.1 72.2
------------------ ------------------
Gross margin.................................................................... 32.9 27.8
------------------ ------------------
Operating expenses:
Selling and general and administrative....................................... 461.2 137.6
Restructuring costs.......................................................... 14.0 14.0
Research and development (exclusive of non-cash compensation) ............... 50.2 12.2
------------------ ------------------
Total operating expenses.................................................. 511.4 163.9
------------------ ------------------
Loss from operations............................................................ (478.5) (136.1)
------------------ ------------------
Other income (expense):
Interest expense............................................................. (267.2) 46.0
Write-off of note receivable................................................. -- (13.4)
Equity in income (loss) of unconsolidated, wholly owned subsidiary 27.3 (0.5)
Interest and other income.................................................... 39.0 4.9
------------------ ------------------
Other expense, net........................................................ (200.9) (55.0)
------------------ ------------------
Loss before income taxes and extraordinary loss................................. (679.4) (191.1)
Loss before extraordinary loss.................................................. (679.4) --
Extraordinary loss, net of income taxes......................................... -- --
------------------ ------------------
Net loss........................................................................ (679.4)% (191.1)%
================== ==================
Dividends related to convertible preferred stock................................ (112.3) (187.8)
================== ==================
Loss attributable to common stockholders........................................ (791.7)% (378.9)%
================== ==================
19
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
Product Sales -- Our revenue from product sales was $144,282 in
revenues from product sales in 1999 compared to $2,552,578 in 2000,
representing an increase of $2,408,296. The increase in revenue from product
sales was due to increased orders and the fulfillment of orders that we were
previously unable to install due to our pre-initial public offering cash
constraints.
Revenue Sharing Arrangements -- Our revenue from revenue sharing
arrangements was $213,654 for 1999 and $266,730 for 2000, representing an
increase of $53,076, or 25%. The increase in revenue from revenue sharing
arrangements was due primarily to increase placements of our products
pursuant to our revenue sharing program.
Maintenance Fee Revenue -- Our maintenance fee revenue was $182,581
for 1999 and $164,332 for 2000, representing a decrease of $18,249, or 10%.
The decrease in maintenance for revenue was due primarily to the expiration
of maintenance contracts representing 753 units and the transfer of
Refreshment Centers to RSi BRE, an unconsolidated subsidiary in 1999.
COST OF REVENUE
Cost of Product Sales Revenue -- Our cost of product sales revenue
was $118,010 for 1999 compared to $1,926,333 for 2000, an increase of
$1,808,323. The increase in cost of product sales revenue was due to the sale
of 1,624 Refreshment Centers and 907 eRoomSafes during 2000. The gross margin
percentage on revenue from product sales revenue was 25% in 2000 compared to
18% for 1999. The increase in gross margin percentage on product sales
revenue resulted from efficiencies obtained in increased production volume.
Cost of Revenue Sharing Revenue -- Our cost of revenue sharing
revenue was $165,995 for 1999 and $91,558 for 2000, representing a decrease
of $74,437, or 45%. The decrease in the cost of revenue sharing revenue was
due to the transfer of Refreshment Centers to RSi BRE. The gross margin
percentage on revenue sharing revenue was 22% in 1999 and 66% in 2000. The
increase in gross margin percentage on revenue sharing revenue resulted from
the increased sales generated by properties in comparison to the capital
invested by RSi BRE.
Cost of Maintenance Revenue -- Our cost of maintenance revenue was
$78,518 for 1999 and $137,770 for 2000, representing an increase of $59,252,
or 75%. The gross margin percentage on maintenance revenues was 57% in 1999
and 16% in 2000. The increase in our cost of maintenance revenue and the
decrease in gross margin percentage was primarily due to the expense
associated with the repair of a third party manufacturing defect and hardware
and software upgrades.
OPERATING EXPENSES
Selling, General and Administrative -- Selling, general and
administrative expenses, inclusive of non-cash compensation expense, were
$2,492,816 for 1999 and $4,105,423 for 2000, representing an increase of
$1,612,607, or 65%. Selling, general and administrative expenses represented
462% of our total revenues in 1999 and 138% of our total revenues in 2000.
The increase in selling, general and administrative expenses was primarily
due to the increased payroll and advertising expense in anticipation of
increased sales activities. In addition, we experienced an increase in legal,
accounting and investor relations expenses in 2000, which expenses we expect
to decrease as a percentage of total revenue.
Research and Development Expenses -- Research and development
expenses were $271,230 for 1999 and $364,960 for 2000, representing an
increase of $93,730, or 35%. As our revenue increases, we expect research and
development expenses to increase as well. Research and development expenses
represented 50% of our total revenue in 1999 and 12% of our total revenue in
2000. The decrease in research and development expenses as a percentage of
total revenue resulted from increased sales.
Non-Cash Compensation Expense -- Non-cash compensation expense was
$105,005 for 1999 and $564,674 for 2000, an increase of $459,669, or 438%.
The increase in non-cash compensation expense is due primarily to the number
of options and warrants issued in 2000.
20
Other Income (Expense), Net -- Other expense was $1,086,123 for 1999
and $1,641,355 for 2000, representing an increase of $555,232, or 51%. The
increase in other expense is due primarily to interest expense and the
write-off of a stockholder receivable of $399,000 which became uncollectable
in 2000.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
We incurred losses attributable to common stockholders of $4,279,444
and $11,306,295 during 1999 and 2000, respectively. The $7,026,851 increase
in the loss attributable to common stockholders was due primarily to the
$1,612,607 increase in selling, general and administrative expenses, the
one-time restructuring costs of $418,606, the $459,669 increase in non-cash
compensation expense, the write-off of a $399,000 stockholder receivable and
the $4,996,661 increase in dividends related to convertible preferred stock.
We have continued to incur losses subsequent to December 31, 2000 and, as a
result, have experienced an increase in accumulated deficit. We believe that
we will continue to incur losses for a period of time.
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK
During 1998, we obtained equity capital through the issuance of
Series A convertible preferred stock which provides for annual cumulative
dividends of 8%. The outstanding shares of Series A convertible preferred
stock were converted to common stock upon the closing of our initial public
offering. In connection with the Series A convertible preferred stock, we
have recorded an additional dividend of $1.8 million to reflect the
contingent beneficial conversion feature of our Series A convertible
preferred stock, a conversion feature that provides for conversion at a ratio
greater than one-to-one. The dividends on Series A convertible preferred
stock represented $18,541 in 1998, $144,000 in 1999 and $87,585 in 2000. We
have paid $146,410 of these dividends through December 31, 2000.
During 1999, we obtained equity capital through the issuance of
Series B convertible preferred stock which provides for annual cumulative
dividends of 6%. The dividends on the Series B convertible preferred stock
are payable in shares of common stock and represented $141,899 in 1999 and
$275,679 in 2000. The outstanding shares of Series B convertible preferred
stock were converted into 2,135,056 shares of common stock upon the closing
of our initial public offering. The holders of Series B convertible preferred
stock received a $1,249,008 beneficial conversion feature at the date of
issuance and an additional $2,498,016 beneficial conversion feature on March
29, 2000 in connection with the modification of the conversion rate. The
Company recognized dividends of $3,425,654 during 2000 related to the
beneficial conversion feature of the Series B convertible preferred stock.
During March and April 2000, we obtained equity capital through the
issuance of Series C convertible preferred stock which provides for annual
cumulative dividends of 7%. The outstanding shares of Series C convertible
preferred stock were converted into 178,318 shares of common stock upon the
closing of our initial public offering. Upon the closing of our initial
public offering, $15,016 of dividends were payable, of which $6,124 have been
paid through December 31, 2000. The remaining dividends will be released upon
the receipt from the holders of stock certificates for Series C convertible
preferred stock for conversion into common stock.
FINANCING ARRANGEMENT WITH AMRESCO LEASING CORPORATION
In 1999, we entered into the amended and restated program agreement
with AMRESCO which represented an exclusive, post-installation, financing
arrangement for the funding of units placed with domestic hotel customers
under our revenue sharing agreements. On May 11, 2000, we replaced this
agreement with a master business lease financing agreement. Finally, on
February 23, 2001, we amended and restated the master business lease
financing agreement and related exhibits. Under the terms of this agreement,
we can finance up to 150% of the fully burdened cost to manufacture and
install our products, through an open-ended line of credit, over the
seven-year term of the agreement. AMRESCO may securitize a portion or all of
the outstanding funds under the financing arrangement. In the event of a
securitization, a portion of the outstanding funds under the financing
arrangement would become asset-backed securities secured by the units and the
revenues generated by the units. The funding under our financing arrangement
with AMRESCO is made on a property-by-property basis and, with respect to the
funding for each property, may be prepaid.
As part of the financing, eRoomSystem SPE, Inc., a Nevada
corporation and wholly-owned subsidiary, will own all the units funded by
AMRESCO under revenue sharing agreements. AMRESCO will take a senior security
interest in the units financed under the financing agreement, and all
proceeds generated by and derived from those products, and has a pledge of
all common stock outstanding of eRoomSystem SPE.
21
The interest rate for the funds under the financing arrangement is
based upon the seven-year treasury rate plus an additional incremental rate
that varies depending upon the total amount outstanding under the financing
arrangement. The incremental rate will vary according to the thresholds
provided in the following table:
THRESHOLD INTEREST RATE
- ------------------------------------------------------------------ -----------------------------
Aggregate funds outstanding of less than $10 million Seven-year treasury rate
plus 12.5%
Aggregate funds outstanding from $10 million until the first Seven-year treasury rate
securitization by AMRESCO plus 10.0%
Aggregate funds outstanding after the first securitization by Seven-year treasury rate
AMRESCO and less than $125 million plus 9.5%
Aggregate funds outstanding of more than $125 million and equal Seven-year treasury rate
to $150 million plus 8.5%
Aggregate funds outstanding of more than $150 million and equal Seven-year treasury rate
to $175 million plus 7.5%
Aggregate funds outstanding of more than $175 million Seven-year treasury rate
plus 6.5%
The actual interest rate for the funding is determined on the date of funding
by AMRESCO. The first AMRESCO financing, which occurred on March 22, 2001 in
the principal amount of $249,220.08, accrues interest at the rate of 17.57%
per annum, which is equal to the seven-year treasury rate of 5.07% plus 12.5%.
In order for us to qualify for funding under our financing
arrangement with AMRESCO, we first identify properties that maintain specific
performance, occupancy and liquidity standards to qualify for funding. Once
we identify a qualified property, we enter into a revenue share agreement
with the property, install our products and submit a preliminary application
for funding to AMRESCO. Upon the approval of our preliminary application for
funding and upon the successful completion of a 90-day seasoning period, we
submit a final application for funding to AMRESCO. Within seven days, AMRESCO
notifies us as to whether the minimum performance standards, as they relate
to the property, have been met and whether our final application for funding
is approved. Once approval is obtained, we will transfer the lease and
ownership of the units to eRoomSystem SPE simultaneous with the receipt of
funding from AMRESCO.
A property will satisfy the minimum performance criteria if the
property retains a minimum of 20% of the gross daily revenue generated on a
per unit per day basis during the 90-day period and remains current in its
payments. By requiring the property to retain a minimum of 20% of the gross
daily revenue, AMRESCO attempts to provide the property with sufficient cash
flow such that the property would not, in the event of bankruptcy, terminate
the revenue sharing arrangement and, as a result, preserve the revenue stream
under the revenue sharing arrangement. Although we modify the basic structure
of our revenue sharing program to reflect the particular demographics of each
property, our basic revenue sharing program provides that we collect an
average of 90% of the initial $0.78 generated by each unit per day and 15% of
all revenue generated by each unit per day over the initial $0.78 generated.
The revenue generated by each unit per day is calculated by dividing the
gross revenues generated by all units in the property on a monthly basis by
the number of days in the month and the total number of units installed at
the property.
Under our basic revenue sharing program, a property must have
average revenues of $0.90 per unit per day to satisfy the performance
criteria of AMRESCO and to qualify for funding under this financing
arrangement. The minimum average revenue of $0.90 is calculated as follows:
AMOUNT TO
MINIMUM GROSS eROOMSYSTEM AMOUNT TO
COLLECTION RATE REVENUES PER DAY TECHNOLOGIES PROPERTY
- ------------------------------- --------------------------- ----------------------- --------------------
90% of the first $0.78 $0.90 $0.702 $0.078
15% above the first $0.78 $0.90 $0.018 $0.102
=========================== ======================= ====================
TOTAL $0.720 $0.180
Accordingly, if a property were to generate revenues of $0.90 per unit per
day, we would receive $0.72 per unit per day and the property would receive
$0.18 per unit per day. Due to the historical performance of our units, we
believe that
22
the units placed pursuant to our basic revenue sharing program will meet the
performance criteria of AMRESCO and qualify for funding under our financing
arrangement with AMRESCO. In the future, there is no assurance that the units
placed pursuant to our revenue sharing program will meet the performance
criteria as each property is unique and the actual performance of each
property will vary.
The placement of products per revenue sharing arrangements is
capital intensive. We estimate that we must place approximately 16,000 units
pursuant to our revenue sharing program in order to become profitable.
Although we are proposing to finance our planned expansion through the
proceeds our financing arrangement with AMRESCO, we will need to have
sufficient capital to fund our operations during the 90-day seasoning period.
In this regard, we may have insufficient cash on hand to finance our planned
expansion and meet our capital expenditure and working capital requirements.
There is no assurance that we will be able to obtain additional capital in
order to fund our operations during the 90-day seasoning period or that our
customers will meet the minimum performance criteria established by AMRESCO
as a pre-requisite to receiving any funding from AMRESCO. If we do not have
sufficient capital to fund operations during the 90-day seasoning period or
if we do not receive sufficient financing from AMRESCO, we may have to shift
more placements of our units from revenue sharing to sales. These matters
raise substantial doubt about our ability to continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
On August 9, 2000, we consummated our initial public offering for
1,800,000 shares of common stock. We received gross proceeds of $11.7 million
and, after deducting the underwriting discounts and commissions and the
offering expenses, net proceeds of approximately $9.86 million. We also
registered 270,000 shares of common stock pursuant to the same registration
statement as part of an over-allotment option granted to the underwriters.
The underwriters had 30 days from the effective date of the registration
statement, or until September 1, 2000, to exercise the over-allotment option,
but did not do so. The net offering proceeds have been and will be used for
funding the production and installation of our products and services, the
repayment of a substantial portion of our outstanding indebtedness and
related accrued interest, the payment of cash dividends on our Series A and
Series C convertible preferred stock, our advertising and promotional
expenses, additional research and development to improve our existing
products and services and to develop our future products and services, and
general corporate purposes and working capital.
As of December 31, 2000, we had cash of $2,811,023 and working
capital of $2,388,359 compared to cash of $113,252 and a working capital
deficit of $2,650,616 at December 31, 1999. The increases in cash and working
capital were the result of cash provided by our initial public offering, net
of cash being used in operations, investment in RSi BRE, increases in
inventories and decreases in deferred offering and financing costs. These
uses of cash were offset, in part, by the proceeds from our Series C
convertible preferred stock offering and the proceeds from the issuance of
promissory notes. Our stockholders' equity improved from a deficit of $23,852
at December 31, 1999 to stockholders' equity of $5,559,471 at December 31,
2000. The improvement in stockholders' equity primarily resulted from
proceeds of our initial public offering. Our accumulated deficit increased
from $13,684,041 at December 31, 1999 to $24,990,336 at December 31, 2000.
The increase in accumulated deficit resulted primarily from the triggering of
a beneficial conversion feature related to our convertible preferred stock at
the time of our initial public offering and the net loss from operations for
the year ended December 31, 2000. We anticipate that our accumulated deficit
will continue to increase for a period of time.
Our current cash on hand and the anticipated funds from our
long-term equipment financing arrangement with AMRESCO may not be sufficient
to meet our capital expenditures and working capital requirements, including
those from our planned expansion, through the conclusion of fiscal year 2001.
The sufficiency of our current cash on hand and the anticipated funds from
our long-term equipment financing arrangement with AMRESCO depends upon our
rate of growth and the mix between the number of product sales and products
placed under revenue sharing arrangements. To the extent that we have
insufficient funds to meet our capital expenditure and working capital
requirements, we will be forced to seek short-term financing to fund
operations during the 90-day seasoning period and to change the mix in favor
of product sales over revenue sharing arrangements. We cannot assure you that
short-term financing will be available to us in amounts or on terms
acceptable to us, if at all.
The first funding pursuant to our long-term equipment financing
arrangement with AMRESCO was in the principal amount of $294,220.08 occurred
on March 22, 2001. We anticipate that additional fundings of approximately
$600,000 and $1,000,000 will be completed by the end of the second and third
quarters of 2001, respectively; provided, however, that the minimum
performance standards of AMRESCO must be met by our customers. We may also
need to raise additional funds to support more rapid expansion, respond to
competitive
23
pressures, invest in our new technology offerings and other product offerings
or respond to unanticipated requirements. We cannot assure you that additional
financing will be available to us in amounts or on terms acceptable to us. If
sufficient funds are not available, or are not available on acceptable terms,
our ability to fund our expansion, take advantage of additional product
development opportunities, develop or enhance our products or services, or
otherwise respond to competitive pressures could be significantly limited.
Our net cash used in operating activities for the year ended December
31, 2000 was $4,285,183. Cash used in operating activities was primarily
attributable to a net loss of $5,702,365, excluding non-cash compensation
expense of $564,674. Our net cash used in operating activities for the year
ended December 31, 1999 was $2,304,807. Cash used in operating activities was
primarily attributed to increases in inventory and offset by increases in
accrued liabilities.
Our primary investing activities have historically consisted of
expenditures relating to our revenue sharing program and for property and
equipment. Net cash used in investing activities was $2,295,888 and $1,094,245
in the year ended December 31, 1999 and 2000, respectively. Investing
activities for the year ended December 31, 2000 consisted of an increase of
refreshment centers placed in service, purchases of property and equipment and
additional investments in RSi BRE. Investing activities for the year ended
December 31, 1999 consisted of additions to refreshment centers in service and
purchases of property and equipment. We expect our investing activity to
continue to increase in 2001 due to an increased placement of our products
under our revenue sharing program. Additionally, we anticipate that we will
experience an increase in our capital expenditures and lease commitments for
property and equipment consistent with anticipated growth in operations,
infrastructure and personnel.
Our financing activities provided $8,077,199 of cash for the year
ended December 31, 2000 compared to $4,712,775 for the year ended December
31, 1999. For the year ended December 31, 2000, cash provided from financing
activities consisted of $1,767,021 from borrowings, $627,489 received from
the sale of preferred stock and $9,766,759 received from our initial public
offering. For the year ended December 31, 1999, cash provided from financing
activities consisted of $477,669 from borrowings, $299,195 received from the
sale of notes payable to officers and stockholders and $4,439,775 received
from the sale of preferred stock.
As of December 31, 2000, our debt, secured by our assets, consisted
of $27,500 in notes issued in a 1997 private debt/equity offering and $25,000
in notes issued in a 2000 private debt/equity offering. As of December 31,
2000, our unsecured debt consisted of $6,479 in notes payable to a bank and
secured by vehicles. As of December 31, 2000, we have paid off a significant
portion of our prior debt obligations.
With respect to our material commitments, we have entered into
operating leases for our facilities and equipment and have entered into
employment agreements with certain officers and key employees. We operate our
facilities and equipment under non-cancelable operating leases with future
minimum rental payments of $119,836 and $104,030 for the years ending
December 31, 2001 and 2002, respectively. The future minimum lease payments
on capitalized leases are calculated to be $35,728 and $28,091 for the years
ending December 31, 2001 and 2002, respectively. Under our current employment
agreements with our officers and key employees, we will pay base salaries of
$664,500 and $540,010 for the years ending December 31, 2001 and 2002,
respectively. The decrease in base salaries for the year ended December 31,
2002 relates to the expiration of a number of our current agreements with our
officers and key employees during such period. In addition, the Company
intends to hire an executive vice president of sales and marketing at a
negotiated salary.
On January 26, 2001, we terminated the employment of fifteen
employees in an effort to maximize operational efficiencies and reduce
monthly expenses. In addition, we expanded the responsibilities of other
positions to account for the terminations. We have taken a one-time
restructuring charge of $418,606 in the fourth quarter of 2000, but estimate
that the restructuring will result in a $1.1 million reduction in annual
overhead.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or SFAS 133. SFAS 133
establishes new accounting and reporting standards for companies to report
information about derivative instruments, including derivative instruments
embedded in other contracts, or collectively referred to as derivatives, and
for hedging activities. This statement is effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect this statement to have a material impact on our results of
operations, financial position or liquidity.
24
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our products require a limited amount of assembly at our facility in
the United States. We purchase refrigerators from suppliers in Mexico, Italy
and China on a purchase order basis in U.S. Dollars. All other components for
our products are purchased from suppliers based in the United States. Our
products are primarily marketed in the United States. We intend to further
expand our marketing into the international lodging market and to other
industries domestically and internationally. As a result, our financial
results could be affected by weak economic conditions in foreign markets.
Because all of our revenues will be denominated in U.S. Dollars, a
strengthening of the dollar could make our products less competitive in
foreign markets. As we expand operations internationally, we will continue to
evaluate our foreign currency exposures and risks and develop appropriate
hedging or other strategies to manage those risks.
25
BUSINESS
OVERVIEW
eRoomSystem Technologies has developed and introduced to the lodging
industry an intelligent, in-room computerized platform and communications
network, or the eRoomSystem. The eRoomSystem is a computerized platform and
processor-based system designed to collect and control data that supports our
Refreshment Centers, eRoomSafes and other applications. These other
applications will include in-room management capabilities, information
management services and direct credit card billing.
Our eRoomSystem delivers in-room solutions that reduce operating
costs, enhance hotel guest satisfaction and provide higher operating profits
to our customers. The solutions offered by our eRoomSystem and related
products have allowed us to establish relationships with premier hotel chains.
We have installed more than 13,500 Refreshment Centers and 5,500
eRoomSafes. These include installations in many of the Marriott International
flagship properties, such as the New York Marriott Marquis, the J.W. Marriott
in Washington D.C., the Marriott Camelback Inn and others. We are negotiating
with Bass Hotels, operator of Holiday Inn, Crowne Plaza and the Hotel
Inter-Continental, and Carlson Hospitality Worldwide, operator of Radisson
Hotels Worldwide, Regent International Hotels and Country Inn and Suites, to
become their exclusive or preferred vendor. We have also installed our
products in the Hilton, Best Western, Ramada and other established hotel
chains. We believe that these relationships provide us with the opportunity
to install our eRoomSystem worldwide.
Our business model focuses on our revenue sharing program that
allows us to partner with our customers with respect to our products. Through
our revenue sharing program, we install our products at little or no upfront
cost to our customers and share in the recurring revenues generated from
sales of goods and services related to our products.
LODGING MARKET
According to the 1999 HORWATH WORLDWIDE HOTEL INDUSTRY STUDY, the
worldwide hotel marketplace consists of approximately 11.7 million hotel
rooms. Of the 11.7 million hotel rooms, 4.7 million hotel rooms are located
in Europe and 3.5 million hotel rooms are located in the United States.
In addition, according to the 1999 DIRECTORY OF HOTEL & MOTEL
COMPANIES; HOTELS MAGAZINE - CORPORATE 300 RANKING, JULY 1999, and the TRAVEL
RESEARCH INTERNATIONAL LIMITED; LODGING HOSPITALITY MAGAZINE - THE BRANDS
REPORT, AUGUST 1999, approximately three million hotel rooms are owned,
managed or franchised by the ten largest hotel chains. These hotel chains
include:
o Cendant, the operator of Ramada, Days Inn and Howard Johnson;
o Bass Hotels, the operator of Holiday Inn, Crowne Plaza and the
Hotel Inter-Continental;
o Marriott International, the operator of Ritz-Carlton, Marriott,
Renaissance and Residence Inn;
o Accor, the operator of Sofitel, Novatel and Red Roof Inns;
o Choice Hotels, the operator of Comfort Inns & Suites, Clarion
and Econolodge;
o Best Western International;
o Hilton Hotels Corporation, the operator of Hilton, Doubletree\
Hotels, Embassy Suites and Hampton Inn;
o Starwood Hotels, the operator of Sheraton, Westin and St.
Regis;
o Carlson Hospitality Worldwide, the operator of Radisson Hotels
Worldwide, Regent International Hotels and Country Inns and
Suites; and
o Hyatt Hotels, the operator of Hyatt and Hyatt Regency.
26
Of these hotel chains listed above, we have installed more than
11,000 Refreshment Centers and 4,500 eRoomSafes in hotels operated by
Marriott International, Hilton Hotels Corporation, Bass Hotels and
Best Western International.
Many hotel properties are rated through either Automobile
Association of America's diamond rating or Mobil's star rating. In order to
obtain a four-or five-diamond rating from Automobile Association of America,
the hotel properties are required to have minibars in all of their hotel
rooms. Under Mobil's star-rating, the presence of minibars in a property's
hotel rooms provides points that can be used toward a four- or five-star
rating. Therefore, we believe that we can market our products to the lodging
industry as an in-room amenity to enhance a hotel's ability to receive a
four- or five-diamond rating or a four- or five-star rating.
OUR PRODUCTS AND SERVICES
eROOMSYSTEM
Since our inception, it has been our objective to innovate the
in-room amenities offered by the lodging industry. Our proprietary
technologies create an intelligent, in-room computerized platform and
communications network that comprise our eRoomSystem. At the core of our
eRoomSystem is our proprietary hardware and software that operate as a
multi-tasking imbedded operating system. Our hardware and software can
operate multiple devices and provide an interactive environment. The
interactive environment provided through our eRoomSystem allows the hotel
guest to input and receive information. Interactive features for the hotel
guest include locking and unlocking our products, receiving pricing
information from the liquid crystal display as well as other functions.
The eRoomSystem provides the communication link between the hotel
guest, our products, the eRoomSystem file server located at the hotel, the
hotel's property management system, and the file server located at our
headquarters, or the eRoomSystem master file server. Our software is remotely
upgradeable from our facilities. We can also remotely adjust prices, change
messages on the liquid crystal display and change the input touchpad layout.
From our facilities, we can control the use of our products in the event a
participating hotel fails to pay any fees or otherwise violates the terms of
its agreement, as well as determine whether our products are active and
working properly.
The eRoomSystem consists of a microprocessor, memory, input/output
ports, communications transceiver, liquid crystal display, touchpad, power
supply and our proprietary software. The proprietary architecture of our
circuit boards has been designed to minimize the need for hardware upgrades.
The eRoomSystem includes an embedded system processor that handles simple
instructions and routes all billing functions and processor-intensive
instructions to the eRoomSystem file server.
The eRoomSystem provides a platform that collects information
relating to the usage of our products. We expect that the eRoomSystem will be
capable of supporting other functions such as the management of in-room
energy, including heating, air conditioning, lighting and television and the
establishment of a trouble-shooting system to manage in-room repairs and
maintenance. We expect that another extension of the eRoomSystem will be a
direct credit card billing process for the healthcare and time-share
industries.
eROOMSERV REFRESHMENT CENTERS
Historically, our primary source of revenue has been from the sale
or revenue sharing of our Refreshment Centers. In 2000, we placed 3,924
Refreshment Centers and 3,010 eRoomSafes, of which 1,820 Refreshment Centers
and 2,103 eRoomSafes were pursuant to revenue-sharing arrangements and 2,104
Refreshment Centers and 907 eRoomSafes were purchases. We currently have
orders on-hand for 1,610 Refreshment Centers, 792 of which include
eRoomSafes. With respect to our orders on-hand, 792 Refreshment Centers and
792 eRoomSafes are to be placed under revenue sharing agreements, and 818
Refreshment Centers are being purchased.
Refreshment Centers are modular in design and consist of our
eRoomSystem, a small absorption compression or, thermoelectric refrigeration
unit, and our unique multi-vending rack. Our multi-vending rack displays up
to 33 different beverages and/or snacks and maintains a full appearance
through a gravity-based design. Historically, we have only offered a
horizontal vending rack, but we intend to introduce in the near future an
upright vending rack and a combination upright/horizontal vending rack. Upon
removal of a product from the Refreshment Center, the gravity-based design of
our vending racks uses the weight of the remaining products to cause such
products to roll or slide forward. The repair or replacement of any component
of our Refreshment Center is relatively simple and is typically
27
provided at no additional charge to the property pursuant to the terms of our
service and maintenance agreement. The Refreshment Center communicates
through the eRoomSystem, which uses the hotel's existing telephone lines,
cable television lines or electrical power outlets.
Our Refreshment Centers operate as follows:
o A hotel guest selects a beverage or snack from our Refreshment
Center;
o The purchase is immediately confirmed on the liquid crystal
display and acknowledged by an audible beep;
o The transaction information, such as product type, price and
time of purchase, is simultaneously transferred to the
eRoomSystem file server;
o The eRoomSystem file server communicates on a real-time basis
with the hotel's property management system and periodically
with our eRoomSystem master file server; and
o The hotel's property management system posts the purchase to the
hotel guest's room account.
The sales data from the eRoomSystem is transmitted to the
eRoomSystem file server from which hotel employees can access periodic sales
activities, inventory levels for restocking purposes and demographic data.
eROOMSAFE
Our eRoomSafes are electronic in-room safes offered in conjunction
with our eRoomSystem. The eRoomSafes include an encrypted combination that
can be changed by the hotel guest. The eRoomSafes have storage space large
enough for laptop computers, video cameras and briefcases. The eRoomSafes
utilize the eRoomSystem to interface with the eRoomSystem file server which,
in turn, communicates with the hotel's property management system.
A common problem with in-room safes occurs at checkout when a guest
may leave the safe locked or forget to remove his or her valuables. With our
competitors' room safes, the locked safe would typically go unnoticed until a
subsequent hotel guest attempts to use the safe. Through the eRoomSystem, our
eRoomSafe automatically notifies the hotel at checkout that the safe door is
locked, providing the guest with an opportunity to remove any valuables
before leaving the hotel.
THE FOLLOWING DIAGRAM REPRESENTS THE STRUCTURE AND COMMUNICATIONS
NETWORK OF OUR EROOMSYSTEM, THE EROOMSYSTEM FILE SERVER, THE HOTEL
PROPERTY MANAGEMENT SYSTEM, AND THE EROOMSYSTEM MASTER FILE SERVER:
[DIAGRAM]
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eROOMDATA MANAGEMENT
One of the byproducts of our technology is the information we have
collected since our first product installation. To date, we have collected
over fourteen million room-nights of data. The eRoomSystem file server
collects information regarding the usage of our Refreshment Centers on a
real-time basis. We use this information to help our customers increase their
operational efficiencies. The information we obtain is unique because we
categorize the information according to specific consumer buying patterns and
demographics.
The information we collect has value in several key areas. First, we
currently offer our customers, as part of our service and maintenance
agreement, specific information about their guests' buying patterns and
provide non-confidential information about other hotels in similar geographic
regions. Second, as we continue to increase our installed room base, we
believe that the information we collect will have value to the suppliers of
goods sold in our Refreshment Centers, such as Coca-Cola, PepsiCo,
Anheuser-Busch, Miller Brewing, Frito-Lay, Mars and others. Third, we are
developing information services to categorize purchases in response to
specific in-room advertising programs by such suppliers.
Our lodging customers benefit in various ways from the information
we provide. The hotels are responsible for restocking the goods sold from our
Refreshment Centers. The real-time sales data generated by our Refreshment
Centers helps the hotel to maximize personnel efficiencies. The transfer of
sales data to the hotel prevents guest pilferage and minimizes disputes over
refreshment center usage, both of which are prevalent in the lodging
industry. Finally, the ability to track product sales performance allows the
hotel to stock the Refreshment Centers with more popular items, which
generally leads to increased sales of product from the Refreshment Centers.
Our system can provide reports on daily restocking requirements, product
sales statistics showing daily, monthly and annual statistics, overnight
audits, inventory control and a variety of customized reports.
We intend to develop strategic relationships with companies in the
information services industry in order to maximize our proprietary
information. We will consider utilizing third parties to assist us in the
roll-out of our information services products.
FUTURE PRODUCTS AND SERVICES
Our research and development and marketing departments are analyzing
additional value added products and services to be delivered to our customers
using the platform of our eRoomSystem. We believe that such additional
products and services can be bundled with our eRoomSystem or separately
marketed to lodging industry customers to provide additional revenue sources
for us. Although the development and delivery schedules vary for each new
product and service, we believe that each of the following will be ready for
marketing within the next nine months:
eROOMENERGY MANAGEMENT. We are negotiating with an energy management
provider to private label energy management products for us. We anticipate
offering energy management products in the third quarter of 2001. These
products will detect in-room movement through heat and/or motion sensors. Our
eRoomSystem will communicate with the energy management products through an
infrared communications portal. When a room is occupied, our eRoomSystem will
give the guest complete control of the heating and air conditioning,
lighting, television and other facilities in the room. When the room is
unoccupied, the eRoomSystem will control each of these systems and adjust
each according to the most energy efficient settings. When a guest opens the
door to re-enter the room, our eRoomSystem will adjust all devices to their
original settings. By adjusting the heating and air conditioning either up or
down, typically 5 to 10 degrees, depending on the time of year, and turning
off the television and lights when a room is unoccupied, a hotel or other
facility can realize measurable energy cost savings.
eROOMMAINTENANCE. Through the eRoomSystem, we also intend to offer
remote engineering and maintenance services. The eRoomSystem links each room
to other areas of the property. By connecting each room to the front desk and
to the engineering departments, we will create a management tool and
communication link. When an in-room maintenance problem is discovered by
engineering or housekeeping, the hotel employee can enter a code on the
touchpad of our eRoomSystem, which will transmit the information to
engineering and inform the front desk of a problem. If the problem is of a
material nature, the front desk can hold the room until the repairs have been
made. As soon as the problem is resolved, engineering or housekeeping will
enter a code that notifies the front desk that the room has been repaired and
is available for a guest.
29
eROOMPERSONNEL. We intend to design our eRoomSystem to dispatch
housekeeping in the most efficient manner while prioritizing the rooms that
need to be cleaned. eRoomPersonnel will permit housekeepers to enter a room
and input their personal codes on the eRoomSystem touchpad. eRoomPersonnel
then proceeds to time how long it takes housekeeping to prepare the room.
When completed, housekeeping inputs their codes again. The system then
informs them which room needs to be cleaned next. If occupancy is high,
eRoomPersonnel can direct housekeeping personnel to an unoccupied room that
is scheduled for check-out. If occupancy is low and additional clean rooms
are currently available, eRoomPersonnel can direct housekeepers to rooms that
are temporarily unoccupied by guests who have elected to stay another night.
This process optimizes housekeeping operations, minimizes guest disturbances
and in turn saves both time and money.
eROOMMANAGEMENT. Our eRoomSystem has the capability to support
standard credit card and smart card readers for direct billing to a
customer's credit card, as well as other point of sale and automated
teller-type functions. When we enter the healthcare and time-share
industries, we propose to offer a direct credit card billing process. By
placing a credit card reader adjacent to a hospital bed or in a time-share
room, we propose to offer a billing solution previously unavailable. This
billing process will allow healthcare and time-share properties to offer
services and products similar to those found in hotel rooms, such as
Refreshment Centers, eRoomSafes, on-demand movies, direct dial long distance
and video games.
SALES AND MARKETING
Historically, we have derived our revenues from the lodging
industry. To date, we have installed more than 13,500 Refreshment Centers and
5,500 eRoomSafes. We have established relationships with Marriott
International, Promus Hotel Corporation (purchased by Hilton Hotels
Corporation) and Carlson Worldwide Hospitality. Due to the
franchisor-franchisee relationship between many hotel chains and their hotel
properties, even if we establish exclusive or preferred vendor relationships
with the hotel chains, we must also enter into definitive agreements with the
franchisees of these hotel chains for the sale or placement of our products
into the actual hotel properties.
All of our relationships with hotel chains are open-ended, including
the arrangement with Promus Hotel Corporation that terminates on April 6,
2003, but is subject to earlier termination upon 90 days written notice from
Promus. With the acquisition of Promus by Hilton Hotels Corporation, we
entered into discussions with Hilton on the role of our relationship with
Promus as to the entire Hilton company. On April 6, 2001, we were advised by
Hilton that it has elected to recommend to its franchisees other vendors for
minibars and refreshment centers. However, we will continue to negotiate and
install our products with franchisees of the Hilton chain on a
property-by-property basis.
In fiscal year 2000, we installed 2,104 Refreshment Centers and 907
eRoomSafes pursuant to purchase orders and 1,820 Refreshment Centers and
2,103 eRoomSafes on a revenue sharing basis. We have shifted our business
model to a revenue sharing program where we generate revenues over the
seven-year term of each revenue sharing agreement. We expect that the
concentration of revenues will shift to revenue sharing as our business model
matures.
Our sales and marketing program consists of the following strategic
initiatives:
RETENTION OF SENIOR MARKETING EXECUTIVES. We are attempting to fill
the position of executive vice president of sales and marketing to oversee
the implementation of our sales and marketing program.
DEPLOYMENT OF AN EXPANDED REGIONAL SALES FORCE. We currently employ
two regional sales managers and eight independent sales representatives. We
intend to hire six additional independent sales representatives.
CONTINUED MARKETING OF THE REVENUE SHARING PROGRAM. Emphasis on our
revenue sharing program is a critical part of our sales and marketing
strategy. Historically, the lodging industry has been resistant to purchase
our products because of the initial capital expenditure required. In addition
to product sales, we now offer our products through a revenue sharing
program. Our revenue sharing program allows us to become partners with hotels
by installing our products at little or no upfront cost and sharing the
revenues generated from goods sold from, and usage of, our products. AMRESCO
Leasing Corporation, or AMRESCO, will finance up to 150% of the cost of our
products placed under our revenue sharing program, subject to satisfaction of
funding requirements. Our products will secure the financing of AMRESCO,
which is payable over seven years. The emphasis of our business model on a
revenue sharing program significantly increases our need for long-term
financing. Our first funding from AMRESCO in the principal amount of
$294,220.08 occurred on March 22, 2001. If our customers fail to meet
AMRESCO's funding requirements or if AMRESCO were to delay or refuse to
provide our required financing, we cannot assure you that other long-term
30
financing will be available in sufficient amounts, on terms acceptable to us
or at all. Our inability to obtain long-term financing may prevent us from
placing additional products under our revenue sharing program or
manufacturing products for sale.
CONTINUED IMPLEMENTATION OF THE CORPORATE ACCOUNT STRATEGY. Our
corporate account strategy involves the negotiation and implementation of
agreements with corporate hotel chains, brands, management companies and real
estate investment trusts whereby we become the exclusive or a preferred
vendor for the corporate hotel chain. Although the franchisees of these
corporate hotel chains may not be required to purchase our products or have
them placed on a revenue sharing basis, the corporate entity would recommend
to its franchisees the use of our products.
We have installed our eRoomSystem in a number of flagship properties
for Marriott International, including the New York Marriott Marquis, the J.W.
Marriott in Washington, D.C., the J.W. Marriott Lenox in Atlanta, the
Marriott Camelback Inn, the New York Marriott Financial Center and, in April
2001, the New York Marriott World Trade Center. In addition, we were selected
as a recommended vendor for Carlson Worldwide Hospitality, representing
Radisson Hotels Worldwide, Regent International and Country Inn and Suites.
For the past six months, a limited number of our products have been
installed in The Bellagio - The Resort, a hotel-casino of MGM Mirage, Inc.,
on a trial basis. On January 30, 2001, we were advised by MGM Mirage, Inc.
that we were not selected to install our products in its hotel-casino
properties. Although we were not selected by MGM Mirage, Inc., we are
negotiating with several other hotel-casinos in Las Vegas, Nevada to install
our products.
CREATION AND ENHANCEMENT OF STRATEGIC MARKETING ALLIANCES. In
conjunction with our corporate account strategy, our objective is to enter
into a number of marketing alliance plans. A marketing alliance plan is a
strategic relationship with a third-party whereby a finder's fee is paid to
the party for its efforts in closing a sale or revenue sharing transaction.
IMPLEMENTATION OF A COMPREHENSIVE DOMESTIC AND INTERNATIONAL
MARKETING PLAN. We are implementing a comprehensive marketing strategy. We
have engaged an advertising and marketing company which has developed
brochures, a corporate name and logo, an interactive website, signage, a
trade show booth, corporate video and compact disc presentations, media
advertisements and other services relative to product design and corporate
communications.
We intend to implement our international marketing strategy
utilizing the core marketing structure that we are developing domestically,
including website, support materials, trade show materials and industry
specific advertisements, to support our global growth strategy.
We have hired a marketing coordinator who oversees our advertising
and promotional efforts by primarily utilizing hospitality trade
publications. Our objective is to establish an international presence through
partnering with various trade publications. In addition, we plan to attend
trade shows and pursue promotional activities through a strong
public-relations program.
SUPPLIERS AND ASSEMBLY
We purchase various electrical and mechanical components, injection
molded parts and basic cube refrigerators from various manufacturers and
electronics firms. For example, we purchase our basic cube refrigerators from
Absocold, Sanyo Corporation, Avanti, Indel-B or Vittrifrigo. Although we
propose to establish two or more turnkey manufacturing sources, we currently
obtain our components on a purchase order basis. Historically, our suppliers
have been dependable and able to meet delivery schedules on time. We believe
that, in the event we cannot obtain our components from our current
suppliers, alternate suppliers can be located without incurring significant
costs or delays. We do not rely on any one supplier, the loss of which would
inhibit our ability to assemble our products on a timely basis.
Our eRoomSystems, Refreshment Centers and eRoomSafes require a
limited amount of assembly. This assembly involves electronic assembly,
wiring and testing. At our St. George, Utah facility, we are able to assemble
up to 2,000 units monthly. Since our existing facility is not sufficient to
meet our projected growth, we will either have to establish turnkey
manufacturing sources, expand our assembly facility or hold orders for our
products unfulfilled. In the event that our current facility is insufficient
to meet our projected growth, we propose to establish two or more third party
turnkey manufacturing sources with contract manufacturers.
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COMPETITION
eROOMSYSTEM. As for other companies that provide in room services
through an in-room refrigerator, Bartech, Inc., a supplier of minibars that
recently relocated to Maryland, offers the e-Fridge(TM) network system. This
system is similar to our eRoomSystem in that it has a processor by which the
property can record transaction information through its in-room refrigerator.
In addition, there are several companies that provide in-room video
entertainment and information services, such as cable television,
pay-per-view movies, video games and Internet services. We may also face
competition from communications companies, such as cable companies,
telecommunications companies and direct broadcast satellite companies, who
may be able to modify their existing infrastructure to provide in-room
entertainment and/or information services. Further, as technology is subject
to rapid change, new technological advancements in components used for
in-room services could adversely affect our growth strategy.
eROOMSERV REFRESHMENT CENTERS. We face competition from suppliers of
automated minibars, such as Bartech, Inc., MiniBar America, Inc. and Dometic
Corporation, and suppliers of honor bars, such as Dometic and MiniBar
America. The automated minibars permit sales to be automatically posted to a
hotel guest's room account and provide real-time information and inventory
data. Honor bars are small refrigerators where sales are manually posted to a
hotel guest's room account by housekeeping services.
We face direct competition from suppliers of automated
refrigerators, such as the e-Fridge(TM) of Bartech and the Auto Classic of
Dometic. Bartech offers the e-Fridge(TM) as part of its e-Fridge(TM) network
system that records all transactions, charges the folios of hotel guests and
generates automatic refill reports. In addition, Bartech offers a revenue
sharing program which offers properties the ability to install Bartech's
products with no cash expenditure. Recently, we were advised that MGM Mirage,
Inc. selected Bartech to install its products at certain of its properties
after a test installation by Bartech at The Bellagio - The Resort. The Auto
Classic of Dometic provides transaction information to the hotel's property
management system and inventory data to the hotel and may be locked remotely.
In contrast to Bartech and Dometic who offer automated minibars and honor
bars, MiniBar America is principally a manufacturer of honor bars.
We compete with each of these companies for the placement of units
in hotel rooms on the basis of price, service, technology and financing
options. Many of our competitors have longer operating histories, larger
customer bases, greater brand recognition and greater financial, research and
development, manufacturing, marketing and technical resources.
eROOMSAFES. The in-room safe industry is a very competitive market
with competitors throughout the world. ElSafe, Inc. is the market leader with
almost 400,000 room safes installed worldwide with installations in over 45
countries. CISA Worldwide is another competitor which maintains offices in
the United States, Asia, the Middle East, Africa and Latin America. The
principal products of ElSafe and CISA Worldwide are electronic safes, which
allow the hotel guest to enter a combination to lock and unlock the safe
instead of a key. Although these competitors offer stand-alone electronic
safes, our fully electronic safes work in conjunction with our eRoomSystem.
We compete with these companies on the basis of price, service, technology
and financing options.
INTELLECTUAL PROPERTY
We rely on a combination of trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers and business partners to protect our proprietary rights
in our products, services, know-how and information. We currently hold three
patents, Patent Nos. 4,857,714, 4,883,948 and 4,939,352, filed under the name
"Credit Card Storage System," all of which protect the use of our credit card
technology. These three patents expire on August 14, 2006, November 27, 2006
and July 2, 2007, respectively. These patents have not been highly utilized
in the lodging industry, but we believe they are important to our future
product offerings in the healthcare and time-share industries. In addition,
we applied for trademarks and service marks for eRoomSystem, eRoomServ
Refreshment Center, eRoomSafe, eRoomManagement, eRoomEnergy, eRoomData,
eRoomMaintenance and eRoomPersonnel. We have also registered our logo as
presented on the cover of this prospectus and have submitted two patent
applications with respect to our Refreshment Centers.
Our proprietary software consists of three modules and provides the
operating system for our eRoomSystem. The first module is an operating system
that permits messages to be scrolled on the flat panel display of our
eRoomSystem and allows hotel guests to interface with our products. The
second module is a Windows(R) based program that provides a communication
link between our eRoomSystem, our products, our eRoomSystem hotel file
32
server and the hotel's property management system. The third module is a
Windows(R) based program that collects data from our eRoomSystem hotel file
server and provides a variety of management and operational reports to us and
our customers.
We do not know if our patent application or any future patent
application will be issued with the full scope of claims we seek, if at all,
or whether any patents we receive will be challenged or invalidated. Our
means of protecting our proprietary rights in the United States or abroad may
not be adequate and competitors may independently develop similar technology.
We cannot be certain that our services do not infringe on patents or other
intellectual property rights that may relate to our services. Like other
technology-based businesses, we face the risk that we will be unable to
protect our intellectual property and other proprietary rights, and the risk
that we will be found to have infringed on the proprietary rights of others.
RESEARCH AND DEVELOPMENT
We currently have three software developers and one hardware
engineer on our staff. Our research and development department focuses on
upgrading our proprietary software and hardware that make up our eRoomSystem.
As our customers, current and future, use a wide range of property management
systems, we must continuously monitor and update our proprietary software so
that the software remains stable and works with the relevant property
management system. In addition, as we expand our business, we will need to
increase the size of our research and development department in order to
integrate additional services into our eRoomSystem and modify our
eRoomSystem, as needed, to serve other markets.
HISTORICAL SUMMARY
We were originally incorporated under the laws of the State of North
Carolina on March 17, 1993 as InnSyst! Corporation. On September 28, 1993,
the operations of InnSyst! were transferred to RoomSystems, Inc., a Virginia
corporation, incorporated on August 12, 1993, or RoomSystems Virginia. On
April 29, 1996, the operations of RoomSystems Virginia were transferred to
RoomSystems, Inc., a Nevada corporation, or RoomSystems. Through an agreement
and plan of reorganization approved by a majority of our stockholders dated
December 31, 1999, RoomSystems became the wholly owned subsidiary of
RoomSystems International Corporation. Pursuant to this agreement and plan of
reorganization, all shares of RoomSystems common stock, including all shares
of common stock underlying outstanding options and warrants, Series A
convertible preferred stock and Series B convertible preferred stock were
exchanged for the identical number and in the same form of securities of
RoomSystems International Corporation. On February 1, 2000, we changed our
name from RoomSystems International Corporation to RoomSystems Technologies,
Inc. Subsequently, on March 29, 2000, with the approval of our stockholders,
we changed our name to eRoomSystem Technologies, Inc.
We have three wholly-owned subsidiaries, RoomSystems, RSi BRE and
eRoomSystem SPE. RoomSystems is our service and maintenance subsidiary that
installs all of our products, provides electronic software upgrades to our
customers, provides customer service and maintenance for our products and
trains hotel personnel on the use and maintenance of our products. The
outstanding shares of RoomSystems common stock have been pledged to AMRESCO.
RSi BRE was formed as part of the Equipment Transfer Agreement we
entered into with RSG Investments, LLC, or RSG Investments, a privately held
company. RSi BRE currently holds approximately 2,270 Refreshment Centers and
approximately 1,860 eRoomSafes. RSG Investments was granted the right to
receive a maximum of $0.57 per Refreshment Center per day of the revenue
realized from 2,050 of the Refreshment Centers held by RSi BRE. We have
pledged the outstanding shares of RSi BRE common stock to RSG Investments and
do not have control over RSi BRE. The board of directors of RSi BRE consists
of a majority of outside directors. RSi BRE may not make cash distributions
without the unanimous approval of its board of directors. We will gain
control over RSi BRE when we satisfy our remaining obligations to RSG
Investments. Once we make all such payments, or once RSG Investments accepts
our offer of a lump-sum discounted present value of the payments, the
ownership of the Refreshment Centers that are subject to the Equipment
Transfer Agreement will be transferred from RSi BRE to us. We anticipate that
RSi BRE would then be dissolved.
eRoomSystem SPE was formed as part of our long-term financing with
AMRESCO. eRoomSystem SPE will own all the products funded by AMRESCO under
our revenue sharing program. AMRESCO will take a senior security
33
interest in all of the assets of eRoomSystem SPE. Unlike RSi BRE, we control
eRoomSystem SPE and its financial results will be consolidated with those of
eRoomSystem Technologies and RoomSystems.
GOVERNMENT REGULATION
We are subject to laws and regulations applicable to businesses
generally, as well as to laws and regulations directly applicable to the
lodging industry. These laws and regulations relate to qualifying to do
business in the various states and in foreign nations in which we currently
have, or propose to have, our products.
Apart from laws and regulations applicable to us, some of our
existing and potential customers are subject to additional laws or
regulations, such as laws and regulations related to liquor and gaming, which
may have an adverse effect on our operations. Due to the licensing
requirements relating to the sale of alcohol, the inability of our
revenue-sharing partners to obtain or maintain their liquor licenses will
result in the loss of revenues for our revenue-sharing partners and us. In
addition, due to the heightened hotel-casino regulatory environment, and our
intent to market to hotel-casinos, our operations may be subject to review by
a hotel-casino's compliance committee to verify that its involvement with us
would not jeopardize its gaming license. The regulatory compliance committee
of a hotel-casino has broad discretion in determining whether or not to
approve a transaction with a third party, which review typically includes the
character, fitness and reputation of the third party and its officers,
directors and principals. If our history or operations present problems for a
hotel-casino, we would either have to expend resources to address or
eliminate the concerns or forego the business.
PROPERTY AND EMPLOYEES
We maintain an office at 3770 Howard Hughes Parkway, Suite 175, Las
Vegas, Nevada. We lease office space pursuant to a six-month lease at the
rate of $1,634 per month. The lease began on October 31, 2000 and ends on
April 30, 2001. We also have offices and a research and development and
assembly facility located at 390 North 3050 East, St. George, Utah. This
lease commenced on November 1, 1997 and expires on October 31, 2002. The
monthly lease rate is $9,500.
On January 26, 2001, we terminated the employment of fifteen
employees in an effort to maximize operational efficiencies and reduce
monthly expenses. In addition, we expanded the responsibilities of other
positions to account for the terminations. We took a one-time restructuring
charge of $418,606 in the fourth quarter of 2000, but estimate that the
restructuring will result in a $1.1 million reduction in annual overhead. As
part of our restructuring, we relocated our software development department
to Las Vegas, Nevada.
As a result of the restructuring, we currently employ thirty
full-time and three part-time employees in our St. George, Utah facility and
three full-time employees in our Las Vegas office. We anticipate the largest
growth in employees will occur in the area of field operations. None of our
employees is subject to a collective bargaining agreement. Of our employees,
we currently have three employees engaged in product assembly and propose to
hire temporary employees as needed. Our in-house staff installs our products
at our customers' properties. Our in-house staff, which currently consists of
seven employees, also performs physical maintenance of our products under our
maintenance agreements. Eventually, we will outsource a portion of the
installation and maintenance of our products.
LEGAL PROCEEDINGS
We are, from time to time, parties to various legal proceedings
arising out of our business. Apart from the following discussion, we believe
that there are no proceedings pending or threatened against us which, if
determined adversely, would have a material adverse effect on our business,
financial condition, results of operations or liquidity.
On September 27, 1999, Royal W. Minson II, our former president and
chief operating officer, filed for protection in the United States Bankruptcy
Court for the Northern District of California, Case No. 99-47533-TD-7, under
Chapter 7 of the United States Bankruptcy Code. Prior to the filing, Mr.
Minson received 121,875 shares of our common stock upon the exercise of
options and executed demand promissory notes in the aggregate original
principal amount of $568,750 to pay for the shares. The bankruptcy schedules
list Mr. Minson's shares as an asset and the demand promissory notes as
liabilities. On January 5, 2000, the Bankruptcy Court entered a discharge
order. We filed a proof of claim for the demand promissory notes executed by
Mr. Minson, plus accrued interest on such notes. On November 8, 2000, we
submitted to the bankruptcy trustee a cash offer of $180,000 relating to the
acquisition of the 121,875 shares of common stock. Subsequently, we withdrew
our purchase offer and have agreed to assist the trustee in
34
the sale of such shares in the public market through the registration of the
121,875 shares pursuant to our selling stockholder registration statement. We
anticipate that the sale of the 121,875 shares will occur during the second
and third quarter of 2001.
On March 2, 1999, Willow Creek Systems, Inc., a former supplier of
circuit boards, brought an action against us that is currently pending in
Salt Lake County Third District Court, State of Utah, Civil No. 99-0902417.
Willow Creek is no longer an operating entity. In its complaint, Willow Creek
alleged breach of contract and seeks payment in the amount of approximately
$125,000 from us for materials delivered pursuant to purchase orders. On
March 12, 2001, we settled the Willow Creek matter in consideration for a
one-time cash payment of $85,000 and 15,000 restricted shares of our common
stock.
On March 28, 2001, we received a letter from counsel for our former
chairman and chief executive officer, Steven L. Sunyich, in which counsel
claims that Mr. Sunyich is due certain severance and other payments pursuant
to the terms of his terminated employment agreement. We are in discussions
with Mr. Sunyich and his counsel as to the claims made in the March 28, 2001
letter.
35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our current directors and executive officers are as follows:
NAME AGE TITLE
---- ---
David S. Harkness 35 Chief Executive Officer and Chairman of the Board of Directors
Stephen M. Nelson 52 President and Chief Operating Officer
Derek K. Ellis 32 Chief Financial Officer and Treasurer
Gregory L. Hrncir 34 General Counsel, Vice President of Business Development and Secretary
Lawrence S. Schroeder 53 Director
Dr. Alan C. Ashton 58 Director
S. Leslie Flegel 61 Director
John J. Prehn 40 Director
All of our executive officers are full-time employees and serve at
the discretion of our board. Non-employee directors of eRoomSystem
Technologies devote such time to the affairs of eRoomSystem Technologies as
is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the executive officers, directors, director designees and key
employees of eRoomSystem Technologies:
DAVID S. HARKNESS has served as our chief executive officer since
December 2000, and as our chairman since March 2001. From December 2000 to
March 2001, Mr. Harkness served as our vice chairman of the board. Since
April 1999, Mr. Harkness has served as co-manager of Providence Management,
LLC, or Providence, which is manager of Ash Capital, LLC, or Ash Capital, an
investment company controlled by Dr. Alan C. Ashton. From November 1997 to
April 1999, Mr. Harkness served as executive vice president and chief
financial officer of Bookcraft, Inc. From March 1996 to November 1997, Mr.
Harkness served as vice president and director of marketing for Fonix
Corporation. Mr. Harkness received his Bachelor of Science in Business
Management and International Finance from Brigham Young University.
STEPHEN M. NELSON has served as our president of eRoomSystem
Technologies and RoomSystems, Inc. since August 2000 and our Chief Operating
Officer of eRoomSystem Technologies and RoomSystems, Inc. since March 2000.
In addition, Mr. Nelson served as our interim chief executive officer from
November 2000 to December 2000. Prior to joining us, Mr. Nelson spent nine
years with TELS Corporation where he served as its president and chief
operating officer from 1996 to 1999, its executive vice president from 1994
to 1996, and its chief financial officer from 1990 to 1994. Mr. Nelson also
served as a member of its board of directors from 1991 to 2000. Mr. Nelson
received his Bachelor of Science in Accounting from the University of Utah in
1974. Mr. Nelson is a certified public accountant and a member of the AICPA,
UACPA, Institute of Management Accountants and American Management
Association.
DEREK K. ELLIS has served as our chief financial officer and
treasurer since August 1999. From December 2000 to March 2001, Mr. Ellis
served as our secretary. Mr. Ellis also serves as chief financial officer,
treasurer, secretary and a director of RoomSystems, Inc. as chief financial
officer, treasurer, secretary and as a director of RSi BRE, Inc., and chief
financial officer, treasurer and as a director of eRoomSystem SPE, Inc. From
1995 to 1997, Mr. Ellis served as the director of finance for IVY
International Communications, Inc., Provo, Utah, formerly a division of
Novell/Word Perfect. Mr. Ellis received his Bachelor of Science in Finance
from the University of Utah.
GREGORY L. HRNCIR has served as our general counsel since September
1999, and as our secretary since March 2001. Mr. Hrncir previously served as
our secretary from September 1999 to November 2000. Mr. Hrncir also serves as
general counsel, secretary and a director of RoomSystems, Inc. and RSi BRE,
Inc. and as secretary of eRoomSystem SPE, Inc. In 1999, Mr. Hrncir served as
general counsel for PayStation America, Inc. Mr. Hrncir worked in private
practice from 1994 to 1998, specializing in corporate and securities matters
and representing us from 1996 to 1998. Mr. Hrncir received his Bachelor of
Science from Arizona State University and his Juris Doctor from Whittier
College School of Law. Mr. Hrncir is a member of the Arizona and California
State bars.
LAWRENCE S. SCHROEDER has served as one of our directors since
August 1999. Mr. Schroeder has also been engaged as an independent sales
consultant since January 2001. Mr. Schroeder served as a director of
RoomSystems, Inc. from 1998 to March 2001. Since 1992, Mr. Schroeder has been
a private consultant to the hospitality, sports and other related industries.
Mr. Schroeder is also a director of River Valley Productions, Kansas City,
Missouri, and a director of Responsive Marketing & Communications, Chicago,
Illinois. Mr. Schroeder received his Bachelor of Science in Business
Administration from Huron College.
36
DR. ALAN C. ASHTON has served as one of our directors since August
2000. Dr. Ashton is the co-founder of WordPerfect Corporation, Orem, Utah.
Dr. Ashton received a Bachelor's Degree in Mathematics and a Ph.D. in
Computer Science from the University of Utah. Formerly, Dr. Ashton served as
a professor of Computer Science at Brigham Young University. Dr. Ashton has
served on the board of directors of Novell, Inc., Geneva Steel and Utah
Valley State College, and currently serves on the board of directors of a
number of emerging-growth technology companies.
S. LESLIE FLEGEL has served as one of our directors since August
2000. Mr. Flegel has been the chairman of board and chief executive officer
of The Source Information Management Company, St. Louis, Missouri, since its
inception in March 1995. For more than 14 years, Mr. Flegel was the principal
owner and chief executive officer of Display Information Systems Company, a
predecessor of The Source. Mr. Flegel received his Bachelor of Arts from the
University of Missouri at Columbia.
JOHN J. PREHN has served as one of our directors since August 2000.
Mr. Prehn is also a member of RSG Investments. From March 1997 to August
2000, Mr. Prehn co-founded and managed Commercial Lending Corporation, the
company he sold to AMRESCO, Inc. From 1989 to 1996, Mr. Prehn co-founded
Peteco, Inc., a company that purchased, packaged and sold securitized assets.
Mr. Prehn received his Bachelor of Science in Business Administration from
the University of California at Berkeley.
COMPOSITION OF OUR BOARD
Our board consists of five members, each of whom will serve as a
director for a one-year term or until a successor has been elected and
qualified, subject to earlier resignation, removal or death. The number of
directors on our board may be increased or decreased by resolution adopted by
the affirmative vote of a majority of the board with our bylaws authorizing
less than two and no more than nine directors. Our board currently possesses
three independent directors.
COMMITTEES OF OUR BOARD
AUDIT COMMITTEE. The audit committee, which was formed on August 18,
2000, is comprised of Messrs. Prehn, Ashton and Flegel. The chairman of the
audit committee is Mr. Prehn. The audit committee met two times during the
fiscal year ended December 31, 2000. The audit committee has the
responsibility to:
o recommend the firm that will serve as our independent public
accountants;
o review the scope and results of the audit and services provided by
the independent public accountants;
o meet with our financial staff to review accounting procedures
and policies and internal controls; and
o perform the other responsibilities set forth in its written
charter.
The audit committee is comprised exclusively of directors who are
not our salaried employees and a majority of whom are, in the opinion of our
board, free from any relationship which would interfere with the exercise of
independent judgment as a committee member.
COMPENSATION COMMITTEE. The compensation committee, which was formed
on August 18, 2000, is comprised of Messrs. Schroeder, Ashton and Prehn. The
chairman of the compensation committee is Mr. Schroeder. The compensation
committee met two times during the fiscal year ended December 31, 2000. In
general, the compensation committee's authority and oversight extends to
total compensation, including base salaries, bonuses, stock options, and
other forms of compensation. More specifically, the compensation committee
has the responsibility to:
o recommend executive compensation policy to our board;
o determine compensation of our senior executives;
o determine the performance criteria and bonuses to be granted; and
o administer and approve stock option grants.
In recommending executive compensation, the compensation committee
has the responsibility to ensure that the compensation program for our
executives is effective in attracting and retaining key officers, links pay
to business strategy and performance, and is administered in a fair and
equitable fashion in the stockholder's interest.
DIRECTOR COMPENSATION
Our non-employee directors receive an attendance fee of $500 per
meeting attended and stock options to purchase 5,000 shares of common stock
at each annual meeting conducted after 2000. Directors who are employees of
eRoomSystem Technologies or our subsidiaries do not receive compensation for
their services as directors.
37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation of executive officers will be established by the board
pursuant to recommendations from the compensation committee. Prior to the
formation of the compensation committee, the compensation of executive officers
was established by Steven L. Sunyich, our former chairman and chief executive
officer. No member of our compensation committee will serve as a member of a
board or compensation committee of any entity that has one or more executive
officers serving as a member of our board or compensation committee. However,
David S. Harkness, our chief executive officer and chairman, is a co-manager and
fifty percent owner of Providence, the manager of Ash Capital, and Dr. Alan C.
Ashton, a director and member of our audit and compensation committee, is the
controlling member of Ash Capital.
2000 STOCK OPTION AND INCENTIVE PLAN
Our stock option plan was adopted by the board on February 3, 2000,
approved by the stockholders on March 29, 2000 and amended and restated by the
board on June 6, 2000. The stock option plan became effective on February 3,
2000. The plan provides us with the vehicle to grant to employees, officers,
directors and consultants stock options and bonuses in the form of stock and
options. Under the plan, we can grant awards for the purchase of up to 2,000,000
shares of common stock in the aggregate, including "incentive stock options"
within the meaning of Section 422 of the United States Internal Revenue Code of
1986 and non-qualified stock options. We have amended the plan to increase the
number of shares authorized under the plan from 2,000,000 shares to 2,400,000
million shares. We have submitted the amended plan to our stockholders for their
approval as part of our annual meeting of stockholders scheduled for May 7,
2001. Upon the approval of our stockholders, we will be able to grant stock
options and bonuses for an additional 400,000 shares.
To date, we have issued options to purchase 1,991,488 shares of common
stock under our stock option plan. The compensation committee of our board has
authority to determine the persons to whom awards will be granted, the nature of
the awards, the number of shares to be covered by each grant, the terms of the
grant and with respect to options, whether the options granted are intended to
be incentive stock options, the duration and rate of exercise of each option,
the option price per share, the manner of exercise and the time, manner and form
of payment upon exercise of an option.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the total
remuneration paid or accrued by eRoomSystem Technologies, to or on behalf of our
chief executive officers, current and former, and our executive officers whose
total annual salary exceeded $100,000 during the fiscal years ended December 31,
2000, 1999 and 1998. In accordance with the rules of the Securities and Exchange
Commission, or the Commission, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which does not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for the executive officers.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- --------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SECURITIES UNDERLYING
OPTIONS/SARS
- -------------------------------------------- --------- --------------- -------------- --------------------------------
David S. Harkness, 2000 $ 4,932 $ 0 250,000
Chairman and chief executive officer 1999 $ 0 $ 0 0
1998 $ 0 $ 0 0
Stephen M. Nelson, 2000 $ 89,773 $25,000 63,598
President, chief operating officer and 1999 $ 0 $ 0 0
former interim chief executive officer 1998 $ 0 $ 0 0
Steven L. Sunyich, 2000 $167,726 $ 0 353,109
Former chief executive officer 1999 $158,152 $ 4,326 0
1998 $ 74,308 $ 0 0
Derek K. Ellis, 2000 $119,021 $ 0 157,427
Chief financial officer and treasurer 1999 $ 99,313 $ 2,679 0
1998 $ 77,000 $ 0 0
Gregory L. Hrncir, 2000 $103,959 $ 0 121,578
General counsel, vice president of 1999 $ 28,184 $ 2,679 0
business development and secretary 1998 $ 0 $ 0 0
38
During 2000, Steven L. Sunyich served as our chief executive officer
until November 2000, Stephen M. Nelson served as our interim chief executive
officer from November 2000 to December 20, 2000 and David S. Harkness has served
as our chief executive officer since December 20, 2000. In addition to the
compensation disclosed above, Mr. Sunyich also received $4,000 in 1998 pursuant
to a consulting agreement and Mr. Hrncir received $23,666 in December 2000
pursuant to a severance agreement and a consulting agreement.
OPTION GRANTS TO EXECUTIVE OFFICERS DURING THE YEAR ENDED DECEMBER 31, 2000
The following table sets forth information regarding grants of stock
options during the fiscal year ended December 31, 2000 made to our executive
officers. The percentages below are based upon the issuance of options to
purchase 1,679,145 shares of common stock rather than 1,692,255 shares of common
stock to reflect the termination of options in 2001 to purchase 13,110 shares of
common stock that failed to vest. We have not issued any stock appreciation
rights.
PERCENT OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES IN BASE PRICE
NAME OPTIONS/ FISCAL YEAR ($/SHARE) EXPIRATION DATE
- -------------------------- -------------------- ----------------- ---------------------- -------------------
David S. Harkness 250,000 $ 1.51 December 20, 2003
-------------------
250,000 14.97%
Stephen M. Nelson 5,569 $ 4.00 August 2, 2003
696 $ 4.67 August 2, 2002
25,000 $ 6.00 August 2, 2003
18,879 $ 8.80 August 2, 2003
3,454 $ 9.60 August 2, 2003
-------------------
53,598 3.21%
Steven L. Sunyich 169,879 $ 4.00 August 2, 2003
1,392 $ 4.67 August 2, 2002
63,315 $ 8.80 August 2, 2003
118,523 $ 9.60 August 2, 2003
-------------------
353,109 21.16%
Derek K. Ellis 75,569 $ 4.00 August 2, 2003
35,004 $ 8.80 August 2, 2003
46,854 $ 9.60 August 2, 2003
-------------------
157,427 9.43%
Gregory L. Hrncir 58,069 $ 4.00 August 2, 2003
27,504 $ 8.80 August 2, 2003
36,005 $ 9.60 August 2, 2003
-------------------
121,578 7.28%
In addition to the stock options granted in the fiscal year ended
December 31, 2000, we have granted stock options to purchase 40,000 shares,
100,000 shares and 100,000 shares to Messrs. Nelson, Ellis and Hrncir,
respectively. These stock options vest 50% on June 30, 2001 and 50% on December
31, 2001, have a three-year term and are exercisable at price of $1.91 per
underlying share.
39
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2000 AND
OPTION VALUES
In the fiscal year ended December 31, 2000, none of our named executive
officers exercised any stock options. The following table sets forth information
related to the fiscal year-end value of unexercised stock options held by our
named executive officers. As the closing price of our common stock on April 19,
2001 was $1.25, none of our named executive officers hold any stock options that
are in-the-money. We have not issued any stock appreciation rights.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------------- --------------------- ------------------- ----------------
David S. Harkness 250,000 0 N/A N/A
Stephen M. Nelson 26,666 26,932 N/A N/A
Steven L. Sunyich 360,459 0 N/A N/A
Derek K. Ellis 156,537 5,374 N/A N/A
Gregory L. Hrncir 119,573 5,374 N/A N/A
REPORT ON REPRICING OF OPTIONS/SARS
During the fiscal year ended December 31, 2000, we did not adjust or
amend the exercise price of any of our outstanding stock options awarded to any
of our named executive officers with the exception of adjustments to all of our
outstanding stock options due to a three-for-four reverse stock split in our
common stock on March 29, 2000. As a result of this reverse stock split, the
exercise prices for all outstanding stock options were appropriately increased
as the number of shares of common stock underlying the stock options were
decreased.
EMPLOYMENT AGREEMENTS
As of December 20, 2000, we entered into an executive employment
agreement with David S. Harkness that will expire on December 31, 2001. As
compensation, Mr. Harkness will be paid an annual base salary of $150,000,
payable in twenty-six equal installments and will be eligible for a performance
bonus to be determined by our compensation committee, together with other
benefits customarily granted to executive officers. Mr. Harkness also received
stock options under the 2000 Plan to purchase 250,000 shares of common stock at
$1.51 per share. The agreement provides that Mr. Harkness shall hold in strict
confidence and shall not disclose any of our non-public information during and
for a period of five years following the termination of the agreement. In
addition, Mr. Harkness has agreed that he will not, directly or indirectly, be
an owner, partner, director, manager, officer or executive, or otherwise render
services to or be associated with any business or activity that competes with us
during the term of employment and for a three-year period following the
termination of such employment.
We may terminate the executive employment agreement with Mr. Harkness
for cause, death or disability. Cause is defined as a breach of the executive
employment agreement or of any other duty or obligation owed to us, a failure to
follow a directive of our board, an act of fraud, misappropriation, dishonesty
or embezzlement, or any willful or negligent misconduct, criminal conviction or
similar conduct or activity. Upon termination for cause, death or disability, we
owe no further obligation to Mr. Harkness with the exception of vested stock
options and the payment of earned but unpaid salary, life insurance or
disability benefits provided to Mr. Harkness. If we terminate the agreement for
any other reason, we are obligated to provide Mr. Harkness with advance written
notice of thirty days and to pay a severance payment equal to three months of
his then existing base salary.
On July 12, 2000, we entered into an executive employment agreement
with Stephen M. Nelson and an amended and restated executive employment
agreement with Derek K. Ellis. The terms of the executive employment agreements
for Messrs. Nelson and Ellis expire on June 30, 2002 and December 31, 2001,
respectively, and provide for base salaries of $125,000 and $132,500,
respectively. Subsequently, on January 29, 2001, Messrs. Nelson and Ellis agreed
to rescind their respective agreements in their entirety, effective
retroactively to July 12, 2000, and enter into new executive employment
agreements. The new agreements provide for the same base salary and benefits,
include the extension of the term of their employment to December 31, 2002 and
adopt the termination language contained in the executive employment agreement
with Mr. Harkness. Through the rescission of their old agreements, we eliminated
a provision of their agreements which obligated us to pay the aggregate exercise
price on the stock options exercised by either Mr. Nelson or Mr. Ellis, and any
applicable state and federal personal income tax incurred as a result of such
payment on behalf of either Mr. Nelson or Mr. Ellis, to the extent that either
Mr. Nelson or Mr. Ellis is be employed
40
upon the conclusion of his employment agreement. In exchange for the rescission
of their old agreements and the revised terms and conditions of the new
agreements, Messrs. Nelson and Ellis each received a one-time bonus.
On November 30, 2000, we entered into a severance agreement with
Gregory L. Hrncir that mutually terminated the employment agreement with Mr.
Hrncir and provided a severance payment in the amount of $67,795, payable to Mr.
Hrncir in thirteen equal bi-weekly installments and other benefits. All of the
terms of such employment agreement became null and void. On the same day, we
entered into a consulting agreement with Mr. Hrncir on a month-to-month basis
whereby Mr. Hrncir would remain as our general counsel and assist in our legal
matters. On January 29, 2001, we entered into a new executive employment
agreement with Mr. Hrncir whereby he returned as a full-time employee acting in
the capacity of general counsel and vice president of business development. The
new agreement provides for a base salary of $130,000, has terms and conditions
essentially identical to those contained in the agreement with Mr. Harkness and
expires on December 31, 2002. The consulting agreement with Mr. Hrncir was
terminated effective January 28, 2001. In addition, on January 29, 2001, we
entered into an amended and restated severance agreement with Mr. Hrncir which
provided for the payment of the balance owed on the severance agreement to Mr.
Hrncir and the rescission of his prior executive employment agreement as of July
12, 2000.
On January 24, 2001, we terminated for cause the second amended and
restated executive employment agreement of Steven L. Sunyich and his employment
with us. The employment agreement was entered into on July 12, 2000 and, other
than the salary amount, is essentially identical to the executive employment
agreements that we had entered into with Messrs. Nelson, Ellis and Hrncir as of
the same date. We have reserved up to $185,000 in the event it is required to
make any payments under the terms and conditions of Mr. Sunyich's executive
employment agreement. Subsequently, Mr. Sunyich resigned as chairman of our
board, which resignation was accepted by our board on March 6, 2001.
On March 1, 2000, we entered into an executive employment agreement
with Ronald Johnson, who is now our former executive vice president of sales and
marketing. The terms of the executive employment agreement provided for a base
salary of $105,000. Subsequently, on July 19, 2000, we entered into a separation
agreement with Mr. Johnson that mutually terminated the employment agreement
with Mr. Johnson and provided for a continuation of his annualized base salary
and benefits through September 30, 2000. With our consent, Mr. Johnson assigned
his options to purchase 91,564 shares of common stock to parties designated by
him.
INSURANCE
We maintain directors and officers liability insurance of $5,000,000 on
behalf of our officers and directors insuring them against liability that they
may incur in such capacities or arising out of such status.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Sections 78.7502 and 78.751 of the Nevada Revised Statutes provide for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. Article XII of our articles of incorporation provides for
indemnification of our directors, officers, employees and other agents to the
extent and under the circumstances permitted by Sections 78.7502 and 78.751 of
the Nevada Revised Statutes. In addition, pursuant to the severance agreement
with Mr. Hrncir, we agreed to indemnify Mr. Hrncir for any actions taken by him
on behalf of eRoomSystem Technologies prior to the effective date of the
severance agreement to the extent provided for in our bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the provisions contained in our articles of incorporation, bylaws, Nevada law
or otherwise, we have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities, other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding, is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
In addition to the indemnification of officers and directors under the
Nevada Revised Statutes, we entered into indemnification agreements with Dr.
Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000.
Pursuant to these indemnification agreements, we agreed to hold harmless and
indemnify each of them against any and all expenses incurred by them as a result
of their positions as directors of eRoomSystem Technologies. In addition, we
41
agreed to advance expenses incurred by each of them upon receipt of a written
request for such advancement containing an unsecured undertaking by each of them
to repay such amounts to the extent that they are held to not be entitled to
indemnification from eRoomSystem Technologies. The advancement of expenses
specifically excludes amounts for judgments, penalties, fines and settlements.
Messrs. Ashton and Prehn each possess the right to indemnification if, in civil
proceedings, they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of eRoomSystem
Technologies, and, in criminal proceedings, they had no reasonable cause to
believe that his conduct was unlawful. In addition, eRoomSystem Technologies may
elect to not indemnify Messrs. Ashton and Prehn if either a majority of the
directors not involved in the relevant proceeding or independent legal counsel,
in a written opinion, determine that they have not met the relevant standards
for indemnification.
On September 28, 1999, we entered into an indemnification agreement
with Donnelly Prehn which indemnifies Mr. Prehn for actions which may be taken
by him as a director on behalf of RSi BRE. Pursuant to this indemnification
agreement, eRoomSystem Technologies and RSi BRE, jointly and severally, agreed
to hold harmless and indemnify Mr. Prehn against any and all expenses incurred
by him as a result of his position as a director of RSi BRE. In addition, we
agreed to advance expenses incurred by Mr. Prehn upon receipt of a written
request for such advancement containing an unsecured undertaking by Mr. Prehn to
repay such amounts to the extent that Mr. Prehn is held not to be entitled to
indemnification from eRoomSystem Technologies. Mr. Prehn's rights to
indemnification are only available if damages have not already been paid
directly to Mr. Prehn by an insurance carrier maintained by either eRoomSystem
Technologies or RSi BRE. Mr. Prehn is not entitled to indemnification if he is
adjudged by a court of competent jurisdiction to have engaged in intentional
misconduct or a knowing violation of the law, if he received an improper
personal benefit, or if a court of competent jurisdiction renders a final
decision that such indemnification is unlawful.
There is no pending litigation or proceeding involving any of our
directors or officers as to which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS INVOLVING ASH CAPITAL
On August 17, 1999, we entered into an agreement of understanding with
Ash Capital, an entity controlled by Dr. Alan C. Ashton, a member of our Board,
in connection with the purchase by Ash Capital of 333,334 shares of our Series B
convertible preferred stock at a price of $3.00 per share. In addition, this
agreement provided Ash Capital with representation on our board and options to
purchase 70,313 shares of our common stock at $4.80 per share and 56,250 shares
of our common stock at $8.80 per share. The agreement of understanding was later
amended by an agreement which increased the amount of our shares of Series B
convertible preferred stock to be purchased as follows: Ash Capital - 333,334
shares; C&W/RSI Partners - 133,334 shares; SKM Investments, LLC - 133,334
shares; and Thunder Mountain Properties LC - 83,334 shares. Pursuant to this
amendment and until the closing of our initial public offering, we agreed to
deliver monthly and annual financial statements, make adjustments for business
combinations and capital-related transactions, and issue additional shares of
our preferred stock to the extent that we sell shares of our common stock, or
its equivalents, for less than $3.00 per share. In addition, the shares of
Series B convertible preferred stock purchased by these investors possessed the
same rights as other shares of our Series B convertible preferred stock. Upon
the consummation of our initial public offering on August 9, 2000, Dr. Ashton
became a member of our board and all shares of our Series B convertible
preferred stock were converted into shares of common stock upon the closing of
our initial public offering.
In addition to the agreement of understanding, we entered into a
stockholders' agreement and proxy dated August 17, 1999 with Ash Capital in
which rights were granted to Ash Capital. As a result, Ash Capital possesses the
right to vote a nominee onto our board, the right of first refusal with respect
to the proposed sale of shares of our capital stock by our executive officers
and their respective affiliates and the right to participate in the proposed
sale of shares of our capital stock in an amount equal to one quarter of the
number of shares proposed to be sold. In the event that there is a transfer by
our executive officers and their respective affiliates that violated this
agreement, Ash Capital possessed the right to sell to our executive officers and
their respective affiliates the number of shares of capital stock Ash Capital
would have been able to sell pursuant to its participation rights. In addition,
with the exception of transfers for estate planning purposes, our executive
officers and their respective affiliates agreed to transfer no more than 10,000
shares of our capital stock per year. Although the agreement was to terminate
upon the earlier of the tenth anniversary of the agreement or upon the
consummation of a firmly underwritten public offering with gross proceeds of at
least $12 million, Ash Capital provided a waiver of the $12 million requirement
and permitted the termination of the agreement upon the consummation of our
initial public offering that generated gross proceeds of $11.7 million.
On February 15, 2000, we received a $500,000 loan from Ash Capital.
This loan was evidenced by a promissory note bearing simple interest at the rate
of 10% per annum, payable on August 15, 2000 and secured by our assets. Ash
Capital was issued a warrant to purchase 18,750 shares of common stock
exercisable at $4.80 per share through August 9, 2002. The primary purpose of
this loan was to fund approximately 900 Refreshment Centers to be installed in
several hotel properties in the United States. In August 2000, the promissory
note was satisfied and paid in full.
In relation to the management of Ash Capital, Providence has served as
the manager of Ash Capital since its inception in April 1999. David S. Harkness,
our chief executive officer and chairman, is the co-manager of Providence and
owns fifty percent of Providence. Providence handles all of the business affairs
of Ash Capital in return for a quarterly management fee of up to $37,500. In
addition, once Ash Capital recoups its original principal investment in a
venture, along with a ten percent annual return, Mr. Harkness is entitled to
receive up to 10% of any remaining amount realized by Ash Capital.
We have entered into two consulting agreements with Providence, one
agreement on September 30, 1999 for marketing and business development services
in exchange for $51,875 and a warrant to purchase 14,961 shares of common stock,
exercisable at $4.80 per share, and another agreement on October 1, 2000 for
strategic tax planning and marketing services in exchange for $60,000. Although
Mr. Harkness will continue to be compensated by Providence in exchange for a
limited amount of assistance on Ash Capital matters unrelated to us, Mr.
Harkness shall no longer receive any of the warrants or any portion of the
payments made by us pursuant to the consulting agreements with Providence.
43
TRANSACTIONS INVOLVING RSG INVESTMENTS
On July 17, 1998, eRoomSystem Technologies entered into an agreement
with RSG Investments through which RSG Investments loaned us $1.5 million. RSG
Investments is a privately-held company in which John J. Prehn, one of our
directors, is a member holding 24% of its membership interests. Mr. Prehn
previously served as the managing director of AMRESCO. At the time of these
agreements, neither RSG Investments nor AMRESCO were affiliated with us.
The purpose of the $1.5 million loan was to fund the production of
approximately 2,270 Refreshment Centers. As an inducement, we issued the
principals of RSG Investments warrants to purchase 46,875 shares of common stock
and agreed to pay interest at the rate of 15% per annum. Our obligation was
secured by Refreshment Centers, our other assets and shares of common stock held
by the officers, directors and consultants. Under this agreement, we were to
"repurchase" the Refreshment Centers within 75 days, or by September 30, 1998.
If we failed to "repurchase" the Refreshment Centers by such date, warrants to
purchase 9,375 shares of common stock would have accrued every 30 days through
January 30, 1999. We failed to "repurchase" the Refreshment Centers by September
30, 1998 and remained in default through January 30, 1999, although we obtained
several extensions from RSG Investments. As our obligation remained unsatisfied,
we entered into a settlement with RSG Investments in the form of an Equipment
Transfer Agreement dated September 28, 1999.
Pursuant to the Equipment Transfer Agreement, we formed a
bankruptcy-remote entity, RSi BRE, placed a representative of RSG Investments on
the board of directors of RSi BRE, transferred ownership of 2,270 Refreshment
Centers to RSi BRE, and granted RSG Investments the right to receive $0.57 per
Refreshment Center per day of the revenue realized from 2,050 of the Refreshment
Centers. As part of the settlement, the RSi BRE board of directors was to
consist of three individuals, a representative of eRoomSystem Technologies, a
representative of RSG Investments and a third independent director. In addition,
we paid $250,000 to RSG Investments, converted $500,000 of our obligation into
166,667 shares of Series B convertible preferred stock and executed a promissory
note in the principal amount of $750,000 bearing an interest rate of 10% per
annum. Pursuant to this settlement, RSG Investments terminated the security
interest granted under the original obligation and received a security interest
in all of the assets of RSi BRE. In addition, the principals of RSG Investments
surrendered all warrants to purchase shares of common stock eRoomSystem
Technologies previously issued to them.
Pursuant to the terms of this promissory note, we transferred 829
additional Refreshment Centers to RSi BRE. We were obligated to satisfy this
promissory note in full on May 1, 2000, which was extended to August 15, 2000.
On August 15, 2000, the promissory note was satisfied and paid in full. As a
result, 829 units were transferred from RSi BRE to us and the remaining
obligations owed to RSG Investments were assumed by RSi BRE.
OTHER TRANSACTIONS WITH RELATED PARTIES
In October 1996, in consideration for the sale of patents to
eRoomSystem Technologies, we agreed to pay $125,000 and issue 65,625 shares of
common stock to Steven L. Sunyich, our former chairman and chief executive
officer. In fiscal year 1999, Mr. Sunyich converted the remaining principal
balance of $70,750 into 23,583 shares of Series B convertible preferred stock.
In 1997, Kelley Family Trust and Toleman Family Trust, both of which
are controlled by Mr. Sunyich, purchased 84,375 and 118,125 shares of common
stock, respectively, at a price of $4.67 per share, evidenced by demand
promissory notes bearing simple interest at the rate of 7% per annum. On October
1, 1999, the board called the demand promissory notes of Kelley Family Trust and
Toleman Family Trust. The demand promissory notes were defaulted upon and the
shares of common stock were returned to us and retired.
In 1997, Derek K. Ellis, our chief financial officer, treasurer and
secretary, purchased 120,375 shares of common stock at a price of $4.67 per
share, evidenced by a demand promissory note bearing simple interest at the rate
of 7% per annum. On October 1, 1999, the board called the demand promissory note
of Mr. Ellis. The demand promissory note was defaulted upon and the shares of
common stock were returned to us and retired.
In 1997, Gregory L. Hrncir, our secretary and general counsel,
purchased 50,625 shares of our common stock at a price of $4.67 per share,
evidenced by a demand promissory note bearing simple interest at the rate of 7%
per annum. On October 1, 1999, our board called the demand promissory note of
Mr. Hrncir. The demand promissory note was defaulted upon and the shares of
common stock were returned to us and retired.
44
In 1998, Mr. Ellis loaned $10,545 to us evidenced by a promissory note.
On September 1, 1999, we entered into an agreement with Mr. Ellis whereby we
agreed to convert the outstanding indebtedness due on this promissory note into
shares of Series B convertible preferred stock. As a result, we issued 3,742
shares of Series B convertible preferred stock and 2,989 shares of our common
stock to Mr. Ellis. These shares of Series B convertible preferred stock were
converted into shares of our common stock upon the closing of our initial public
offering.
Mr. Sunyich loaned the sum of $205,209 to us, as evidenced by a
promissory note dated January 1, 1999. In addition, William R. Shupe, a former
executive officer and former consultant, loaned the sum of $83,411 to us, as
evidenced by a promissory note dated January 1, 1999. On September 1, 1999, we
entered into agreements whereby we agreed to convert the outstanding
indebtedness due on these promissory notes. As a result, we issued 72,434 shares
of Series B convertible preferred stock and 51,983 shares of our common stock to
Mr. Sunyich and 29,808 shares of Series B convertible preferred stock and 25,377
shares of our common stock to Mr. Shupe. These shares of Series B convertible
preferred stock were converted into shares of our common stock upon the closing
of our initial public offering.
The funds loaned by Mr. Sunyich and Mr. Shupe were originally loaned to
them by Riggs Family Partnership, an entity owned and controlled by Mr. Shupe.
Upon inquiry, we were advised that the loans by Riggs Family Partnership had
been obtained from the proceeds of what may have been an unregistered offering
of our common stock by Riggs Family Partnership and Mr. Shupe. Through its
offering, Riggs Family Partnership sold shares of our common stock held by two
of our stockholders. We have been advised that, from April 1998 through March
1999, Riggs Family Partnership sold approximately 112,500 shares of our common
stock to approximately 36 investors in exchange for approximately $1.3 million.
Further, in December 1999, Riggs Family Partnership notified us of its
intention to transfer to these investors approximately 60,000 additional shares
of our common stock held by Riggs Family Partnership to offset the effect of our
one-for-two reverse stock split. We have not been able to determine whether this
unregistered offering was conducted by Riggs Family Partnership with the benefit
of a state or federal exemption from registration. As a result, Riggs Family
Partnership and Mr. Shupe may be subject to an examination by administrative
agencies with respect to its offers and sales of our common stock or may be
subject to demand for rescission by the purchasers of our common stock. Despite
the possible exposure of Riggs Family Partnership and Mr. Shupe to liability, we
did not have any control over Riggs Family Partnership or Mr. Shupe and did not
participate in the actual offer and sale of our common stock to these
purchasers.
On May 30, 1999, the SBD Limited Partnership, an entity controlled by
Mr. Sunyich, executed a promissory note in favor of eRoomSystem Technologies in
the original principal amount of $1,590,000 in consideration for the issuance of
198,750 shares of our common stock. The purpose of the issuance was to assist
eRoomSystem Technologies in complying with the stock pledge requirements
mandated by the terms of the $1,500,000 loan from RSG Investments. On September
28, 1999, as a result of a settlement agreement with RSG Investments, the
198,750 shares of common stock were returned to the SBD Limited Partnership.
Immediately thereafter, the SBD Limited Partnership surrendered the 198,750
shares of common stock to eRoomSystem Technologies in exchange for the
cancellation of the promissory note. The shares of common stock were booked as
treasury stock and have been retired.
On December 7, 1999 and February 14, 2000, Mr. Sunyich formally
assigned to eRoomSystem Technologies Patent No. 4,939,352 and Patent Nos.
4,857,714 and 4,883,948, respectively. These patents relate to credit card point
of sale technology. Each of the patent assignments have been filed with the
United States Patent and Trademark Office. The assignments finalized the sale of
such patents by Mr. Sunyich to us in 1996. In exchange, we issued 65,625 shares
and a promissory note in the principal amount of $125,000 to Mr. Sunyich. After
paying down the promissory note to approximately $70,750, we converted the
remaining outstanding principal and interest into 23,583 shares of Series B
convertible preferred stock. These shares were converted into shares of our
common stock upon the closing of our initial public offering.
The terms of each of the affiliate transactions were as favorable to
the issuer or its affiliates as those generally available from unaffiliated
third parties. We lacked sufficient disinterested independent directors to
ratify the affiliate transactions at the time the transactions were initiated.
All future material affiliated transactions and loans will be made, or entered
into, on terms that are no less favorable to us than those that can be obtained
from unaffiliated third parties. All future material affiliated transactions and
loans, and any forgiveness of loans, must be approved by a majority of our
independent directors who do not have an interest in the transactions and who
had access, at our expense, to our legal counsel or independent legal counsel.
45
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common
stock by our executive officers and our directors, individually, all of our
executive officers and directors, as a group, and all persons or entities known
to us to beneficially own five percent or more of our common stock, as of April
6, 2001 and, as adjusted, to reflect the sale of the shares of common stock in
this offering. The beneficial ownership is calculated based on 7,066,019 shares
of our common stock outstanding as of April 6, 2001 and 7,407,199 shares of our
common stock outstanding upon completion of this offering. Beneficial ownership
is determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities.
Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, with respect to all shares of capital stock listed
as owned by such person. Shares issuable upon the exercise of options that are
currently exercisable or become exercisable within sixty days of April 6, 2001
are considered outstanding for the purpose of calculating the percentage of
outstanding shares of our common stock held by the individual, but not for the
purpose of calculating the percentage of outstanding shares of our common stock
held by another individual. Unless otherwise indicated, the address of the
following stockholders is c/o eRoomSystem Technologies, Inc., 3770 Howard Hughes
Parkway, Suite 175, Las Vegas, Nevada 89109.
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY PRIOR TO THE AFTER THE
NAME OF EXECUTIVE OFFICERS AND DIRECTORS OWNED OFFERING OFFERING
- ---------------------------------------- ----- -------- --------
David S. Harkness(1) 962,333 12.9% 12.3%
Dr. Alan C. Ashton(2) 711,333 9.9% 9.4%
6405 South 3000 East, Suite 201
Salt Lake City, Utah 84121
Derek K. Ellis(3) 171,220 2.4% 2.3%
S. Leslie Flegel(4) 130,490 1.8% 1.7%
Gregory L. Hrncir(5) 125,135 1.7% 1.7%
Lawrence S. Schroeder(6) 55,911 0.8% 0.7%
Stephen M. Nelson(7) 38,878 0.5% 0.5%
John J. Prehn(8) 20,000 0.3% 0.3%
All of our executive officers and directors as a group 1,503,966 18.9% 18.1%
(8 persons)
GREATER THAN FIVE PERCENT STOCKHOLDERS
Steven L. Sunyich(9) 841,662 11.6% 11.0%
2506 Parkway Circle
Santa Clara, Utah 84765
Ash Capital, LLC(10) 711,333 9.9% 9.4%
801 West 2150 North
Provo, Utah 84604
Wellington Management Group, LLP(11) 475,000 6.7% 6.4%
75 State Street
Boston, Massachusetts 02109
- ------------------
(1) Reflects beneficial ownership of 1,000 shares of our common stock
and options to purchase an aggregate of 250,000 shares of our common stock.
The options held by Mr. Harkness are immediately exercisable. Of the 961,333
shares, 711,333 shares are attributable to Mr. Harkness solely as a result of
his position of co-manager and 50% owner of Providence, which has a 20%
profits interest in, and is the manager of, Ash Capital. Mr. Harkness
disclaims any beneficial ownership of the shares of our common stock
beneficially owned by Ash Capital.
46
(2) Ash Capital, controlled by Dr. Ashton, owns 566,020 shares of our
common stock and options to purchase 145,313 shares of our common stock. All
of the options held by Ash Capital are immediately exercisable.
(3) Reflects beneficial ownership of 11,995 shares of our common stock
and options to purchase an aggregate of 261,911 shares of our common stock,
of which amount options to purchase 159,224 shares will be exercisable by May
28, 2001.
(4) Reflects beneficial ownership of 15,490 shares of our common stock,
options to purchase 112,500 shares of our common stock and a warrant to
purchase 2,500 shares of our common stock. All of the options and warrants
held by Mr. Flegel are immediately exercisable.
(5) Reflects beneficial ownership of 2,875 shares of our common stock and
options to purchase an aggregate of 224,947 shares of our common stock, of
which amount options to purchase 122,260 shares will be exercisable by May
28, 2001.
(6) Reflects beneficial ownership of options to purchase 58,598 shares of
our common stock, of which amount options to purchase 55,911 shares are
immediately exercisable.
(7) Reflects beneficial ownership of 1,300 shares of our common stock and
options to purchase an aggregate of 93,598 shares of our common stock, of
which amount options to purchase 37,578 shares will be exercisable by May 28,
2001.
(8) Reflects beneficial ownership of 5,000 shares of our common stock and
options to purchase 15,000 shares of our common stock. The options held by
Mr. Prehn are immediately exercisable. RSG Investments, an entity in which
Mr. Prehn is a member, owns 178,569 shares of our common stock. Since Mr.
Prehn's ownership of RSG Investments is 24% and Mr. Prehn otherwise does not
have any voting or investment power in the shares of our common stock
beneficially owned by RSG Investments, such shares have not been attributed
to Mr. Prehn.
(9) Reflects beneficial ownership of 210,639 shares of our common stock
(of which he shares voting and dispositive power with his spouse with respect
to 3,750 shares), 270,564 shares of our common stock held by trusts for which
Mr. Sunyich acts as trustee and his family members are beneficiaries, and
options to purchase an aggregate of 360,459 shares of our common stock, all
of which are immediately exercisable.
(10) As provided in footnote 8 above, Ash Capital, controlled by Dr.
Ashton, owns 566,020 shares of our common stock and options to purchase
145,313 shares of our common stock, which are immediately exercisable.
(11) Wellington Management Company, LLP reported on Schedule 13G dated
February 13, 2001, that in its capacity as investment advisor it possessed
shared voting and dispositive power with respect to 475,000 shares and that
its clients are the owners of record of such shares.
47
DESCRIPTION OF CAPITAL STOCK
eRoomSystem's authorized capital stock consists of 50,000,000 shares
of common stock, $0.001 par value; 5,000,000 shares of preferred stock,
$0.001 par value; 500,000 shares of Series A convertible preferred stock,
$0.001 par value; 2,500,000 shares of Series B convertible preferred stock,
$0.001 par value; and 2,000,000 shares of Series C convertible preferred
stock, $0.001 par value. Our current authorized capital was effected through
an amendment and restatement of our articles of incorporation on March 29,
2000.
On September 28, 1999, our stockholders approved a reverse split of
our common stock, including all common stock underlying our outstanding
options and warrants, at the rate of one share for every two shares
outstanding. Due to contractual anti-dilution rights which have since been
terminated, 1,471,000 shares of our common stock were excluded from the
one-for-two reverse stock split. This reverse stock split did not affect our
Series A or Series B convertible preferred stock and has been retroactively
reflected in this prospectus.
On March 29, 2000, our stockholders approved a reverse split of our
common stock, including all common stock underlying our outstanding options
and warrants, at a rate of three shares for each four shares outstanding. Our
three-for-four reverse stock split did not affect our Series A, Series B or
Series C convertible preferred stock and has been retroactively reflected in
this prospectus.
As of April 6, 2001, and after giving effect to the one-for-two
reverse stock split and the three-for-four reverse stock split of our common
stock, there were 7,066,019 shares of common stock outstanding and no shares
of preferred stock outstanding. As set forth below, there are outstanding
options and warrants to purchase 3,260,650 shares of common stock as of April
6, 2001. We have reserved 2,000,000 shares of common stock for issuance
pursuant to our stock option plan.
COMMON STOCK
As of April 6, 2001, our outstanding shares of common stock were
held by approximately 725 stockholders. Holders of common stock are entitled
to one vote per share on all matters submitted to a vote of the shareholders.
We do not allow cumulative voting of any kind, and are not required to do so
under Nevada law. Subject to preferences that may be applicable to any then
outstanding preferred stock, the holders of common stock will be entitled to
receive dividends, if any, as may be declared from time to time by the board
out of legally available funds. Upon liquidation, dissolution, or winding up
of eRoomSystem Technologies, the holders of common stock will be entitled to
a pro rata share of our assets that are legally available for distribution
after payment of all debts and other liabilities and subject to the prior
rights of any preferred stock then outstanding. Holders of our common stock
have no preemptive, subscription, redemption, or conversion rights.
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "ERMS." On April 19, 2001, the last reported sale price of eRoomSystem
Technologies' common stock was $1.25. As we have a history of operating
losses and as there has only been a limited public market for our common
stock, we may not be able to meet the requirements for continued listing on
the Nasdaq SmallCap Market. In the event that our common stock no longer
meets the listing requirements of the Nasdaq SmallCap Market, our common
stock will most likely be traded on the OTC Bulletin Board or the National
Quotation Bureau Pink Sheets. If our common stock is no longer traded on the
Nasdaq SmallCap Market, the visibility of our common stock to the market and
its liquidity will most likely be reduced.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of undesignated
preferred stock. None of the undesignated preferred stock is issued or
outstanding, and we have no present plans to issue shares of undesignated
preferred stock. Although our board is empowered to issue one or more series
of undesignated preferred stock with such rights, preferences, restrictions
and privileges as may be fixed by our board, without further action by our
stockholders, we will not offer any preferred stock to any officer, director
or 5% stockholder except on the same terms it is offered to all other
existing or new stockholders, or unless the issuance of any preferred stock
is approved by a majority of our independent directors who did not have an
interest in the transactions and who have access, at our expense, to our
legal counsel or independent legal counsel. The issuance of the undesignated
preferred stock could adversely affect the rights, including voting rights,
of the holders of our common stock and could impede an attempted takeover of
us.
48
In addition to our undesignated preferred stock, we have authorized
500,000 shares of Series A convertible preferred stock, $0.001 par value,
2,500,000 shares of Series B convertible preferred stock, $0.001 par value,
and 2,000,000 shares of Series C convertible preferred stock, $0.001 par
value. Prior to the consummation of our initial public offering, we had
issued and outstanding 360,000 shares of Series A convertible preferred
stock, 2,081,680 shares of Series B convertible preferred stock and 161,535
shares of Series C convertible preferred stock. Upon the consummation of our
initial public offering, the outstanding shares of Series A convertible
preferred stock, Series B convertible preferred stock and Series C
convertible preferred stock were converted into 553,846 shares, 2,135,056
shares and 178,318 shares of our common stock, respectively. In addition, all
accrued outstanding dividends of shares of common stock have been paid and
all accrued dividends of cash will be paid upon the receipt from the
remaining holders of stock certificates for Series A convertible preferred
stock and Series C convertible preferred stock for conversion into shares of
common stock.
OPTIONS AND WARRANTS
As of April 6, 2001, there were options and warrants outstanding to
purchase 3,260,650 shares of common stock at exercise prices ranging from
$1.00 to $16.00 per share with a weighted average exercise price per share of
$4.89. Upon the assumption that warrant holders exercise all of their
warrants, there will be options and warrants outstanding to purchase
2,919,470 shares of common stock. These options and warrants are exercisable
at various times through the third anniversary date of this offering. We will
not grant any options or warrants to purchase common stock at an exercise
price of less than 85% of the fair market value of our common stock on the
date of grant.
REGISTRATION RIGHTS
In conjunction with our July 1996 through March 1997 notes offering,
we distributed offering documents that contained a statement that made
reference to demand and piggy-back registration rights for the shares of
common stock underlying the warrants granted in the offering. These purported
registration rights apply to 341,180 shares of common stock. Although we
believe that there are sufficient grounds to deny such registration rights,
we have agreed to register the shares of common stock underlying these
warrants pursuant to this offering on behalf of warrant holders.
Pursuant to our April 1997 through December 1997 units offering, we
granted registration rights to the purchasers of units where such purchasers
possessed the right to demand registration and piggy-back registration for
the shares of common stock purchased. These registration rights apply to
372,375 shares of common stock. We have not solicited or obtained waivers
from the holders of these registration rights with respect to our initial
public offering or this offering since the shares were purchased over two
years ago and are freely tradable pursuant to Rule 144(k) of the Securities
Act.
Pursuant to our January 1998 through March 1998 common stock
offering, we granted purchasers of common stock the right to piggy-back the
registration of their shares onto a future registration statement of
eRoomSystem Technologies for a public offering. The determination of whether
the shares of common stock purchased by these investors will be included in a
future registration statement will be dependent upon the underwriter or
underwriters for the public offering, as the underwriter or underwriters
would have final discretion as to which shares of common stock will be
registered. We have not solicited or obtained waivers from the holders of
these registration rights with respect to our initial public offering since
the shares were purchased over two years ago and are freely tradable pursuant
to Rule 144(k) of the Securities Act.
Pursuant to an offshore subscription agreement dated as of April 13,
2000, we granted registration rights for the 200,000 shares of common stock
issued to the selling stockholders in connection with the bridge loan. In
accordance with these registration rights, these shares of common stock have
been registered pursuant to this offering. In addition, we have agreed to
have a registration statement for these shares declared effective within 180
days of the closing of our initial public offering. The selling stockholders
are prohibited from selling their shares of common stock until 180 days after
the closing of our initial public offering, or for a longer period as
required by the National Association of Securities Dealers, Inc. or the
Nasdaq Stock Market not to exceed one year.
On March 24, 2000, we entered into an agreement with an agency to
provide us with advertising, marketing and promotional services and
materials. As part of our fee, we granted to the agency warrants to purchase
125,000 shares of our common stock at an exercise price of $4.50 per share
and the one-time right, beginning on August 2, 2001, to have the shares of
common stock underlying the warrant registered pursuant to the Securities Act.
49
On August 2, 2000, in connection with our initial public offering,
we issued to our underwriters, for nominal consideration, warrants to
purchase up to an aggregate of 180,000 shares of common stock at an exercise
price of $7.80 per share. The warrants are exercisable for a period of four
years beginning on August 2, 2001 hereof. In addition, we granted to our
underwriters the right, beginning on August 2, 2001, to have the shares of
common stock underlying the warrants registered pursuant to the Securities
Act either through a one-time demand registration right or piggy-back
registration rights. These rights include the right to require us to register
these shares for a four year period and the right to include these shares for
a six year period in a registration statement filed by us.
On November 8, 2000, we submitted to the trustee of the bankruptcy
estate of Royal W. Minson II, our former president and chief operating
officer, a cash offer of $180,000 relating to the acquisition of the 121,875
shares of common stock. Subsequently, we withdrew our purchase offer and have
agreed to assist the trustee in the sale of such shares in the public market
through the registration of the 121,875 shares pursuant to our selling
stockholder registration statement. Accordingly, these shares of common stock
have been registered pursuant to this offering.
2000 REVERSE STOCK SPLIT
On March 29, 2000, our board and a majority of our stockholders
approved by written consent our three-for-four reverse stock split. This
reverse stock split affected all shares of common stock outstanding and
underlying our options and warrants, but did not affect the previously
outstanding shares of Series A, Series B and Series C convertible preferred
stock.
NEVADA LAW, OUR ARTICLES OF INCORPORATION AND BYLAWS
Some of the provisions of our articles of incorporation and bylaws
may have the effect of discouraging some types of transactions that involve
an actual or threatened change of control of eRoomSystem Technologies, which
in turn could limit your ability to sell your shares at a premium. Some of
these provisions are summarized below.
SIZE OF BOARD AND ELECTION OF DIRECTORS. Our articles of
incorporation and bylaws, when read together, provide for a minimum of two
and a maximum of nine persons to serve on the board. However, the number of
directors may be increased or decreased by a resolution adopted by the
affirmative vote of a majority of the board. Removal of a director requires
two-thirds vote of the outstanding shares of our common stock.
STOCKHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide for
advance notice requirements for stockholder nominations and proposals at
annual meetings of our stockholders. Stockholders may nominate directors or
submit other proposals only upon written notice to eRoomSystem Technologies
not less than 120 days nor more than 150 days prior to the anniversary of the
date of the notice to stockholders of the previous year's annual meeting. A
stockholder's notice also must contain additional information, as specified
in the bylaws. The board may reject proposals that are not made in accordance
with the procedures contained in the bylaws or that are not properly the
subject of stockholder action.
CALLING SPECIAL STOCKHOLDER MEETINGS; STOCKHOLDER ACTION WITHOUT A
MEETING. Matters to be acted upon by the stockholders at special meetings are
limited to those specified in the notice of the meeting. A special meeting of
stockholders may be called by the board, the Chairman or the president of
eRoomSystem Technologies by resolution of the board or at the request in
writing of stockholders holding at least 10% of the outstanding shares
entitled to vote at the special meeting. As allowed by Nevada law, the bylaws
provide that any action by written consent of stockholders in lieu of a
meeting must be signed by the holders of at least a majority of the voting
power.
PREFERRED STOCK. We are authorized to issue 5,000,000 shares of
undesignated preferred stock, commonly referred to as "blank check" preferred
stock. None of the undesignated preferred stock is issued or outstanding, and
we have no present plans to issue shares of undesignated preferred stock. Our
board is empowered to issue one or more series of undesignated preferred
stock with such rights, preferences, restrictions and privileges as may be
fixed by our board, without further action by our stockholders. The issuance
of the undesignated preferred stock could adversely affect the rights,
including voting rights, of the holders of our common stock and could impede
an attempted takeover of us.
NEVADA ANTI-TAKEOVER STATUTES. Nevada law provides that an acquiring
person who acquires a controlling interest in a Nevada corporation may only
exercise voting rights on any control shares if those voting rights are
conferred by a majority vote of the corporation's disinterested stockholders
at a special meeting held upon the request of
50
the acquiring person. If the acquiring person is accorded full voting rights
and acquires control shares with at least a majority of all the voting power,
any of our stockholders who did not vote in favor of authorizing voting
rights for the control shares, are entitled to payment for the fair value of
his shares. A "controlling interest" is an interest that is sufficient to
enable the acquiring person to exercise at least one-fifth of the voting
power of the corporation in the election of directors. "Control shares" are
outstanding voting shares that an acquiring person or associated persons
acquire or offer to acquire in an acquisition and those shares acquired
during the 90-day period before the person involved became an acquiring
person.
In addition, Nevada law restricts the ability of a corporation to
engage in any combination with an interested stockholder for three years from
when the interested stockholder acquires shares that cause the stockholder to
become an interested stockholder, unless the combination or the purchase of
shares by the interested stockholder is approved by the board before the
stockholder became an interested stockholder. If the combination was not
previously approved, the interested stockholder may only effect a combination
after the three-year period, if the stockholder receives approval from a
majority of the disinterested shares or the offer meets the fair price
criteria.
An "interested stockholder" is a person who is:
o the beneficial owner, directly or indirectly, of 10% or more of
the voting power of the outstanding voting
shares of a corporation; or
o an affiliate or associate of a corporation and, at any time within
three years immediately before the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding shares of a corporation.
These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the board and in the policies
formulated by the board and to discourage some types of transactions that may
involve actual or threatened change of control of our company. These
provisions are designed to reduce our vulnerability to an unsolicited
proposal for a takeover that does not contemplate the acquisition of all of
our outstanding shares or an unsolicited proposal for the potential
restructuring or sale of all or a part of our company. However, these
provisions could discourage potential acquisition proposals and could delay
or prevent a change in control of our company. These provisions may also have
the effect of preventing changes in our management.
As a result of the potential adverse effects of these provisions on
our stockholders, on July 11, 2000, our board approved the second amendment
and restatement of our articles of incorporation whereby eRoomSystem
Technologies elected not to be governed by the Nevada laws relating to an
acquisition of a controlling interest in a Nevada corporation and a business
combination with an interested stockholder. On July 12, 2000, our
stockholders approved this second amendment and restatement of our articles
of incorporation. Under Nevada law, the amendment to our articles of
incorporation is not effective until 18 months after July 12, 2000 and will
not apply to any combination of eRoomSystem Technologies with an interested
stockholder whose date of acquiring our shares is on or before July 12, 2000.
TRANSFER AGENT
Our transfer agent is American Stock Transfer and Trust Company. Its
address is 40 Wall Street, New York, New York 10005, and its telephone number
is (718) 921-8360.
51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to our initial public offering, there had been no market for
our common stock. As of April 6, 2001, there were 7,066,019 shares of common
stock outstanding. Pursuant to this offering and upon the assumption that all
shares of common stock registered are sold, there will be 7,407,199 shares of
common stock outstanding. Of this amount, 663,055 shares are freely tradeable
pursuant to this offering and another 1,800,000 shares are freely tradeable
pursuant to our initial public offering, unless purchased by our "affiliates"
as that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors and/or 10% stockholders.
The balance of 4,944,144 shares outstanding are "restricted
securities" within the meaning of Rule 144. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rules 144 or 144(k) promulgated under the Securities
Act, which are summarized below. Sales of the restricted securities in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
Our directors, officers and selected stockholders entered into
lock-up agreements in connection with our initial public offering generally
providing that, without first obtaining the written consent of the
underwriter representative:
o they will not offer or sell any of our common stock owned by them
during the first 18 months following the closing of our initial
public offering;
o they will not offer or sell more than 10% of our common stock
owned by them in any of the next two consecutive calendar quarters
after the initial 18-month period; and
o they will not offer or sell more than the lesser of 25% of our
outstanding common stock owned by them or the number of shares
which may be sold pursuant to the volume limitation of Rule 144(e)
under the Securities Act, in any of the next four calendar
quarters thereafter.
These stockholders also agreed that, during the four-year period from the
closing of our initial public offering, they will not sell shares of our
common stock in excess of the volume limitations of Rule 144(e) even though
Rule 144(k) may be available. The underwriter representative may elect to
release such stockholders from their respective lock-up agreements if, in the
sole discretion of the underwriter representative, the sales of common stock
will not disrupt an orderly market for our common stock. In addition, our
officers and directors entered into an additional lock-up agreement where
they will not sell any of our common stock owned by them during the two-year
period after the close of our initial public offering and offer or sell more
than 2.5% of our common stock owned by them in any of the next eight
consecutive calendar quarters after the initial two-year period.
Taking into account the lock-up agreements, and assuming the
underwriter representative does not release stockholders from these
agreements, the following shares will be eligible for sale in the public
market at the following times:
o Beginning on the date of this prospectus, all 663,055 shares
registered in this offering, all 1,800,000 shares sold in our
initial public offering, up to 2,168,406 shares pursuant to Rule
144(k) and 233,865 shares of common stock eligible for sale in the
public market, subject to volume limitations, as explained below,
pursuant to Rule 144 will be immediately available for sale in the
public market.
o On May 2, 2001, a nine-month lock-up will expire with respect to
1,389,792 shares of common stock, all shares of which will be
eligible for sale in the public market, subject to volume
limitations, pursuant to Rule 144.
o On August 2, 2001, a twelve-month lock-up will expire with respect
to 178,318 shares of common stock, all shares of which will be
eligible for sale in the public market, subject to volume
limitations, pursuant to Rule 144.
In general, under Rule 144 as currently in effect, after the
expiration of the lock-up agreements, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
52
o one percent of the number of shares of common stock then
outstanding which will equal approximately 74,072 shares
immediately after this offering; or
o the average weekly trading volume of the common stock during the
four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect
to manner of sale, notice, and the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract to resell these shares in reliance upon Rule
144 but without compliance with specific restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 without complying
with the holding period requirement and that non-affiliates may sell these
shares in reliance on Rule 144 without complying with the holding period,
public information, volume limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8
under the Securities Act to register shares to be issued pursuant to our
employee benefit plans. As a result, any options or rights exercised under
our stock option plan will also be freely tradable in the public market.
However, shares held by affiliates will be subject to lock-up agreements and
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resaleable under Rule 701. As of
April 6, 2001, assuming the exercise of all of the warrants to purchase
341,180 shares of common stock registered pursuant to this offering, there
were outstanding options and warrants for the purchase of 2,919,470 shares of
common stock, of which 2,385,858 shares were vested and exercisable.
53
LEGAL MATTERS
Kummer Kaempfer Bonner & Renshaw, Las Vegas, Nevada, will pass upon the
validity of the shares of common stock being registered under this prospectus
for us.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 2000,
and the consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended have been included in this
prospectus in reliance on the report of Hansen, Barnett & Maxwell, Salt Lake
City, Utah, independent certified public accountants, given on the authority
of that firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In September 1999, we engaged the firm of Arthur Andersen LLP to
audit our financial statements for the fiscal years ended December 31, 1998
and 1999. On March 31, 2000, we received a letter in which Arthur Andersen
resigned as our independent auditors due to its determination that its
independence had been impaired. Arthur Andersen did not issue a report for
our financial statements for the last two fiscal years. The resignation of
Arthur Andersen was not based upon a disagreement on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure while Arthur Andersen was engaged by us. On April 4, 2000, our
board approved the retention of Hansen, Barnett & Maxwell as our independent
auditors.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form
SB-2 under the Securities Act with respect to the shares of common stock
registered on behalf of selling stockholders and warrant holders. This
prospectus, filed as part of the registration statement, does not contain all
of the information set forth in the registration statement and its exhibits,
portions of which have been omitted as permitted by the rules and regulations
of the Commission. For further information about us and the common stock, we
refer you to the registration statement and to its exhibits. Statements in
this prospectus about the contents of any contract, agreement or other
document are not necessarily complete and, in each instance, we refer you to
the copy of such contract, agreement or document filed as an exhibit to the
registration statement, and each such statement being qualified in all
respects by reference to the document to which it refers. Anyone may inspect
the registration statement and its exhibits without charge at the public
reference facilities the Commission maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies
of all or any part of these materials from the Commission upon the payment of
the fees prescribed by the Commission. You may also inspect these reports and
other information without charge at a website maintained by the Commission.
The address of this site is http://www.sec.gov. You may also obtain
information on the operation of the public reference facilities of the
Commission at 1-800-732-0330.
We are subject to the informational requirements of the Exchange Act
and are required to file reports, proxy statements and other information with
the Commission. You will be able to inspect and copy these reports, proxy
statements and other information at the public reference facilities
maintained by the Commission and at the Commission's regional offices at the
addresses noted above. You also will be able to obtain copies of this
material from the Public Reference Section of the Commission as described
above, or inspect them without charge at the Commission's website. Since we
have received approval for quotation on the Nasdaq SmallCap Market, then you
will be able to inspect reports, proxy and information statements and other
information concerning us at the National Association of Securities Dealers,
Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
54
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants....................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)................ F-6
Consolidated Statements of Cash Flows.................................... F-8
Notes to Consolidated Financial Statements............................... F-10
F-1
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
eRoomSystem Technologies, Inc.
We have audited the accompanying consolidated balance sheets of eRoomSystem
Technologies, Inc. (a Nevada corporation) and subsidiary as of December 31,
1999 and 2000, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
eRoomSystem Technologies, Inc. and subsidiary as of December 31, 1999 and
2000, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring losses
from operations. During the years ended December 31, 1999 and 2000, the
Company had net losses of $3,672,175 and $5,702,365, respectively. During the
years ended December 31, 1999 and 2000, the Company's operations used
$2,304,807 and $4,285,183 of cash, respectively. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 19, 2001
F-2
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------------------
1999 2000
-------------- --------------
CURRENT ASSETS
Cash $ 113,252 $ 2,811,023
Accounts receivable, net of allowance for doubtful accounts of $15,000 and
$24,000, respectively.................................................... 40,213 773,715
Inventories................................................................ 697,033 946,318
Prepaid expenses and other................................................. 6,250 45,056
-------------- --------------
TOTAL CURRENT ASSETS.................................................. 856,748 4,576,112
-------------- --------------
REFRESHMENT CENTERS IN SERVICE, net of accumulated depreciation of $3,858 and
$120,343, respectively..................................................... 169,791 1,762,245
-------------- --------------
PROPERTY AND EQUIPMENT
Production equipment....................................................... 138,908 225,110
Computer equipment......................................................... 171,666 216,482
Vehicles and other......................................................... 76,857 67,316
-------------- --------------
387,431 508,908
Less accumulated depreciation and amortization............................. (264,946) (323,044)
-------------- --------------
NET PROPERTY AND EQUIPMENT............................................ 122,485 185,864
-------------- --------------
INVESTMENT IN WHOLLY OWNED, UNCONSOLIDATED SUBSIDIARY......................... 2,535,976 936,182
-------------- --------------
OTHER ASSETS
Patents and license rights, net of accumulated amortization of $222,710
and $290,208, respectively............................................... 249,780 182,282
Deferred offering and financing costs, net of accumulated amortization of
$0 and $0, respectively.................................................. 88,000 --
Deposits and other......................................................... 327,851 172,464
-------------- --------------
TOTAL OTHER ASSETS.................................................... 665,631 354,746
-------------- --------------
TOTAL ASSETS.................................................................. $ 4,350,631 $ 7,815,149
============== ==============
See accompanying notes to consolidated financial statements.
F-3
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
DECEMBER 31,
-----------------------------------
1999 2000
------------- -------------
CURRENT LIABILITIES
Notes payable and current portion of long-term debt........................ $ 1,560,458 $ 56,710
Current portion of capital lease obligations............................... 22,061 28,091
Accounts payable........................................................... 987,013 1,071,333
Accrued liabilities........................................................ 332,835 406,191
Accrued interest........................................................... 290,117 12,906
Accrued restructuring costs................................................ -- 418,606
Customer deposits.......................................................... 93,470 89,258
Deferred maintenance revenue............................................... 58,868 72,764
Preferred stock dividends payable.......................................... 162,542 31,894
------------- -------------
TOTAL CURRENT LIABILITIES............................................. 3,507,364 2,187,753
------------- -------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion..................................... 812,022 2,269
Capital lease obligations, net of current portion.......................... 55,097 25,656
------------- -------------
TOTAL LONG-TERM LIABILITIES........................................... 867,119 27,925
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, $0.001 par value; 500,000 shares
authorized; 360,000 shares outstanding at December 31,1999 and no shares
outstanding at December 31, 2000......................................... 1,332,953 --
Series B convertible preferred stock, $0.001 par value; 2,500,000 shares
authorized, 2,081,680 shares outstanding at December 31,1999 and no
shares outstanding at December 31, 2000.................................. 6,171,196 --
Series C convertible preferred stock, $0.001 par value; 2,000,000 shares
authorized, no shares outstanding........................................ -- --
Undesignated preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares outstanding........................................ -- --
Common stock, $0.001 par value; 50,000,000 shares authorized; 2,217,291
shares and 7,051,019 shares outstanding at December 31, 1999 and 2000,
respectively............................................................. 2,218 7,051
Additional paid-in capital................................................. 6,265,284 28,546,432
Warrants and options outstanding........................................... 728,538 2,036,324
Notes receivable from stockholders......................................... (840,000) --
Accumulated deficit........................................................ (13,684,041) (24,990,336)
------------- -------------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT).................................. (23,852) 5,599,471
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).......................... $ 4,350,631 $ 7,815,149
============= =============
See accompanying notes to consolidated financial statements.
F-4
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1999 2000
------------- -------------
REVENUE
Product sales.............................................................. $ 144,282 $ 2,552,578
Revenue sharing arrangements............................................... 213,654 266,730
Maintenance fees........................................................... 182,581 164,332
------------- -------------
TOTAL REVENUE......................................................... 540,517 2,983,640
------------- -------------
COST OF REVENUE
Product sales.............................................................. 118,010 1,926,333
Revenue sharing arrangements............................................... 165,995 91,558
Maintenance................................................................ 78,518 137,770
------------- -------------
TOTAL COST OF REVENUE................................................. 362,523 2,155,661
------------- -------------
GROSS MARGIN.................................................................. 177,994 827,979
------------- -------------
OPERATING EXPENSES
Selling general and administrative (including non-cash compensation
expense of $105,005 and $564,674, respectively).......................... 2,492,816 4,105,423
Restructuring costs........................................................ -- 418,606
Research and development................................................... 271,230 364,960
------------- -------------
TOTAL OPERATING EXPENSES.............................................. 2,764,046 4,888,989
------------- -------------
LOSS FROM OPERATIONS.......................................................... (2,586,052) (4,061,010)
------------- -------------
OTHER INCOME (EXPENSE)
Interest expense........................................................... (1,444,532) (1,371,899)
Write-off of note receivable from stockholder.............................. -- (399,000)
Equity in income (loss) from unconsolidated, wholly owned subsidiary....... 147,615 (16,229)
Interest and other income.................................................. 210,794 145,773
------------- -------------
OTHER EXPENSE, NET.................................................... (1,086,123) (1,641,355)
------------- -------------
NET LOSS...................................................................... (3,672,175) (5,702,365)
DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK.............................. (607,269) (5,603,930)
------------- -------------
LOSS ATTRIBUTED TO COMMON STOCKHOLDERS........................................ $ (4,279,444) $ (11,306,295)
============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE....................................... $ -- $ --
============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE....................................... $ (1.33) $ (2.73)
============= =============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARE OUTSTANDING................... $ 3,220,709 $ 4,137,458
============= =============
See accompanying notes to consolidated financial statements.
F-5
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
1999 2000
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
SERIES A CONVERTIBLE PREFERRED STOCK
Balance at Beginning of Year...................... 360,000 $ 1,332,953 360,000 $ 1,332,953
Series A convertible preferred stock beneficial
conversion dividend............................ -- -- -- 1,800,000
Conversion of Series A preferred stock into
common stock................................... -- -- (360,000) (3,132,953)
----------- ------------ ----------- ------------
Balance at End of Year.................... 360,000 $ 1,332,953 -- $ --
=========== ============ =========== ============
SERIES B CONVERTIBLE PREFERRED STOCK
Balance, at Beginning of Year..................... -- $ -- 2,081,680 $ 6,171,196
Issuance of Series B convertible preferred stock
for cash and conversion of notes payable at
$3.00 per shares, net.......................... 2,081,680 5,849,826 -- --
Series B convertible preferred stock beneficial
conversion dividend............................ -- 321,370 -- 3,425,654
Conversion of Series B preferred stock into
common stock................................... -- -- (2,081,680) (9,596,850)
----------- ------------ ----------- ------------
Balance at End of Year.................... 2,081,680 $ 6,171,196 -- $ --
=========== ============ =========== ============
SERIES C CONVERTIBLE PREFERRED STOCK
Issuance of Series C convertible preferred stock
and 42,500 warrants for cash at $2.83 per share -- $ -- 196,150 $ 535,986
Conversion of Series C preferred stock into
common stock................................... -- -- (196,150) (535,986)
----------- ------------ ----------- ------------
Balance at End of Year.................... -- $ -- -- $ --
=========== ============ =========== ============
COMMON STOCK
Balance, Beginning of Year........................ 3,531,311 $ 3,532 2,217,291 $ 2,218
Issuance of common stock to entity controlled by
the Company's former CEO in exchange for a
note receivable................................ 198,750 199 -- --
Return of common stock from entity controlled by
the Company's former CEO....................... (198,750) (199) -- --
Issuance of common stock and 180,000 warrants for
cash........................................... -- -- 1,800,000 1,800
Issuance of common stock for interest in
connection with conversion of notes payable to
stockholders................................... 83,500 84 -- --
Issuance of common stock in connection with 2000
Bridge loan.................................... -- -- 200,000 200
Issuance of common stock for interest in
connection with 90-day convertible notes, the
2000 Bridge loan and notes payable to
shareholders................................... 41,410 41 25,957 26
Issuance of common stock for services............. 3,134 3 777 1
Series B convertible preferred stock dividend in
the form of common stock....................... 28,936 29 68,169 68
Conversion of Series A preferred stock into
common stock................................... -- -- 553,846 554
Conversion of Series B preferred stock into
common stock................................... -- -- 2,135,056 2,135
Conversion of Series C preferred stock into
common stock................................... -- -- 178,318 178
Shares issued under anti-dilution agreement....... -- -- 12,230 12
Return of common stock as payment of shareholder
notes receivable............................... (1,471,000) (1,471) -- --
Return of common stock as a result of a default
on a note receivable from a shareholder........ -- -- (140,625) (141)
----------- ------------ ----------- ------------
Balance at End of Year.................... 2,217,291 $ 2,218 7,051,019 $ 7,051
=========== ============ =========== ============
See accompanying notes to consolidated financial statements.
F-6
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
1999 2000
------------- -------------
ADDITIONAL PAID-IN CAPITAL
Balance at Beginning of Year................................................. $ 8,670,586 $ 6,265,284
Issuance of common stock to entity controlled by the Company's former CEO in
exchange for a note receivable............................................. 1,589,801 --
Return of common stock from entity controlled by the Company's former CEO..... (1,589,801) --
Issuance of common stock and 180,000 warrants for cash........................ -- 8,630,702
Issuance of common stock for interest in connection with conversion of notes
payable to stockholders.................................................... 264,398 --
Issuance of common stock in connection with 2000 Bridge loan.................. -- 440,341
Issuance of common stock for interest in connection with 90-day convertible
Notes and shareholders notes payable....................................... 121,566 87,086
Issuance of common stock for services......................................... 5,962 2,484
Issuance of Series C convertible preferred stock and 42,500 warrants for cash
at $2.83 per share......................................................... -- 31,875
Series B convertible preferred stock dividend in the form of common stock..... 141,870 275,609
Conversion of Series A preferred stock into common stock...................... -- 3,132,399
Series B convertible preferred stock dividend in the form of common stock..... -- 9,594,715
Conversion of Series C preferred stock into common stock...................... -- 535,808
Shares issued under anti-dilution agreement receivable........................ -- (12)
Return of common stock as payment of shareholder notes receivable............. (2,939,098) --
Return of common stock as a result of a default on a note receivable from a
shareholder................................................................ -- (449,859)
------------- -------------
Balance at End of Year................................................ $ 6,265,284 $ 28,546,432
============= =============
WARRANTS AND OPTIONS OUTSTANDING
Balance at Beginning of Year.................................................. $ 1,043,362 $ 728,538
Issuance of Series C convertible preferred stock and 42,500 warrants for cash
at $2.83 per share......................................................... -- 59,988
Issuance of common stock and 180,000 warrants for cash........................ -- 470,572
Issuance of warrants related to advertising agreement, financing activities
and consulting............................................................. 191,870 777,226
Return of warrants in connection with troubled debt restructuring............. (506,694) --
------------- -------------
Balance at End of Year................................................ $ 728,538 $ 2,036,324
============= =============
NOTE RECEIVABLE FROM SHAREHOLDERS
Balance at Beginning of Year.................................................. $ (4,073,941) $ (840,000)
Issuance of common stock to entity controlled by the Company's former CEO in
exchange for a note receivable............................................. (1,590,000) --
Return of common stock from entity controlled by the Company's former CEO..... 1,590,000 --
Accrual of interest on notes receivable from stockholders..................... (235,951) --
Reserve for shareholder notes receivable...................................... 529,323 390,000
Return of common stock as payment of shareholder notes receivable............. 2,940,569 --
Return of common stock as a result of a default on a note receivable from a
shareholder................................................................ -- 450,000
------------- -------------
Balance at End of Year................................................ $ (840,000) $ --
============= =============
ACCUMULATED DEFICIT
Balance at Beginning of Year.................................................. $ (9,404,597) $ (13,684,041)
Series A convertible preferred stock dividend accrual......................... (144,000) (87,583)
Series B convertible preferred stock dividend in the form of common stock..... (141,899) (275,677)
Series C convertible preferred stock dividend accrual......................... -- (15,016)
Series A convertible preferred stock beneficial conversion dividend........... -- (1,800,000)
Series B convertible preferred stock beneficial conversion dividend........... (321,370) (3,425,654)
Net loss...................................................................... (3,672,175) (5,702,365)
------------- -------------
Balance at End of Year................................................ $ (13,684,041) $ (24,990,336)
============= =============
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) AT END OF YEAR........................... $ (23,852) $ 5,599,471
============= =============
See accompanying notes to consolidated financial statements.
F-7
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1999 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................... $ (3,672,175) $ (5,702,365)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 292,877 222,675
Interest expense paid by issuance of common stock, warrants, and stock
options............................................................... 478,919 167,005
Amortization of deferred offering, financing costs and accretion of debt
discount.............................................................. 35,997 496,728
Interest accrued on notes receivable from stockholders................... (235,951) --
Write-off of note receivable from stockholder............................ -- 390,000
Reserve against stockholders notes receivable............................ 529,323 --
Non-cash compensation expense............................................ 105,005 564,674
Distributions in excess of (undistributed) equity in income from
unconsolidated subsidiary............................................. (46,242) (81,499)
Accounts receivable...................................................... (4,558) (733,502)
Inventories.............................................................. 613,898 (249,285)
Prepaid expenses, deposits and other..................................... (163,435) 116,581
Accounts payable......................................................... (97,689) 153,318
Accrued liabilities...................................................... (178,228) 353,165
Other liabilities........................................................ 37,452 17,322
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES................................. (2,304,807) (4,285,183)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to refreshment centers in service................................ (1,711,105) (933,422)
Purchase of property and equipment......................................... (12,239) (160,823)
Cash investment in wholly owned, unconsolidated subsidiary................. (572,544) --
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES................................. (2,295,888) (1,094,245)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................................................... 477,669 1,767,021
Principal payments on notes payable........................................ (400,789) (3,827,771)
Proceeds from issuance of notes payable to officers and stockholders....... 299,195 --
Principal payments on capital lease obligations............................ (15,753) (23,411)
Other offering and financing costs paid.................................... (88,000) --
Proceeds from issuance of common stock and warrants........................ -- 9,766,759
Proceeds from issuance of preferred stock and warrants..................... 4,439,775 627,849
Payment of dividends....................................................... -- (233,248)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................. 4,712,097 8,077,199
------------- -------------
NET INCREASE IN CASH.......................................................... 111,402 2,697,771
CASH AT BEGINNING OF YEAR..................................................... 1,850 113,252
------------- -------------
CASH AT END OF YEAR........................................................... $ 113,252 $ 2,811,023
============= =============
See accompanying notes to consolidated financial statements.
F-8
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1999 2000
------------- -------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest..................................................... $ 126,857 $ 792,522
============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrual of preferred stock dividends....................................... 607,269 378,276
Issuance of common stock as payment of debt obligations.................... 386,088 --
Issuance of preferred stock as payment of debt obligations................. 1,410,051 --
Value of warrants converted to debt........................................ 506,694 --
Cancellation of stockholder notes receivable and related accrued interest
in exchange for return of 1,471,000 and 140,625 shares of common stock... 2,940,569 450,000
Property and equipment acquired by capital lease........................... 28,476 --
Issuance of warrants for advertising agreement............................. -- 135,144
Accrued interest, accounts payable and payable to stockholder converted to
notes payable............................................................ 401,162 56,063
Beneficial conversion feature on Series A and B Preferred Stock............ -- 5,225,654
Value of shares issued as a dividend on Series B Preferred Stock........... -- 275,679
Conversion of Series A, B and C Preferred Stock into common stock.......... -- 13,265,789
Transfer of assets from investment in unconsolidated subsidiary to
refreshment centers in service........................................... -- 775,518
Transfer of notes payable and accrued interest to unconsolidated subsidiary -- 943,956
See accompanying notes to consolidated financial statements.
F-9
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
eRoomSystem Technologies, Inc., a Nevada corporation ("eRoomSystem
Technologies"), is the successor to RoomSystems, Inc., a Nevada corporation
("RSI"). RSI was originally incorporated as InnSyst! Corporation, a North
Carolina corporation, on March 17, 1993 and on April 17, 1996, was
reincorporated as a Nevada corporation.
On August 31, 1999, RoomSystems International Corporation ("RSIC") was
incorporated in Nevada as a wholly owned subsidiary of RSI. As of December
31, 1999, RSI, RSIC and their shareholders entered into an Agreement and Plan
of Reorganization wherein RSI became a wholly owned subsidiary of RSIC. On
March 29, 2000 and corrected on May 30, 2000, RSIC changed its name to
eRoomSystem Technologies, Inc.
This reorganization has been accounted for as a reorganization of entities
under common control with the assets and liabilities reflected at carry-over
basis in a manner similar to pooling-of-interests accounting. The
accompanying consolidated financial statements have been restated to reflect
the equivalent eRoomSystem Technologies shares for all periods presented.
On September 29, 1999, eRoomSystem Technologies formed a new
bankruptcy-remote entity, RSi BRE, Inc. ("RSi BRE"), as a wholly owned
subsidiary (see Note 3).
On May 10, 2000, eRoomSystem Technologies formed a new bankruptcy-remote
entity, eRoomSystem SPE, Inc. ("SPE"), as a wholly owned subsidiary. SPE was
formed for the purposes of purchasing certain business leases and certain
related refreshment centers, obtaining the rights, through licensing, to
certain intellectual property relating to the use of the refreshment centers,
and obtaining financing secured by pledging the business leases.
The accompanying consolidated financial statements include the accounts of
eRoomSystem Technologies, and its wholly owned subsidiaries RSI and SPE,
after elimination of intercompany accounts and transactions. RSi BRE has not
been consolidated in the accompanying financial statements since the Company
does not have the ability to control RSi BRE's operations. RSi BRE has been
accounted for under the equity method of accounting. eRoomSystem Technologies
and RSI are sometimes collectively referred to as "eRoomSystem Technologies"
or the "Company."
NATURE OF OPERATIONS AND RELATED RISKS
The Company designs, assembles and markets a complete line of fully-automated
Refreshment Centers and eRoomSafes traditionally installed in hotels. The
Refreshment Centers and eRoomSafes use proprietary software, and patented
credit card technology, that integrate with the data collection computer in
each hotel.
Since inception, the Company has suffered recurring net losses. During the
years ended December 31, 1999 and 2000, the Company had net losses of
$3,672,175 and 5,702,365, respectively. During the years ended December 31,
1999 and 2000, the Company's operations used $2,304,807 and $4,285,183 of
cash, respectively. These matters raise substantial doubt about the Company's
ability to continue as a going concern. In the future, the Company may need
to obtain additional financing to provide working capital for operations.
Management is attempting to arrange debt financing for product sales. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
The Company is subject to certain risk factors frequently encountered by
companies that are in the early stages of developing a business line that may
impact its ability to become a profitable enterprise. These risk factors
include, among others:
a. The Company's business model is capital intensive and will require
significant additional equity or debt financing. This additional
funding may not be available in sufficient amounts or on acceptable
terms to the Company, or at all.
F-10
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. The Company faces competition from companies that have substantially
greater capital resources, research and development, manufacturing and
marketing resources than the Company.
c. The Company's ability to implement its strategy is dependent upon its
ability to retain key employees, ability to attract and retain
additional qualified personnel and its ability to manage expansion
effectively.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
INVENTORIES
Inventories include direct materials, direct labor and manufacturing overhead
costs and are stated at the lower of cost (using the first-in, first-out
method) or market value. Inventories consist of the following:
December 31,
-----------------------------
1999 2000
---------- -----------
Finished goods.................................. $ 284,382 $ 90,943
Work-in process................................. 160,764 100,759
Parts and raw materials......................... 251,887 754,616
---------- -----------
$ 697,033 $ 946,318
========== ===========
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Due to competitive pressures and
technical innovation, it is possible that estimates of the net realizable value
could change in the near term.
REFRESHMENT CENTERS IN SERVICE AND PROPERTY AND EQUIPMENT
Refreshment Centers (including eRoomSafes, if applicable) and property and
equipment are stated at cost, less accumulated depreciation and amortization.
Major additions and improvements are capitalized, while minor repairs and
maintenance costs are expensed when incurred. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets, after taking into consideration residual values for Refreshment
Centers, which are as follows:
Refreshment Centers in service................... 7 years
Production equipment............................. 3 - 5 years
Computer and office equipment.................... 3 - 7 years
Vehicles......................................... 7 years
Depreciation and amortization expense related to Refreshment Centers in service
and property and equipment was $277,030 and $191,399 for the years ended
December 31, 1999 and 2000, respectively.
On retirement or disposition of property and equipment, the cost and related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is recognized in the statement of operations.
CASH EQUIVALENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less, readily convertible to known amounts of cash. At December
31, 2000 and 1999, the Company had cash in excess of federally insured limits of
$2,711,023 and $6,324, respectively.
F-11
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts reported in the accompanying consolidated financial
statements for cash, accounts receivable and accounts payable approximate
fair values because of the immediate or short-term maturities of these
financial instruments. The carrying amounts of the Company's debt obligations
approximate fair value based on current interest rates available to the
Company.
CAPITALIZED SOFTWARE COSTS
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" development costs
incurred in the research and development of new software products to be sold,
leased or otherwise marketed are expensed as incurred until technological
feasibility in the form of a working model has been established. Internally
generated capitalizable software development costs have not been material for
the years ended December 31, 1999 and 2000. The Company has charged its
software development costs to research and development expense in the
accompanying consolidated statements of operations.
PATENTS AND LICENSE RIGHTS
Patents and license rights consist of patents and licenses purchased from a
related party (see Note 5). These costs are being amortized on a
straight-line basis over the estimated life of the related patents or
licenses of 7 years. Management evaluates the recoverability of these costs
on a periodic basis, based on revenues from the products related to the
technology, existing or expected revenue trends and projected cash flows.
DEFERRED OFFERING AND FINANCING COSTS
The Company capitalizes direct costs associated with the acquisition of debt
financing. These costs are amortized over the life of the related debt as
additional interest expense. If the underlying debt is repaid or extinguished
prior to the scheduled maturity, the costs are removed from the accounts and
considered in the determination of the gain or loss from extinguishment.
Certain debt has been converted to equity and the related unamortized debt
financing costs have been recorded as equity offering costs. The Company also
capitalizes direct costs associated with the acquisition of equity financing
which are netted against the actual equity proceeds.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. The Company evaluates, at each
balance sheet date, whether events and circumstances have occurred which
indicate possible impairment. The Company uses an estimate of future
undiscounted net cash flows from the related asset or group of assets over
their remaining life in measuring whether the assets are recoverable. As of
December 31, 2000, the Company does not consider any of its long-lived assets
to be impaired.
REVENUE RECOGNITION
The Company generates revenues from either the sale of Refreshment Centers
and eRoomSafes or from leases of Refreshment Centers and eRoomSafes under
revenue sharing agreements. Under the revenue sharing agreements, the Company
receives a portion of the sales generated by the units and under certain
agreements is guaranteed a minimum daily revenue amount. The Company also
generates revenues from maintenance services.
Revenue from the sale of Refreshment Centers and eRoomSafes is recognized
upon completion of installation and acceptance by the customer. The revenue
sharing agreements are accounted for as operating leases with revenue being
recognized as earned over the lease period. Maintenance revenue is recognized
as the services are performed or pro rata over the service period. With
respect to the sale of products, the maintenance services are not integral to
the functionality of the Refreshment Centers and are at the option of the
customer. Maintenance services are mandatory for Refreshment Centers placed
under revenue sharing agreements and are incorporated into those agreements.
In connection with the revenue sharing agreements, a portion of the revenues
received by the Company are classified as maintenance fees based upon
vendor-specific objective evidence of fair value. The Company defers revenue
paid in advance relating to future services and products not yet installed
and accepted by the customer.
F-12
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company recognizes an asset or liability for the deferred tax
consequences of all temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. These deferred
tax assets or liabilities are measured using the enacted tax rates that will
be in effect when the differences are expected to reverse. Deferred tax
assets are reviewed periodically for recoverability and valuation allowances
are provided, as necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This statement, as extended by SFAS No. 137, is effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect this statement to have a
material impact on the Company's results of operations, financial position or
liquidity.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
This bulletin requires the application of specific criteria in determination
of the timing of revenue recognition in financial statements and is effective
for all fiscal years beginning after December 16, 1999. The Company's
accounting policies conform to the requirements of this bulletin and the
adoption of this bulletin had no material effect upon the Company's results
of operations, financial position or liquidity.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion
No. 25." Interpretation No. 44 provides definitive guidance regarding
accounting for stock-based compensation to non-employee directors.
Interpretation 44 allows non-employee directors to be treated as "employees"
for purposes of applying APB Opinion No. 25. The Company has applied this
interpretation to all issuances to non-employee directors during 1999 and
thereafter.
NET LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares
outstanding. Dilutive loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares and the dilutive potential common share equivalents then outstanding.
Potential common share equivalents consist of shares issuable upon the
exercise of stock options, warrants and shares issuable upon the conversion
of Series A, Series B, and Series C convertible preferred stock.
As of December 31, 1999, there were 360,000 and 2,081,680 shares of Series A
and Series B convertible preferred stock outstanding, respectively. As of
December 31, 1999 and 2000, there were options and warrants outstanding to
purchase 866,508 shares and 2,976,560 shares of common stock, respectively,
that were not included in the computation of diluted loss per common share as
their effect would have been anti-dilutive, thereby decreasing the loss per
common share.
NOTE 3 - RSG INVESTMENT TRANSACTIONS AND SETTLEMENT
On July 17, 1998, the Company entered into an Equipment Purchase and Sale
Agreement (the "Equipment Agreement") with RSG Investments, LLC ("RSG"), an
unrelated lender. Under the terms of the Equipment Agreement, RSG paid $1.5
million for the production of approximately 2,270 Refreshment Centers (the
"RSG Units") to be installed in six hotel properties in the United States
under revenue sharing agreements. Pursuant to the Equipment Agreement, title
to the RSG Units was transferred to RSG and the Company was to repurchase the
RSG Units within 75 days, or by September 30, 1998. The repurchase price was
based upon the $1.5 million bearing interest at 15 percent per annum and was
secured by the Company's common stock pledged by certain officers,
F-13
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directors and consultants to the Company and the Company's assets. Due to the
Company's obligation to repurchase the RSG Units, this transaction was
treated as a collateralized borrowing.
As an inducement for RSG to enter into the Equipment Agreement, the Company
issued to the principals of RSG warrants to purchase 46,875 shares of common
stock at $12.80 per share. These warrants were valued by the Company at the
time of issuance at $253,347 using the Black-Scholes option pricing model
with the following assumptions: risk-free interest rate of 5.5 percent,
expected dividend yield of 0 percent, volatility of 58.2 percent, and
expected life of 4.9 years. In the event that the Company did not meet the
obligation to repurchase the units, additional warrants to purchase 9,375
shares of the Company's common stock at $12.80 per share accrued to RSG every
thirty days through January 28, 1999, whereupon the Equipment Agreement would
be in default.
During the years ended December 31, 1998 and 1999, the Company issued
additional warrants to purchase 37,500 and 9,375 shares of common stock,
respectively, in connection with the Equipment Agreement. These additional
warrants were valued by the Company at the time of issuance at $202,597 and
$50,750, respectively, using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 5.5 percent, expected
dividend yield of 0 percent, volatility of 58.2 percent, and expected life of
4.9 years. All of the warrants issued to RSG were to be exercisable for a
period of three years subsequent to the Company's initial public offering.
On January 28, 1999, the Company was unable to meet the terms of the
repurchase obligation and the Equipment Agreement was in default. RSG granted
the Company several extensions to meet the terms under the Equipment
Agreement, the last of which was signed on May 19, 1999. RSG placed certain
conditions on the Company, the failure to meet any of the conditions would
result in RSG's foreclosure on the pledged common stock and the assets of the
Company.
On September 28, 1999, the Company and RSG entered into a settlement
agreement in the form of the Equipment Transfer Agreement (the "Transfer
Agreement"), which provided for the following:
o eRoomSystem Technologies formed a new bankruptcy-remote entity, RSi
BRE, as a wholly owned subsidiary. The ownership of the RSG Units and
the related revenue sharing agreements were transferred to RSi BRE. RSG
is to receive $0.57 per unit per day of the revenue realized from the
revenue sharing agreements covering 2,050 of the RSG Units over the
remaining life of their seven year revenue sharing agreements. However,
the $0.57 per unit per day is paid only after $0.11 per unit per day
has been paid to the Company to cover taxes and maintenance. To the
extent that at least $0.68 per unit per day in revenue is not realized
from the RSG Units, the Company has no obligation to pay the difference
to RSG. Rather, RSG is subject to the risk that revenues generated from
the RSG Units are not at least $0.68 per unit per day. To the extent
that the revenue per unit per day exceeds $0.68, the incremental amount
is paid to the Company.
o RSG converted one-third of the principal amount of the loan, or
$500,000, into 166,667 shares of Series B convertible preferred stock
at $3.00 per share.
o The Company paid $250,000 to RSG upon the execution of the Transfer
Agreement and executed a promissory note in the amount of $750,000
bearing 10 percent interest. This note was paid in full on August 9,
2000 with the proceeds from the IPO.
o The Company transferred $750,000 of cash and other assets into RSi BRE
to pay for the manufacture and installation of at least an additional
750 Refreshment Centers. If the Company had failed to pay the $750,000
note to RSG prior to December 31, 2000, the $750,000 note would have
been forgiven and in exchange RSG would have received $0.57 per unit
per day from an additional 750 units held as collateral under the
obligations to RSG over the remaining term of their seven year revenue
sharing agreements. This obligation was under the same terms as the
$0.57 per unit per day payments discussed above.
o RSG terminated the pledge of the common stock of the stockholders and
the assets of the Company.
o RSG remitted to the Company all payments received under the revenue
sharing agreements for the RSG Units.
F-14
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o RSG forgave the interest due on the repurchase obligation up to August
1, 1999.
o RSG returned to the Company the warrants to purchase 93,750 shares of
the Company's common stock, and the warrants which accrued during the
period commencing September 30, 1998 through January 28, 1999.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," the Company accounted for this transaction as
a troubled debt restructuring. Accordingly, no gain or loss was recognized
from this transaction. Rather, the Company combined all liabilities to RSG at
the time of the Transfer Agreement including the principal amount of the
repurchase obligation of $1,500,000, accrued interest of $298,849 and the
value of the warrants of $506,694. The total liability of $2,305,543 was
reduced by the $250,000 of cash paid and the $500,000 of Series B convertible
preferred stock that was issued to RSG. The Company is amortizing the
remaining liability over the remaining life of the underlying revenue sharing
agreements using an estimated effective interest rate of approximately 41
percent. This estimated effective interest rate could fluctuate in future
periods depending upon the level and timing of revenues generated from the
RSG units.
Under the terms of the Transfer Agreement, the Company paid RSG $750,000 on
August 15, 2000. Upon making the required payment, 750 additional units
valued at $737,337 held by RSi BRE as collateral under the obligation to RSG
were transferred to the Company. The remaining balance of the obligation to
RSG of $914,615 was transferred to and assumed by RSi BRE.
The board of directors of RSi BRE is comprised of one appointee from the
Company, one appointee from RSG and one independent appointee. All operating
decisions, including disbursements, of RSi BRE require unanimous consent of
RSi BRE's board of directors. As a result, the Company does not control RSi
BRE. In accordance with EITF 96-16, "Investor's Accounting for an Investee
When the Investor has a Majority of the Voting Interest But the Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights," the
Company has determined that RSi BRE does not qualify for consolidation in the
Company's financial statements. Rather, the Company's investment in RSi BRE
is reflected as an "Investment in Wholly Owned, Unconsolidated Subsidiary" in
the accompanying consolidated balance sheet and is being accounted for under
the equity method of accounting. At December 31, 1999 and 2000, the assets
and liabilities of RSi BRE consisted of the following:
December 31,
-----------------------------------
1999 2000
------------ ------------
Cash......................................................... $ 189,659 $ 170,288
Accounts receivable, net of allowance for doubtful accounts.. 66,507 137,406
Inventory.................................................... 414,860 --
Refreshment centers in service............................... 2,097,363 2,090,118
Accumulated depreciation..................................... (217,797) (492,510)
Accrued liabilities.......................................... (4,616) (54,505)
Customer deposits............................................ (10,000) --
Notes payable................................................ -- (914,615)
------------ ------------
Net Assets................................................... $ 2,535,976 $ 936,182
============ ============
For the period from its inception (September 29, 1999) to December 31, 1999 and
for the year ended December 31, 2000, the revenues and expenses of RSi BRE
consisted of the following:
December 31,
-----------------------------------
1999 2000
------------ ------------
Revenue sharing agreement revenues........................... $ 212,919 $ 593,803
Depreciation................................................. (53,947) (316,586)
Other operating expenses..................................... (16,654) (205,958)
Interest expense............................................. -- (94,249)
Interest income.............................................. 5,297 6,761
------------ ------------
Net Income/(Loss)............................................ $ 147,615 $ (16,229)
============ ============
F-15
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
1996 PRIVATE DEBT OFFERING
During the period from September through December 31, 1996, the Company
raised $1,310,000 of debt funding through a best efforts private placement of
promissory notes (the "1996 Notes"). An additional $160,000 was raised
through March 1997. The 1996 Notes bore interest at 12 percent per annum paid
quarterly and matured one year from the date of issuance. In the event the
Company did not repay all principal and accrued interest at the end of the
one-year term, the 1996 Notes were extended for an additional year and the
interest rate increased to 15 percent per annum. If the 1996 Notes were
extended for the additional year, all outstanding principal was to be
amortized on a monthly basis over the second year. The 1996 Notes are secured
by the assets of the Company.
The investors in the 1996 Notes were also originally issued 242,550 warrants
to purchase shares of common stock of eRoomSystem Technologies at $2.67 per
share which are exercisable for a period of the earlier of five years from
the date of issuance or three years subsequent to the closing of the
Company's initial public offering (through August 9, 2003). In addition, the
Company agreed to pay the placement agent a 12 percent selling commission and
issued the agent and brokers 86,250 warrants to purchase common stock at
$2.67 per share which are exercisable for a period of the earlier of five
years from the date of issuance or three years subsequent to the Company's
initial public offering (through August 9, 2003).
During late 1997 and early 1998, the Company defaulted on all of the 1996
Notes. To avoid foreclosure on the assets of the Company by the holders of
1996 Notes, the Company agreed to issue each of the holders of the 1996 Notes
the following:
o On a monthly basis commencing on the maturity date of each note and
continuing until the date of pay off or conversion into equity
securities, through September 28, 1999, a warrant to purchase 99 shares
of common stock at $2.67 per share, from September 29, 1999 through
March 29, 2000, a warrant to purchase 198 shares of common stock at
$1.33 per share, and thereafter, a warrant to purchase 264 shares of
common stock at $1.00 per share, for every $20,000 of outstanding
principal, which warrants are exercisable for a period of two years
subsequent to the closing of the Company's initial public offering
(through August 9, 2002). During the years ended December 31, 1999 and
2000, the Company issued warrants to purchase 28,608 shares and 33,400
shares of common stock, respectively, which were valued (utilizing the
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 1999 and 2000,
respectively: risk free interest rates at 5.7 and 6.3 percent, expected
dividend yield of 0 percent, volatility at 96.5 and 81.1 percent, and
expected lives at 3.0 and 1.71 years, respectively) at amounts ranging
from $1.63 to $4.99 and $0.17 to $5.62 per warrant, respectively. The
Company recognized $92,830 and $48,346 in interest expense relating to
the grant of these warrants during the years ended December 31, 1999
and 2000, respectively.
o 188 shares of common stock for every $20,000 of outstanding principal,
or a total of 13,781 shares of common stock which were valued at $10.67
per share on the date of issuance in 1998.
o An additional 469 shares of common stock for every $20,000 of
outstanding principal converted into Series A convertible preferred
stock. During 1998, holders of $1,040,000 of outstanding principal
elected to convert their 1996 Notes into 208,000 shares of Series A
convertible preferred stock at an agreed upon value of $5.00 per share.
In connection with this conversion, the Company issued 24,375 shares of
common stock which were valued at $10.67 per share.
The total value of $407,000 related to the issuance of the 13,781 common
shares issued to avoid foreclosure and the 24,375 common shares issued to
induce the conversion to Series A convertible preferred stock has been
recognized as an extraordinary loss from debt extinguishment in the
accompanying December 31, 1998 statement of operations.
In connection with the above-mentioned conversion of the 1996 Notes into
Series A convertible preferred stock, the Company issued 13,125 shares of
common stock to the original placement agent for assisting in the conversion.
These shares were valued at $10.67 per share and were recorded as an offset
to additional paid-in capital.
F-16
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 1999, the remaining holders of the 1996 Notes were offered the right
to convert their notes into Series B convertible preferred stock at the rate
of $3.00 per share. Notes consisting of $300,000 of outstanding principal and
$58,124 of accrued interest were converted into 119,374 shares of Series B
convertible preferred stock.
As of December 31, 1999, the remaining 1996 Notes in the amount of $130,000
were in default and were continuing to accrue warrants on a monthly basis. As
of December 31, 2000, all 1996 notes were settled in full.
1997 PRIVATE DEBT AND EQUITY OFFERING
In April 1997, the Company began a private placement offering of promissory
notes (the "1997 Notes") and shares of common stock. The offering (as
amended) consisted of 198.6 units at $10,000 per unit, totaling gross
proceeds of 1,986,000, each unit consisting of 938 shares of common stock and
a $5,000 promissory note. The 1997 Notes bore interest at 15 percent, payable
quarterly, were due in one year and were secured by the assets of the Company.
In connection with the private placement offering, the Company agreed to
issue common stock to a placement agent (the "Merchant Banker"), such that
the Merchant Banker would own 5.9 percent of the issued and outstanding
capital stock of the Company immediately preceding the filing of a
registration statement relating to an initial public offering of the
Company's securities.
In May 1998, the Company entered into an agreement with the Merchant Banker
which eliminated its anti-dilution rights in exchange for the issuance of
68,948 shares of common stock and the forgiveness of $50,014 in receivables
from the Merchant Banker. The additional shares issued have been reflected as
a stock dividend inasmuch as no additional services were provided by the
Merchant Banker.
In September 1998, holders of the 1997 Notes were offered the right to
convert the 1997 notes and accrued interest into common stock at a rate of
$10.67 per share. Note holders consisting of $115,000 in outstanding
principal and $9,428 of accrued interest elected to convert their 1997 Notes
into 11,665 shares of common stock at that time. The Company incurred $11,082
of offering costs associated with this conversion which was recorded as an
offset to additional paid-in capital.
In May 1999, remaining holders of the 1997 Notes were offered the right to
convert the notes and accrued interest into Series B convertible preferred
stock at the rate of $3.00 per share. Notes consisting of $425,051 in
outstanding principal and $96,882 of accrued interest were converted into
173,976 shares of Series B convertible preferred stock at that time. In
addition, the Company paid $5,000 in cash to one investor.
As of December 31, 1999, the remaining 1997 Notes in the amount of $431,750
were in default. As of December 31, 2000, $27,500 remained outstanding under
the 1997 Notes with the funds for the repayment of the remaining 1997 Notes
placed into a separate account. These funds will be released upon the
Company's receipt of the relevant security interest termination statements.
1999 PRIVATE DEBT OFFERING
From February through May 1999, the Company offered 15 percent promissory
notes with a term of ninety days (the "1999 Notes"). Interest was payable at
maturity. Additionally, the 1999 Notes provided for the holders to receive
100 shares of common stock (75 shares before the March 29, 2000 reverse stock
split and 37.5 shares before the September 28, 1999 reverse stock split)
every thirty days for each $1,000 of principal outstanding. The Company
received $350,000 from the issuance of the 1999 Notes. The 1999 Notes are
secured by the assets of the Company. During 1999, the Company paid off
$134,885 of the 1999 Notes with cash and converted $180,000 of the 1999 Notes
and 7,479 shares of accrued but unissued common stock (which were valued at
$4.00 per share) into 81,909 shares of Series B convertible preferred stock.
In addition, during 1999, the Company accrued and issued 41,410 shares of
common stock that were not converted into Series B convertible preferred
stock. As of December 31, 1999, $35,115 of these notes remained outstanding
and were in default. As of December 31, 2000, these notes were paid in full.
F-17
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 PRIVATE PLACEMENT OFFERING
On April 13, 2000, the Company issued subordinated $1,500,000 in promissory
notes and issued 200,000 shares of common stock from a private placement
offering. The Company received $1,472,500, net of offering costs of $27,500,
from the private placement offering. The proceeds of the offering were
allocated to the financial instruments issued based upon their relative fair
values which resulted in $1,051,769 to the promissory note before the
offering costs of $19,810 and $440,541 being allocated to the common stock.
The Company also recorded a discount on the notes payable of $448,398, which
was amortized as interest expense through August 9, 2000, the date the
promissory notes were paid in full.
2000 NOTE PAYABLE TO STOCKHOLDER
On February 15, 2000, the Company received a $500,000 loan from a company,
wholly owned by a stockholder and nominee to the board of directors. The loan
was evidenced by a promissory note, bore interest at the rate of 10 percent
per annum, matured on May 31, 2000 (subsequently extended to August 15, 2000)
and was secured by the assets of the Company. In addition, the Company issued
a warrant for the purchase of 18,750 shares of common stock, which is
exercisable at $4.80 per share for two years subsequent to the closing of the
IPO (through August 9, 2002). The warrants issued were valued at $31,547
based upon their fair value measured using the Black-Scholes option pricing
model with the following assumptions: 6.7 risk-free interest rate, expected
dividend yield of 0 percent, 102.7 percent volatility and 2.4 years estimated
life. The discount to the notes resulting from allocating a portion of the
proceeds to the warrants was immediately amortized to interest expense. The
Company repaid the note on August 9, 2000.
2000 CONVERTIBLE PROMISSORY NOTES
During March and April 2000, $212,500 of convertible promissory notes were
issued in connection with the Series C convertible preferred stock offering.
These notes bore interest at 7% per annum, payable semi-annually and mature
on December 31, 2001. These notes were convertible at the option of the
holders into common stock at $5.52, commencing September 9, 2000. These notes
were repaid on August 9, 2000 with the exception of $25,000, which remains
outstanding.
FINANCING AGREEMENT
During 1999, the Company entered into a program agreement with a finance
company to provide funding for Refreshment Centers which the Company places
with hotel customers under revenue sharing agreements. Under the terms of the
program agreement, the finance company will fund the Company's product costs
for each Refreshment Center that has been in service for 90 days, subject to
the hotel customer meeting certain requirements and other conditions.
Financing of up to $340 million is available to the Company under the program
agreement. The Company is obligated to repay the financing over seven years,
with a formula-based variable interest rate. As part of the financing,
eRoomSystem Technologies, Inc. has formed a new entity, eRoomSystem SPE,
Inc., a Nevada corporation. eRoomSystem SPE, Inc. will own all of the
Refreshment Centers funded by the finance company as well as the revenue
sharing agreements. The finance company will take a senior security interest
in the Refreshment Centers financed under the program agreement. As of
December 31, 1999 and 2000, no Refreshment Centers have been funded nor has
any financing been provided under the program agreement.
F-18
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable and long-term debt consists of the following:
December 31,
-----------------------------
1999 2000
----------- -----------
1996 Notes secured by assets of the Company, interest at 15% per annum and
accruing warrants to purchase common stock on a monthly basis (see
description above), paid December 2000.................................. $ 130,000 $ --
1997 Notes secured by assets of the Company, in default, interest of 15% per
annum (see description above) .......................................... 431,750 27,500
1999 Notes secured by assets of the Company, (see description above), paid
August 2000............................................................. 35,115 --
Note payable to RSG net of discount, secured by assets of the Company,
imputed interest at 41 % per annum, transferred to RSi BRE (see Note 3) 1,555,544 --
Note payable to a corporation for services performed, paid August 2000 102,290 --
Note payable to an individual, secured by assets of the Company, in default,
interest at 15% per annum, unsecured, paid December 2000................ 100,000 --
Note payable to a bank, interest at 10 % per annum, due in monthly
installments through June 2002, secured by vehicle...................... 11,719 6,479
Note payable to an individual, interest at 15% per annum, unsecured, paid
in full................................................................. 6,062 --
2000 Convertible promissory notes, secured by assets of the Company, bearing
interest at 7% per annum, (see description above) ...................... -- 25,000
----------- -----------
Total notes payable and long-term debt.................................... 2,372,480 58,979
Less: Current portion..................................................... (1,560,458) (56,710)
----------- -----------
$ 812,022 $ 2,269
=========== ===========
Although none of the notes in default have been extended, holders of the notes
in default have not taken any action to foreclose on the notes. The Company
intends to pay the notes in default upon receipt of the relevant security
interest termination statements from the holders of the notes. To this end, the
Company has placed $73,990 of cash into a separate account for payment of these
notes and related accrued interest.
Future maturities of notes payable and long-term debt are as follows:
YEAR ENDING DECEMBER 31,
2001...................................... $ 56,710
2002...................................... 2,269
--------
Total............................................. $ 58,979
--------
NOTE 5 - NOTES PAYABLE TO STOCKHOLDERS
In October 1996, in connection with the Company's acquisition of certain
patents and license rights from the Company's former chief executive officer,
the Company agreed to pay the chief executive officer $125,000 as well as
issue the former chief executive officer 65,625 shares of common stock. The
$125,000 obligation was originally due March 1, 1997 without interest. During
1997and 1998, the Company paid $54,250 towards the principal on this
obligation. In December, 1999, the Company's former chief executive officer
agreed to convert the remaining principal balance of $70,750 into 23,583
shares of Series B preferred stock at $3.00 per share.
During the years ended December 31, 1998 and 1999, the Company's former chief
executive officer loaned the Company $75,000 and $130,209, respectively.
Additionally, during the year ended December 31, 1999, the Company's chief
financial officer, who is a stockholder, and another stockholder loaned the
Company $10,545 and $83,441, respectively. These loans were evidenced by
promissory notes which bore interest at 10 percent. In
F-19
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition, the note holders were also to receive 100 shares of common stock
per month for every $1,000 of principal outstanding. During 1999, the Company
accrued and issued 83,500 shares of common stock in connection with these
agreements. The shares were valued at $3.20 per share. During September 1999,
all amounts outstanding on these notes were converted into 105,984 shares of
Series B convertible preferred stock at a rate of $3.00 per share.
NOTE 6 - LEASES
CAPITALIZED LEASE OBLIGATIONS
Certain equipment is leased under capital lease agreements. The following is
a summary of assets held under capital lease agreements:
December 31,
------------------------------
1999 2000
---------- -----------
Property and equipment.......................... $ 103,602 $ 103,602
Less: Accumulated amortization.................. (62,701) (77,114)
---------- -----------
$ 40,901 $ 26,488
=========== ===========
The following is a schedule of future minimum lease payments under capital lease
agreement together with the present value of the net minimum lease payments:
YEAR ENDING DECEMBER 31,
2001......................................... $ 35,728
2002......................................... 28,401
---------
Total net minimum lease payments.............. 64,129
Less: Amount representing interest........... (10,382)
---------
Present value of net minimum lease payments... 53,747
Less: Current portion........................ (28,091)
---------
Long-term portion............................ $ 25,656
=========
OPERATING LEASES AS LESSOR
The Company accounts for its revenue sharing agreements as operating leases. As
of December 31, 2000, the Company had two revenue sharing agreements for which
the customers were contractually obligated to pay minimum monthly payments.
Agreements with all other customers provide for an allocation of revenues to the
Company with no minimum monthly payment. Accordingly, the Company is unable to
estimate future amounts to be received under these agreements.
Future minimum payments to be received under the contract that provides for
minimum monthly amounts were as follows, as of December 31, 2000:
YEAR ENDING DECEMBER 31,
2001................................................ $ 136,667
2002................................................ 138,775
2003................................................ 138,775
2004................................................ 138,775
2005................................................ 138,775
Thereafter........................................... 140,883
------------
Total............................................... $ 832,650
============
F-20
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING LEASES AS LESSEE
The Company leases its operating facilities and certain equipment under
non-cancelable operating leases. Rent expense for the years ended December 31,
1999 and 2000 was $115,245 and $128,494, respectively. Minimum rental payments
under non-cancelable operating leases were as follows:
YEAR ENDING DECEMBER 31,
2001......................................... $ 115,000
2002......................................... 100,000
-----------
Total........................................ $ 215,000
===========
NOTE 7 - INCOME TAXES
The Company has paid no federal or state income taxes. The significant
components of the Company's deferred income tax assets as of December 31, 1999
and 2000 are as follows:
1999 2000
------------ ------------
Deferred Income Tax Assets:
Net operating loss carryforwards.......................... $ 3,640,709 $ 5,520,926
Reserves and accrued liabilities.......................... 82,602 73,029
------------ ------------
Total Deferred Income Tax Assets.................... 3,723,311 5,593,955
Valuation allowance....................................... (3,687,977) (5,556,869)
------------ ------------
Net Deferred Tax Asset.............................. 35,334 37,086
------------ ------------
Deferred Income Liability - Depreciation..................... (35,334) (37,086)
------------ ------------
Net Deferred Income Taxes........................... $ -- $ --
============= ============
The amount of, and ultimate realization of, the deferred income tax assets
are dependent, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be determined.
The Company has established a valuation allowance against its deferred income
tax assets. Management believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of these deferred income tax assets to warrant the valuation
allowance.
The following is a reconciliation of the amount of tax benefit that would
result from applying the federal statutory rate to pretax loss with the
benefit from income taxes:
December 31,
---------------------------------
1999 2000
------------ ------------
Benefit at statutory rate (34%)............................... $ (1,248,540) $ (1,938,804)
Non-deductible expenses....................................... 220,108 145,183
Change in valuation allowance................................. 1,076,904 1,868,892
State tax benefit, net of federal tax benefit................. (48,472) (75,271)
------------ ------------
Net Benefit From Income Taxes............................ $ -- $ --
============ ============
The following summarizes the tax net operating loss carryforwards and their
respective expiration dates as of December 31, 2000:
2008................................................ $ 44,057
2010................................................ 930,194
2011................................................ 2,188,074
2017................................................ 1,082,373
2018................................................ 3,635,513
2019................................................ 3,397,087
2020................................................ 4,353,864
------------
Total net operating loss carryforwards.............. $ 15,631,162
============
F-21
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
In March 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $125,000 from the
Company related to purchases of materials from the vendor. The Company has
responded to the lawsuit, and management believes that the materials
delivered by the vendor were defective. In addition, the Company's costs
resulting from the defective materials are in excess of $120,000. Although
the Company, after consultation with legal counsel, believes that their
defenses have merit, they are unable to predict the outcome of this matter.
The Company is also the subject of certain legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these legal
matters will not have a material impact on the consolidated financial
condition or results of operations of the Company.
In January 1999, the Company received $288,620 as a loan from an officer and
a consultant. The proceeds were loaned to the officer and the consultant by
the Riggs Family Partnership, a third party which had received the proceeds
from an unregistered offering of the Company's common stock. Collectively,
the loans from the officer and the consultant were subsequently converted
into 102,242 shares of Series B convertible preferred stock and 77,353 shares
of common stock. This unregistered offering was performed outside the Company
and without its knowledge. The Company has not been able to determine whether
the unregistered offering was conducted with the benefit of a state or
federal exemption from registration. The Company was not privy to any
offering materials that may have been used or distributed with respect to the
offering, and it has no independent knowledge regarding the status of the
investors. The Company also maintains that it did not have any control over,
or contractual relationship with, the Riggs Family Partnership. In the event
a successful claim is asserted against the Riggs Family Partnership, as a
result of the unregistered offering, the Company may be subject to a
potential disgorgement of the proceeds received plus interest. No amount has
been reclassified from stockholders' deficit to a liability in the
accompanying financial statements for any possible payments, which may result
from the outcome of this unasserted claim.
EMPLOYMENT AGREEMENTS
In January 2001, the company entered into and amended employment agreements
with certain of its executive officers. The revised agreements are for
periods through December 31, 2002 with an option to extend the terms for up
to an additional 12 months upon mutual agreement of the Company and each
executive officer. In the event of termination of employment without cause,
each executive officer is entitled to cash compensation equal to three months
of the then existing base salary under his respective employment agreement.
On November 30, 2000, the Company entered into a severance agreement with an
executive officer that terminated the officer's employment agreement. The
severance agreement provided that $67,795 of severance payments be provided
to the executive officer. On January 29, 2001, the Company entered into a new
employment agreement with the individual and agreed to pay the balance owed
under the severance agreement.
On December 19, 2000, the Company reached a verbal one-year employment
agreement with its new chief executive officer. As part of this agreement,
the Company agreed to pay the new officer a base salary of $150,000 and
issued options to purchase 250,000 shares of common stock at $1.51 per share.
These options vested on the date granted and are exercisable for two years.
The granting of the options will have no financial effect due to the exercise
price being above the market value of the common stock on the date granted.
ADVERTISING AGREEMENT
On March 24, 2000, the Company entered into a letter of agreement with an
advertising agency. Under the terms of the agreement, the advertising agency
is to assist the Company in the development and implementation of the
Company's creative design related primarily to the IPO and secondarily to its
advertising, marketing and promotion. The agreement lasts for a term of one
year and provides for the agency to be compensated as follows: months one
through four - on March 29, 2000, the Company issued the agency a warrant to
purchase 125,000 shares of common
F-22
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock at $4.80 per share, and months five through twelve - the Company is to
pay the agency $43,687 per month in cash. These options have demand
registration rights after August 9, 2001. In addition, the Company also
agreed to pay all outside expenses incurred by the agency, on behalf of the
Company, which is estimated to be $450,000. The warrants issued were valued
at $135,144 based upon their fair value measured using the Black-Scholes
option pricing model with the following assumptions: 6.7 percent risk-free
interest rate, 0 percent expected dividend yield, 83.41percent volatility,
and a 1.76 year estimated life. The Company charged the fair value of these
warrants against the proceeds received as part of the IPO.
REGISTRATION RIGHTS
In connection with certain of its debt and equity offerings and the
conversion of certain debt to equity, the Company has granted the holders
572,375 shares of common stock and warrants to purchase 341,180 shares of
common stock the right, subject to applicable terms and conditions, to
require the Company to register their common stock on a best efforts basis
(or equivalent common shares upon the exercise of the warrants) under the
Securities Act for offer to sell to the public. Additionally, the Company has
also granted certain stock and warrant holders the right to join in any
registration of securities of the Company (subject to certain exceptions).
After August 9, 2001, in connection with certain agreements and its IPO, the
Company has granted holders of 305,000 warrants to purchase common shares the
rights, subject to applicable terms and conditions, to require the Company to
register their common shares upon the exercise of the warrants under the
Securities Act for offer to sell to the public. The Company is obligated to
pay all offering expenses related to offerings requested by the stock and
warrant holders under these agreements. The stockholders are obligated to pay
all selling expenses.
NOTE 9 - STOCKHOLDERS' EQUITY
AMENDMENT TO ARTICLES OF INCORPORATION
On February 2, 2000, with stockholder approval, the Company filed articles of
amendment to its articles of incorporation. The amended articles of
incorporation authorize the Company to issue 500,000 shares of $0.001 par
value Series A preferred stock, 2,500,000 shares of $0.001 par Series B
preferred stock and 2,000,000 shares of $0.001 par value Series C preferred
stock and 20,000,000 shares of $0.001 par value common stock. The Company's
board of directors is authorized, without stockholder approval, to designate
and determine the preferences, limitations and relative rights granted to, or
imposed upon, each share of preferred stock which are not fixed by the
amended articles of incorporation.
On March 29, 2000, and corrected on May 30, 2000, the Company filed an
amendment and restatement of the Company's articles of incorporation, as
amended and restated on February 2, 2000. The amended and restated articles
of incorporation: (i) changed the Company's name to "eRoomSystem
Technologies, Inc."; (ii) increased the Company's authorized capital stock to
60,000,000 shares; (iii) increased the authorized number of shares of the
Company's common stock from 20,000,000 shares to 50,000,000 shares; and (iv)
authorized 5,000,000 shares of undesignated preferred stock at $0.001 par
value.
REVERSE STOCK SPLITS
On September 28, 1999, the Company's board of directors approved a
one-for-two reverse stock split related to its outstanding common stock and
common stock options and warrants. However, in connection with their
employment agreements, officers which held 996,000 shares of common stock and
a former consultant which held 475,000 shares of common stock were excluded
from the effect of this reverse stock split. On March 29, 2000, the Company's
board of directors approved a three-for-four shares reverse stock split
related to its common stock and common stock options and warrants.
Additionally, in connection with the sale of the Series A and B convertible
preferred stock, the holders of Series A and B convertible preferred stock
were excluded from the effect of these reverse stock splits. The 1999 and
2000 stock splits have been retroactively reflected in the accompanying
consolidated financial statements for all periods presented.
STOCK ISSUANCES FOR SERVICES
During the year ended December 31, 1999, the Company issued shares of common
stock to officers, key employees and outside parties for services provided
and as bonuses. The shares issued have been valued by the Company's
F-23
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors at estimated fair values based on other issuances of
shares for cash and on the terms of related transactions. During 1999, the
Company issued 1,864 shares of its common stock to certain officers and key
employees and recorded $5,965 of related compensation expense, respectively.
The shares issued in 1999 were valued at $3.20 per share.
1997 STOCK OPTION EXERCISE
During the year ended December 31, 1997, certain option and warrant holders
exercised options and warrants to purchase 1,733,500 shares of common stock
in exchange for partial recourse notes receivable of $3,799,250. The notes
were due on demand, bore interest at 7 percent per annum and the principal
and accrued interest could be paid by surrendering shares of common stock to
the Company. Through December 31, 1999, the Company accrued $510,642 of
interest related to these notes receivable. On the dates the options and
warrants were granted to employees during 1997, the exercise price of $1.75
per share was greater than the fair value of the Company's common stock.
Accordingly, no compensation was recognized. Warrants granted to third-party
consultants were valued at their fair value based upon the Black-Scholes
option pricing model and resulted in the recognition of approximately $93,000
of compensation expense during 1997.
EITF 95-16, "Accounting for Stock Compensation Arrangements with Employer
Loan Features Under APB No. 25," requires employee notes received upon
exercise of stock options to be accounted for as the issuance of new stock
options with a new measurement date if the notes are nonrecourse to the
employee. The notes received in connection with the exercise of these options
were partial recourse to the stockholders. Accordingly, they were not
nonrecourse notes and were therefore not considered to be the issuance of new
stock options.
In connection with their employment/consulting agreements, certain
stockholders had been exempted from the effects of the reverse stock split
discussed above. During the year ended December 31, 1999, the Company
demanded payment on notes receivable with principal balances totaling
$3,143,000. Holders of 1,471,000 shares of common stock, with a principal
obligation totaling $2,574,250, and accrued interest of $366,319 surrendered
their shares to the Company as satisfaction of the obligation. Since these
officers and former consultant immediately returned all of these shares to
the Company, no compensation was recognized in connection with the exclusion
of these shares from the reverse stock split. However, as of December 31,
1999, a holder of 121,875 shares of common stock with a principal balance of
$568,750 and accrued interest of $50,938 had filed for bankruptcy protection.
As a result, the Company is currently negotiating with the bankruptcy trustee
for the return of the shares. However, the fair value of the shares was less
than the principal and accrued interest on the note receivable. Accordingly,
as of December 31, 1999, the Company recorded a reserve of $229,688 against
the note receivable to reflect it at the fair value of the underlying
collateral. Negotiations with the bankruptcy trustee during 2000 have
resulted in the understanding that the Company would have to pay the trustee
for the shares of common stock in order for the Company to reacquire the
same. Accordingly, the note receivable was written down to zero during the
three months ended September 30, 2000. The Company has been authorized by its
board of directors to acquire the 121,875 shares of common stock from the
bankruptcy trustee for $180,000, however this transaction has yet to occur.
As of December 31, 1999, a note receivable from the exercise of 140,625 stock
options, with a principal balance of $656,250, and accrued interest of
$93,385 remained outstanding for which the Company had not yet demanded
repayment. As a result of the decline in the value of the underlying
collateral and because the Company did not believe it will receive payment
beyond the return of the underlying common stock, the Company recorded a
reserve of $299,635 to reflect the note receivable at the fair value of the
underlying collateral. At March 31, 2000, the Company canceled a note
receivable from the stockholder which was used to purchase shares of common
stock. As consideration for the cancellation of the note receivable, 140,625
shares of common stock were returned to the Company by the stockholder and
retired.
1998 SERIES A CONVERTIBLE PREFERRED STOCK OFFERING
In January 1998, the Company issued 360,000 shares of Series A convertible
preferred stock at a price of $5.00 per share. The Company received $600,275
in net cash proceeds (net of offering costs of $159,725) and issued 152,000
shares of Series A convertible preferred stock. In addition, the Company
issued 208,000 shares of Series A convertible preferred stock relating to the
conversion of $1,040,000 of 1996 Notes. The placement agent received a cash
commission of 13 percent, due diligence and non-accountable expense
allowances (for a total of $149,843), 13,125 shares of common stock (valued
at $10.67 per share) and warrants to purchase 6,840 shares of common stock
exercisable at $16.00 per share which are exercisable for a period of two
years subsequent to the Company's initial
F-24
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
public offering (through August 9, 2002). The Company valued these warrants
at $2.56 per share using a Black-Scholes option pricing model with the
following assumptions: risk free rate of 5.6 percent, expected dividend yield
of 0 percent, volatility of 58.2 and an expected life of 2.1 years.
The Series A convertible preferred stock was automatically converted into
shares of common stock upon the consummation of the IPO at the conversion
rate of $10.00 divided by $6.50. The outstanding shares of the Series A
convertible preferred stock were converted into 553,846 shares of common
stock on August 9, 2000.
On November 14, 1998, holders of Series A convertible preferred stock
commenced cumulating an 8% annual dividend. The annual dividend requirement
applicable to Series A preferred shares outstanding at December 31, 1999 was
$144,000, or $0.40 per share. Due to certain provisions of the Series A
convertible preferred stock, the Company's one-for-two reverse stock split
declared on September 28, 1999 did not affect the number of shares of Series
A convertible preferred stock outstanding. As of December 31, 1999, holders
of Series A convertible preferred stock were owed dividends of $162,541. Upon
closing the IPO, $250,124 of Series A convertible preferred stock dividends
were due and payable, of which $219,555 were paid through December 31, 2000.
The Company is paying the Series A convertible preferred dividends upon the
receipt from stockholders of their Series A convertible preferred stock
certificates for conversion into common stock.
The conversion of the Series A preferred shares was contingent upon an
initial public offering that was outside the control of the stockholders. In
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
a contingent beneficial conversion feature was measured at the commitment
date, but not recognized until the contingency was resolved. Accordingly, the
Company deferred recording the beneficial conversion feature until the time
of the IPO. In connection with the IPO, the Company recorded the contingent
beneficial conversion feature of $5.00 per Series A share, or $1,800,000, as
a dividend to the Series A convertible preferred stockholders.
Upon the liquidation, dissolution or winding up of the Company, holders of
the Series A preferred stock, while outstanding, were entitled to receive,
out of legally available assets, a liquidation preference of $10.00 per
share, plus an amount equal to any unpaid dividends through the payment date,
before any payment or distribution was made to holders of common stock or any
series or class of stock thereafter issued that rank junior as to the
liquidation rights of the Series A preferred stock. The holders of the Series
A shares were not entitled to vote on any matter, excluding matters affecting
the rights of such stockholders or as required by law. In connection with
such vote, each share of Series A preferred stock, while outstanding, was
entitled to one vote.
1999 SERIES B CONVERTIBLE PREFERRED STOCK OFFERING
From May through September 1999, the Company issued 2,081,680 shares of
Series B convertible preferred stock at a price of $3.00 per share. The
Company received $3,584,256 in net cash proceeds (net of cash offering costs
of $480,885) and issued 1,355,047 shares of Series B convertible preferred
stock. In addition, the Company issued 726,633 shares of Series B convertible
preferred stock upon the conversion of $2,265,570 of promissory notes and
unpaid salaries of certain officers and as part of the settlement with RSG
Investments. The placement agent received a cash commission of 9 percent on
shares which they placed and a non-refundable expense allowance of 2.5
percent.
Effective January 1, 2000 and in connection with the Series B convertible
preferred stock offering, the Company agreed to pay an individual a finder's
fee of $51,250 plus interest at 10 percent, which was payable from proceeds
of the Company's initial public offering and agreed to issue an option to
purchase 1,125 shares of common stock at an exercise price of $4.80 per share.
Pursuant to the terms of the Series B convertible preferred stock, the shares
were automatically converted into shares of common stock upon the
consummation of the IPO. Before the modification as explained below, the
conversion was at the lower of (i) $3.00 per share or (ii) 50 percent of the
initial public offering price per share. On April 12, 2000, the certificate
of designation for the Series B preferred stock was amended to modify the
conversion rate to be determined by dividing $3.00 by 45 percent of the
initial public offering price per share. As a result of the IPO price being
$6.50 per share of common stock, the Series B convertible preferred stock was
converted into 2,135,056 shares of common stock on August 9, 2000.
The holders of the Series B preferred stock were entitled to an annual
cumulative dividend of six percent, payable in common stock. The annual
dividend requirement applicable to Series B convertible preferred stock
outstanding was
F-25
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$374,702, or $0.18 per share. For the year ended December 31, 1999 and 2000,
the Company accrued common stock dividends of 28,936 and 68,169 shares with a
value of $141,899 and $275,677, respectively, related to the Series B
convertible preferred stock.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company determined that the holders of the Series B convertible preferred
stock had received a beneficial conversion feature at the date of issuance.
This beneficial conversion feature was valued at $1,249,008 and was accrued
as a dividend between the date of issuance of the Series B convertible
preferred stock and September 28, 2000, the date which the Series B
convertible preferred stockholders have the right to convert their shares. By
modifying the terms of the beneficial conversion feature, when the value of
the common stock was $3.20 per share, the beneficial conversion feature was
increased by $2,498,016. The increase to the beneficial conversion feature
was accrued as a dividend from April 12, 2000 through August 9, 2000. During
the year ended December 31, 1999 and 2000, the Company recorded dividends of
$321,370 and $3,425,654 to the Series B convertible preferred stockholders
related to the beneficial conversion feature.
Upon the liquidation, dissolution or winding up of the Company, holders of
Series B convertible preferred stock, while outstanding, were entitled to
receive, out of legally available assets, a liquidation preference of $10.00
per share, plus an amount equal to any unpaid dividends through the payment
date, before any payment or distribution was made to holders of common stock
or any series or class thereafter issued that ranks junior to the liquidation
rights of the Series B convertible preferred stock. The holders of Series B
convertible preferred stock were not entitled to vote on any matter,
excluding matters affecting the rights of such Series B stockholders or as
required by law. In connection with any such vote, each outstanding share of
Series B convertible preferred stock, while outstanding, was entitled to one
vote. In addition, if the Company had not completed an initial public
offering by September 28, 2000, holders of Series B convertible preferred
stock would have been accorded voting rights. If such event had occurred,
each share of Series B convertible preferred stock would have been entitled
to one vote.
1999 COMMON STOCK ISSUANCE
On May 30, 1999, the Company sold 198,750 shares of common stock to an entity
controlled by the Company's former president in exchange for a promissory
note in the amount of $1,590,000. The purpose of the stock sale was to assist
the Company in complying with certain stock pledge requirements set forth in
the Equipment Agreement with RSG. On September 28, 1999, as a result of the
Transfer Agreement with RSG, the 198,750 shares of common stock were returned
to the Company in exchange for the cancellation of the promissory note. The
shares have been reflected as issued and retired in the accompanying
statement of stockholders' equity (deficit) for the year ended 1999.
2000 SERIES C CONVERTIBLE PREFERRED STOCK OFFERING
The Company issued $212,500 of 7% secured, subordinated, convertible
promissory notes, 196,150 shares of 7% Series C convertible preferred stock
and warrants to purchase 42,500 shares of common stock at $6.60 per share, in
a private placement offering during March and April 2000. The Company
received $774,636 in proceeds (net of offering costs of $75,364).
The proceeds from the offering were allocated to the financial instruments
issued, based upon their relative fair values, and resulted in an allocation
of $164,169 to the promissory notes before offering costs of $17,382, $31,875
to the beneficial debt conversion feature, $535,986 to the Series C
convertible preferred stock and $59,988 to the warrants. While the allocated
value of the warrants was less than their fair value of $71,350, the fair
value was measured using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate of 5%,
expected dividend yield of 0%, volatility of 100%, and expected lives of 3.25
years. The debt issuance costs were amortized through August 9, 2000 and the
discount on the promissory notes of $48,331 was amortized as interest expense
through August 9, 2000.
The Series C convertible preferred stock was issued at a stated value of
$3.25 per share. The outstanding shares of Series C convertible preferred
stock were automatically converted into common stock upon the close of the
IPO at the rate determined by $3.25 divided by 55% of the IPO price of $6.50
per share which resulted in the issuance of 178,318 shares of common stock.
F-26
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends on the Series C convertible preferred stock accrued at 7% annually
through August 9, 2000 and were payable in cash. Upon closing of the IPO,
$15,016 of Series C convertible preferred stock dividends was payable of
which $13,693 was paid through December 31, 2000. The Company is paying the
preferred dividends upon the receipt from stockholders of their Series C
convertible preferred stock certificates for conversion into common stock.
Upon the liquidation, holders of the Series C convertible preferred stock,
while outstanding, were entitled to receive, out of legally available assets,
a liquidation preference of $10.00 per share plus an amount equal to any
unpaid dividends through the payment date before any payment or distribution
was made to the holders of common stock or any series or class of the
Company's capital stock that ranks junior to the liquidation rights of the
Series C convertible preferred stock. The holders of the Series C convertible
preferred stock could not vote on any matter, excluding matters affecting the
rights of such stockholders or as required by law. In connection with any
such vote, each share of Series C convertible preferred stock, while
outstanding, was entitled to one vote.
2000 COMMON STOCK INITIAL PUBLIC OFFERING
On August 2, 2000, a registration statement for 1,800,000 shares of common
stock became effective and, on August 9, 2000, the Company issued 1,800,000
shares of common stock to the public in connection with the IPO. The shares
were issued at $6.50 per share before offering costs and commissions. In
addition, the Company issued 180,000 warrants to the underwriter in
connection with the IPO. The warrants are exercisable from August 2, 2001
through August 2, 2005 at $7.80 per share, with the exercise price subject to
reduction if the Company issues common stock to others at less than the
exercise price. The net value from the IPO, after offering costs and
commissions, totaled $9,103,074 and were allocated to the common stock issued
and the warrants based upon their relative fair value. Accordingly,
$8,632,502 was allocated to the 1,800,000 shares of common stock, and
$470,572 was allocated to the 180,000 warrants. After adding back $88,000 in
costs relating to the IPO during 1999 and $135,144 in non-cash offering
costs, the Company received $9,326,218 in cash proceeds relating to the IPO.
Although the amount allocated to the warrants was less than their fair value,
the fair value of the warrants was $636,895 determined using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 6.0%, expected dividend yield of 0%, volatility of 62.49%,
and expected lives of 4.0 years.
OTHER 2000 EQUITY TRANSACTIONS
On April 13, 2000, the Company issued 200,000 shares of common stock in
connection with the issuance of a nine percent secured, subordinated
promissory note in the principal amount of $1,500,000. The Company received
$1,472,500, net of offering costs of $27,500, from the private placement
offering. The proceeds from the offering were allocated to the financial
instruments issued based upon their relative fair values and resulted in
$440,541 being allocated to the common stock. The Company also recorded a
discount on the notes payable of $448,398, which was amortized as interest
expense through August 9, 2000.
During the year ended December 31, 2000, the Company issued 4,116 shares of
common stock to an employee who previously loaned money to the Company. The
shares were issued as a payment of interest and the value of the shares
issued was $14,250 or $3.46 per share. Additionally, the Company issued
21,841 shares of common stock to the holders of the 1999 Private Debt
Offering who are entitled to receive shares for the payment of interest. The
value of the shares issued as an interest payment was $72,862 or $3.33 per
share.
In June 2000, the Company issued 777 shares of common stock to an employee
for services previously rendered. The shares were valued at $2,485 or $3.20
per share. During September 2000, the Company issued 12,176 shares of common
stock to stockholders who had been protected from the effects of the reverse
stock splits but who had not been previously identified. In October 2000, the
Company issued 5,670 shares of common stock as an interest payment to an
employee who loaned funds to the Company.
NOTE 10 - STOCK OPTIONS AND WARRANTS
STOCK-BASED COMPENSATION
The Company accounts for its stock options issued to directors, officers and
employees under Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). Under APB 25, compensation expense is recognized
if an option's exercise price on the measurement date is below the fair value
of the Company's common stock. The
F-27
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company accounts for options and warrants issued to non-employees in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) which requires these options and warrants be accounted for at their fair
value.
NON-EMPLOYEE GRANTS
During the years ended December 31, 1999 and 2000, the Company issued options
to purchase 63,711 shares and 314,626 shares of common stock, respectively,
to non-employees for various consulting services. The exercise price was
$4.80 to $9.60 and $4.00 to $9.60 for the years ended December 31, 1999 and
2000, respectively. These options were valued in accordance with SFAS 123
(utilizing the Black-Scholes option pricing model with the following weighted
average assumptions for the years ended 1999 and 2000, respectively: risk
free interest rate of 6.2 and 6.7 percent, expected dividend yield of 0
percent, volatility of 100.6 and 85.3 percent, expected lives of 2.6 and 3.4
years, respectively) at amounts ranging from $1.37 to $1.63 and $1.15 to
$3.12 per share, respectively. The Company recognized $99,040 and $562,189 in
compensation expense relating to the grant of these options during the years
ended December 31, 1999 and 2000, respectively.
EMPLOYEE GRANTS
During 1999, the Company granted options to purchase 269,909 shares of common
stock, respectively. The exercise price ranged from $11.33 and $4.80 to $8.80
per share, respectively. The options were vested upon grant.
On February 3, 2000, the Board of Directors adopted, and on March 29, 2000, a
majority of the shareholders' approved the creation of the 2000 Stock Option
Plan ("2000 Plan") with 2,000,000 shares of common stock reserved for
issuance thereunder. The 2000 Plan was amended and restated by the Board of
Directors on June 6, 2000. The 2000 Plan provides for both the direct award
and sale of shares and for the grant of options to purchase shares. The
Company's compensation committee administers the plan and has the discretion
to determine the employees, directors, independent contractors and advisors
who will receive awards, the type of awards (stock, incentive stock options
or non-qualified stock options) to be granted, the term, vesting and exercise
prices. The exercise price for the options may be paid in cash, in shares of
the Company's common stock valued at fair market value on the exercise date
or through a same-day sale program without any cash outlay by the optionee.
In the event of a change in control (as defined), all restrictions on all
awards or sales of shares issued under the plan will lapse and vesting on all
unexercised options will accelerate to the date of the change in control.
During the year ended December 31, 2000, the Company granted options to
purchase of 1,395,776 shares of common stock to certain officers and
employees of the Company pursuant to the 2000 Plan. These options vested
immediately. The exercise prices range from $1.58 to $9.60 per share. The
options are exercisable through August 2, 2003.
SFAS 123 requires pro forma information regarding operating results as if the
Company had accounted for its stock options granted to employees under the
minimum fair value method of the statement. The minimum fair value of the
stock options was estimated at the grant date by the Company using the
Black-Scholes option pricing model. The following weighted average
assumptions were used in the Black-Scholes model for the years ended 1999 and
2000, respectively: risk-free interest rate of 6.3 and 6.5 percent, a
dividend yield of 0 percent, volatility of 100.6 and 81.1 percent, and
expected lives of 2.7 and 3.1 years.
Following are the pro forma disclosures and the related impact on the net
losses:
Years Ended December 31,
---------------------------------
1999 2000
------------ --------------
Loss attributable to common stockholders as reported...... $ (4,279,444) $ (11,306,295)
Loss attributable to common stockholders pro forma........ (4,725,793) (13,135,257)
Basic and diluted loss per common share as reported....... (1.33) (2.73)
Basic and diluted loss per common share pro forma......... (1.47) (3.17)
Due to the nature and timing of option grants, the resulting pro forma
compensation cost may not be indicative of future years.
F-28
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OUTSTANDING STOCK OPTIONS AND WARRANTS
The Company has, from time to time, granted stock options and warrants to
employees, directors, consultants and in connection with financing
transactions. A summary of stock option and warrant activity for the years
ended December 31, 1999 and 2000 is as follows:
Options and Weighted Average
Warrants Price Range Exercise Price
----------- -------------- ---------------
Balance, December 31, 1998.......... 598,030 $ 2.67 - 16.00 $ 5.00
Granted........................ 362,228 1.33 - 9.60 5.56
Forfeited...................... (93,750) 12.80 12.80
----------
Balance, December 31, 1999.......... 866,508 2.67 - 16.00 4.39
Granted........................ 2,110,052 1.00 - 9.60 5.98
----------
Balance, December 31, 2000.......... 2,976,560 1.00 - 16.00 5.53
==========
Exercisable, December 31, 1999...... 866,508 2.67 - 16.00 4.39
==========
Exercisable, December 31, 2000...... 2,727,038 1.00 - 16.00 5.31
==========
Weighted-average fair value of
options granted during year
ended December 31, 1999.......... $ 1.66
==========
Weighted-average fair value of
options granted during year
ended December 31, 2000.......... $ 1.54
==========
A summary of stock option and warrant grants with exercise prices less than,
equal to or greater than the estimated market value on the date of grant during
the years ended December 31, 1999 and 2000 is as follows:
Options and Weighted Weighted Average Fair
Warrants Average Value of Options and
Granted Exercise Price Warrants
----------- -------------- ---------------------
Year Ended December 31, 1999:
Grants with exercise price less than
estimated market value............... 19,233 $2.40 $2.20
Grants with exercise price greater
than estimated market value.......... 342,995 5.66 1.82
Year Ended - December 31, 2000:
Grants with exercise price less than
estimated market value............... 14,650 1.84 2.70
Grants with exercise price greater
than estimated market value.......... 2,095,402 6.03 1.54
A summary of the options and warrants outstanding and exercisable as of December
31, 1999 and 2000 follows:
DECEMBER 31, 1999
Weighted Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ----------------- -------------- ----------- ---------------
$ 1.33 - 2.67 398,304 2.5 years $ 2.65 398,304 $ 2.65
2.68 - 5.33 366,914 2.6 years 4.76 366,914 4.76
5.34 -16.00 101,290 2.6 years 9.72 101,290 9.72
--------- ---------
866,508 866,508
========= =========
F-29
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Weighted Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ----------------- -------------- ----------- ---------------
$ 1.00 - 2.67 671,958 1.53 years $ 2.23 671,958 $ 2.23
2.68 - 5.33 1,208,057 2.14 years 4.45 1,208,057 4.45
5.34 - 16.00 1,096,545 2.80 years 8.74 847,023 8.99
---------- ---------
2,976,560 2,727,038
========== =========
NOTE 11 - SEGMENT INFORMATION
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes disclosures related
to components of a company for which separate financial information is
available and evaluated regularly by a company's chief operating decision
makers in deciding how to allocate resources and in assessing performance. It
also requires segment disclosures about products and services as well as
geographic areas. The Company has determined that it did not have any
separately reportable operating segments as of December 31, 1999 and 2000.
However, the Company does sell Refreshment Centers in geographic locations
outside of the United States.
Revenues attributed to individual countries based on the location of sales to
unaffiliated customers for the years ended December 31, 1999 and 2000 is as
follows:
December 31,
------------------------------
1999 2000
------------ ------------
Revenue:
United States............................. $ 540,517 $ 2,905,643
Other Countries........................... -- 77,997
------------ ------------
Total Revenue............................. $ 540,517 $ 2,983,640
============ ============
NOTE 12 - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's historical revenues and receivables have been derived solely
from the lodging industry. The Company offers credit terms on the sale of its
Refreshment Centers and in connection with its revenue sharing contracts. The
Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
During the year ended December 31, 1999, revenues from two customers
accounted for 26.7 and 16.0 percent of total revenues. During the year ended
December 31, 2000, revenues from four customers accounted for 20.1, 19.6,
15.7, and 13.6 percent of total revenues.
NOTE 13 - RESTRUCTURING COSTS
Management and the Board of Directors determined in December 2000 to
restructure the Company's operations in an effort to reduce operating costs.
In connection with the restructuring, the Company modified certain executive
employment agreements and terminated 15 employees. As a result of the
modification of the executive employment agreements and the obligation to pay
termination benefits, which include related payroll taxes, the Company
recognized a restructuring charge of $418,606 during the fourth quarter of
2000.
F-30
EROOMSYSTEM TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS
REGISTRATION OF WARRANTS
Under the terms of a 1996 private placement, the Company distributed offering
documents that contained a statement that referred to the right of holders of
341,180 warrants to join in any registration of the Company's securities. In
August 2000, the Company completed the IPO at $6.50 per share. Subsequently,
the warrant holders have made an informal demand for the registration of the
underlying shares of common stock. Through negotiations with the warrant
holders, the Company has agreed to register the underlying shares in this
offering. The Company has estimated the cost of the additional registration
statement to be $60,000 with such estimate charged against operations.
TERMINATION OF AN EXECUTIVE OFFICER
On January 26, 2001, the Company terminated with cause the employment
agreement with an executive officer. Under the terms of his agreement, as
modified in July 2000, the termination may require the Company to pay
approximately $185,000 to the former officer through December 31, 2001.
ISSUANCE OF OPTIONS
On January 23, 2001, the Company issued options, pursuant to the 2000 Plan,
to purchase a total of 303,200 shares on common stock. Fifty percent of these
option vest on June 30, 2001 and the remaining fifty percent on December 31,
2001. These options are exercisable at $1.91 per share and expire three years
from the date of issuance (January 23, 2004). The granting of the options
will have not financial effect due to the exercise price being equal to the
market value of the common stock on the date granted. The options will have a
value of $.088 per share based on the Black-Scholes option pricing model with
the following assumptions: risk free interest rate of 5.7 percent, volatility
of 62.5 percent, expected dividend yield of 0 percent, and an expected life
of three years.
FINANCING AGREEMENT (UNAUDITED)
During March 2001, the Company received its first funding related to the
agreement with a financing company to provide funding for Refreshment Centers
which the Company places with hotel customers under revenue sharing
agreements. This funding was in the amount of $294,220 and accrues interest
at the rate of 17.5% per annum, which is equal to the seven-year treasury
rate of 5.07% plus 12.5%.
F-31
[INSIDE BACK COVER]
This page will be blank in the final prospectus.
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
PAGE
Prospectus Summary......................... 1
Risk Factors............................... 4
Special Note Regarding Forward-Looking
Information............................. 9
Use of Proceeds............................ 10
Determination of Offering Price............ 10
Dividend Policy............................ 10
Selling Stockholders and Warrant Holders... 11
Plan of Distribution....................... 14
Selected Financial Data.................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 17
Business................................... 26
Management................................. 36
Certain Relationships and Related
Transactions............................ 43
Principal Stockholders..................... 46
Description of Capital Stock............... 48
Shares Eligible for Future Sale............ 52
Legal Matters.............................. 54
Experts.................................... 54
Change in Accountants...................... 54
Available Information...................... 54
Index to Consolidated Financial Statements. F-1
---------------
Through and including ___________, 2001, all dealers effecting
transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to a
dealer's obligation to deliver a prospectus when acting as an underwriter and
with respect to an unsold allotment or subscription.
321,875 Shares of Common Stock on Behalf of
Selling Stockholders
341,180 Shares of Common Stock on Behalf of
Warrant Holders
EROOMSYSTEM TECHNOLOGIES, INC.
[LOGO]
[INSERT DATE]
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 78.7502 and 78.751 of the Nevada Revised Statutes provides
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Article XII of our amended and restated
articles of incorporation (Exhibit 3.01 hereto) provides for indemnification
of our directors, officers, employees and other agents to the extent and
under the circumstances permitted by Sections 78.7502 and 78.751 of the
Nevada Revised Statutes. In addition, pursuant to the severance agreement
with Mr. Hrncir, we agreed to indemnify Mr. Hrncir for any actions taken by
him on behalf of eRoomSystem Technologies prior to the effective date of the
severance agreement to the extent provided for in our bylaws.
In addition to the indemnification of officers and directors under
the Nevada Revised Statutes, we entered into indemnification agreements with
Dr. Alan C. Ashton on August 17, 1999 and with John J. Prehn on May 31, 2000.
Pursuant to these indemnification agreements, we agreed to hold harmless and
indemnify each of them against any and all expenses incurred by them as a
result of their positions as directors of eRoomSystem Technologies. In
addition, we agreed to advance expenses incurred by each of them upon receipt
of a written request for such advancement containing an unsecured undertaking
by each of them to repay such amounts to the extent that they are held to not
be entitled to indemnification from eRoomSystem Technologies. The advancement
of expenses specifically excludes amounts for judgments, penalties, fines and
settlements. Messrs. Ashton and Prehn each possess the right to
indemnification if, in civil proceedings, they acted in good faith and in a
manner that they reasonably believed to be in or not opposed to the best
interests of eRoomSystem Technologies, and, in criminal proceedings, they had
no reasonable cause to believe that his conduct was unlawful. In addition,
eRoomSystem Technologies may elect to not indemnify Messrs. Ashton and Prehn
if either a majority of the directors not involved in the relevant proceeding
or independent legal counsel, in a written opinion, determine that they have
not met the relevant standards for indemnification.
On September 28, 1999, we entered into an indemnification agreement
with Donnelly Prehn which indemnifies Mr. Prehn for actions to be taken by
him as a director on behalf of RSi BRE. Pursuant to this indemnification
agreement, eRoomSystem Technologies and RSi BRE, jointly and severally,
agreed to hold harmless and indemnify Mr. Prehn against any and all expenses
incurred by him as a result of his position as a director of eRoomSystem
Technologies. In addition, we agreed to advance expenses incurred by Mr.
Prehn upon receipt of a written request for such advancement containing an
unsecured undertaking by Mr. Prehn to repay such amounts to the extent that
Mr. Prehn held to not be entitled to indemnification from eRoomSystem
Technologies. Mr. Prehn's rights to indemnification are only available if
damages have not already been paid directly to Mr. Prehn by an insurance
carrier maintained by either eRoomSystem Technologies or RSi BRE. Mr. Prehn
is not entitled to indemnification if he is adjudged by a court of competent
jurisdiction to have engaged in intentional misconduct or a knowing violation
of the law, if he received an improper personal benefit, or if a court of
competent jurisdiction renders a final decisions that such indemnification is
unlawful.
Even though indemnification for liabilities arising under the
Securities Act may be provided to certain directors and officers pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee.
SEC registration fee $ 274
Printing and engraving costs 15,000
Legal fees and expenses 50,000
Accounting fees and expenses 20,000
Blue Sky fees and expenses 10,000
Transfer Agent and Registrar fees 5,000
Miscellaneous expenses 5,000
----------
TOTAL $ 105,284
We will pay substantially all costs and expenses associated with the
registration of the shares of common stock covered by this registration
statement. Selling stockholders and warrant holders are responsible for all
underwriting discounts, commissions, transfer taxes and other expenses
associated with the sale of common stock by them.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
From January 1998 through December 2000, we have granted or issued
and sold the following unregistered securities:
(1) On January 9, 1998, we commenced a private placement, or Series
A convertible preferred stock offering, of up to 1,200,000 shares of Series A
convertible preferred stock at a price of $5.00 per share, underwritten on a
best-efforts basis by Capital Bay Securities, or CBS. We received cash
subscriptions of $760,000, and issued 152,000 shares of Series A convertible
preferred stock. CBS received 13% in the form of a commission, due diligence
and non-accountable expense allowances, and warrants to purchase 6,840 shares
of common stock exercisable at $16.00 per share for serving as placement
agent. On the six-month anniversary of the close of the Series A convertible
preferred stock offering, or November 14, 1998, holders of Series A
convertible preferred stock started to accrue an 8% annual dividend, payable
in the form of cash. The reverse stock split did not affect the number of
shares of Series A convertible preferred stock outstanding. This offering was
exempt from registration in reliance on Rule 506 of Regulation D of the
Securities Act. The securities were issued to independent third parties and
to existing stockholders, each of whom were accredited investors. Each of the
investors received a private placement memorandum disclosing information
about the securities and our corporate, business and financial matters. Upon
the closing of our initial public offering, the shares of Series A
convertible preferred stock were converted into shares of our common stock.
As of the date of the closing of our initial public offering, holders of
Series A convertible preferred stock were owed dividends of $250,126. We paid
$146,410 of the accrued dividends through September 30, 2000 with the funds
for the remaining dividends placed in a separate account to be released upon
the receipt of the remaining stock certificates for our Series A convertible
preferred stock.
(2) On January 16, 1998, we commenced a private placement, or the
1998 Common Stock Offering, of up to 60,938 shares of common stock, at a
price of $10.67 per share. The 1998 Common Stock Offering was underwritten on
a best-efforts basis by Spectrum Securities, Inc., or Spectrum. We received
cash subscriptions of $379,000, and issued 35,531 shares of common stock.
Spectrum received a cash commission of 12.5% and warrants to purchase 4,264
shares of common stock, exercisable at $12.80 per share, for serving as
placement agent. This offering was exempt from registration in reliance on
Rule 506 of Regulation D of the Securities Act. The securities were issued to
independent third parties and to existing stockholders, each of who were
accredited investors. Each of the investors received a private placement
memorandum disclosing information about the securities and our corporate,
business and financial matters.
(3) On January 23, 1998, we offered to convert our 1996 12% secured
promissory notes, or the 1996 Notes, into shares of Series A convertible
preferred stock. Pursuant to this offer, $1,040,000 of the $1,470,000 1996
Notes were converted into 208,000 shares of Series A convertible preferred
stock. This offering was exempt in reliance on Rule 506 of Regulation D of
the Securities Act. The investors were either accredited or sophisticated
II-2
non-accredited investors, either alone or with a purchaser representative.
Each of the investors received a private placement memorandum disclosing
information about the securities and our corporate, business and financial
matters.
(4) In January 1998, we issued 13,781 shares of common stock to
holders of the 1996 Notes, at a rate of 188 shares of common stock per
$20,000 in outstanding principal, to prevent the foreclosure of our assets by
holders of the 1996 Notes. This offering was exempt from registration in
reliance upon Section 4(2) of the Securities Act. The investors were either
accredited or sophisticated non-accredited investors.
(5) In April 1998, we issued a $100,000 short-term promissory note
to an existing stockholder which was subsequently converted into 9,375 shares
of common stock at a price of $10.67 per share. In addition, this investor
was granted an additional 1,500 shares of common stock as an inducement to
convert the promissory note, which was valued at $10.67 per share and
recorded as additional interest expense in 1998. This offering was exempt
from registration in reliance upon Section 3(a)(9) and Section 4(2) of the
Securities Act. The investor was an accredited investor.
(6) In May 1998, we offered 10% unsecured promissory notes, or the
1998 Notes, with a term of sixty days and automatically convertible at
maturity into common stock at the rate of $10.67 per share. We received cash
subscriptions totaling $561,520 and issued 54,296 shares of common stock to
the holders of the 1998 Notes, which amount included $17,632 of accrued
interest. This offering was exempt from registration in reliance upon Section
4(2) of the Securities Act. The securities were issued to independent third
parties and to existing stockholders, each of whom were either accredited or
sophisticated non-accredited investors.
(7) In October 1998, we offered to convert previously issued notes
into shares of common stock at a rate of $10.67 per share of common stock. As
a result of the conversion, we converted $115,000 in outstanding principal
and $24,568 in accrued interest into 26,169 shares of common stock. This
offering was exempt in reliance upon Section 3(a)(9) and Section 4(2) of the
Securities Act. The investors were accredited investors and sophisticated
non-accredited investors.
(8) From February 1999 through May 1999, we offered 15% unsecured
promissory notes, or the 1999 Notes, with a term of ninety days and interest
accruing at the rate of 37.5 shares of common stock every thirty days for
every $1,000 of outstanding principal. We received $350,000 from the sale of
1999 Notes. $134,885 of the 1999 Notes have been paid off, and $180,000 of
the 1999 Notes have been converted into 81,909 shares of Series B convertible
preferred stock, which amount includes accrued interest and shares of common
stock. All of the outstanding 1999 Notes are in default. As of March 31,
2000, we have issued 50,137 shares of common stock as interest and have
outstanding $35,115 in principal and $7,947 of accrued interest on the 1999
Notes. This offering was exempt in reliance upon Section 4(2) of the
Securities Act. The securities were issued to independent third parties who
were either accredited or sophisticated non-accredited investors. We repaid
the 1999 Notes from the proceeds of our initial public offering.
(9) From March 1999 through October 1999, we conducted a private
placement, or the 1999 Preferred Stock Offering, of up to $4,000,000 of
Series B convertible preferred stock at $3.00 per share. The 1999 Preferred
Stock Offering was co-underwritten on a best-efforts basis by Donald & Co.
Securities Inc. and CBS. Donald & Co. and CBS received a commission of 9% and
a non-refundable expense allowance of 2.5%. Upon completion of the 1999
Preferred Stock Offering, we issued 1,355,047 shares of Series B convertible
preferred stock in exchange for cash subscriptions of $4,065,133 and 726,633
shares of Series B convertible preferred stock in exchange for certain
outstanding promissory notes and unpaid salaries to certain officers and as
part of the settlement with RSG Investments. The reverse stock split did not
affect the number of shares of Series B convertible preferred stock
outstanding. This offering was exempt in reliance on Rule 506 of Regulation D
of the Securities Act. The securities were issued to independent third
parties and to existing stockholders who were either accredited investors or
sophisticated non-accredited investors. Each of the investors received a
private placement memorandum disclosing information about the securities and
our corporate, business and financial matters. Pursuant to the terms of the
Series B convertible preferred stock, the shares were automatically converted
into shares of common stock upon the consummation of our initial public
offering.
(10) In May 1999, holders of previously issued notes were offered
the right to convert their notes and accrued interest into Series B
convertible preferred stock at the rate of $3.00 per share. Holders of these
notes consisting of $425,051 in outstanding principal, plus accrued interest,
converted into 175,562 shares of Series B
II-3
convertible preferred stock. This offering was exempt from registration in
reliance on Section 3(a)(9) and Section 4(2) of the Securities Act. The
investors were either accredited or sophisticated non-accredited investors.
Each of the investors received a private placement memorandum disclosing
information about the conversion and our corporate, business and financial
matters. Pursuant to the terms of the Series B convertible preferred stock,
the shares were automatically converted into shares of common stock upon the
consummation of our initial public offering.
(11) On May 30, 1999, we issued 198,750 shares of our common stock
to the SBD Limited Partnership, an entity controlled by Steven L. Sunyich,
our former chairman, in exchange for a promissory note in favor eRoomSystem
Technologies in the original principal amount of $1,590,000. The purpose of
the issuance was to assist eRoomSystem Technologies in complying with the
stock pledge requirements mandated by the terms of the $1,500,000 loan from
RSG Investments. On September 30, 1999, we entered into an Equipment Transfer
Agreement with RSG, and the 198,750 shares of common stock were returned to
the SBD Limited Partnership. In turn, the SBD Limited Partnership surrendered
the 198,750 shares of common stock to eRoomSystem Technologies in exchange
for the cancellation of the promissory note. The shares of common stock were
booked as treasury stock and have been retired. This offering was exempt in
reliance on Section 4(2) of the Securities Act. Mr. Sunyich was an accredited
investor.
(12) On September 1, 1999, we entered into promissory note purchase
agreements with Steven L. Sunyich, our former chairman, Derek Ellis, our chief
financial officer, treasurer and secretary, and a former executive officer of
and consultant to eRoomSystem Technologies, in which we agreed to convert the
outstanding indebtedness due on their respective demand promissory notes into
shares of Series B convertible preferred stock. As a result of these
agreements, we issued 72,434 shares of Series B convertible preferred stock
and 51,981 shares of our common stock to Mr. Sunyich, 3,742 shares of Series
B convertible preferred stock and 2,990 shares of our common stock to Mr.
Ellis, and 29,808 shares of Series B convertible preferred stock and 25,376
shares of our common stock to the former executive officer and consultant.
The shares of Series B convertible preferred stock were converted into shares
of common stock upon the closing of our initial public offering. This
offering was exempt in reliance on Section 4(2) of the Securities Act.
Messrs. Sunyich and Ellis were both accredited investors.
(13) On December 7, 1999 and February 14, 2000, Mr. Sunyich formally
assigned to us all of his rights in Patent No. 4,939,352 and Patent Nos.
4,857,714 and 4,883,948, which relate to credit card point of sale
technology. In exchange, we issued 65,625 shares of common stock and a
promissory note in the principal amount of $125,000 to Mr. Sunyich. After
paying down the promissory note to approximately $70,000, we converted the
remaining outstanding principal and interest into 23,524 shares of Series B
convertible preferred stock. This offering was exempt in reliance on Section
4(2) of the Securities Act. Mr. Sunyich was an accredited investor.
(14) On December 30, 1999, we entered into conversion agreements
with Steven L. Sunyich, our former chairman, and Derek Ellis, our chief
financial officer, treasurer and secretary, in which we agreed to convert
unpaid salaries in exchange for shares of Series B convertible preferred stock.
As a result of these agreements, we issued 73,052 shares of Series B
convertible preferred stock to Mr. Sunyich and 3,776 shares of Series B
convertible preferred stock to Mr. Ellis. This offering was exempt in reliance
on Section 4(2) of the Securities Act. Messrs. Sunyich and Ellis were both
accredited investors. The shares of Series B convertible preferred stock were
converted into shares of common stock upon the closing of our initial public
offering.
(15) On February 15, 2000, we received a loan in the original
principal amount of $500,000 from Ash Capital, LLC, an entity controlled by
Dr. Alan C. Ashton, a then director designee of the Company. To evidence this
transaction, we issued a promissory note bearing an interest rate of 10% and
warrants to purchase 18,750 shares of common stock to Ash Capital. We repaid
the remaining principal and accrued interest from the net proceeds of our
initial public offering. This issuance of securities was exempt from
registration in reliance on Section 4(2) of the Securities Act. Dr. Ashton is
an accredited investor.
(16) In March and April 2000, we conducted a private placement, or
the 2000 Units Offering, of up to $3,000,000 of units where each $100,000
unit consisted of a 7% convertible promissory note in the original principal
amount of $25,000, 23,077 shares of Series C convertible preferred stock and
a warrant to purchase 5,000 shares of common stock at an exercise price of
$6.60 per share. The 2000 Units Offering was underwritten on a best-efforts
basis by Donald & Co. Securities Inc., who received a commission of 8% and a
non-accountable expense allowance of 0.5% As a result of the 2000 Units
Offering, we received cash of $850,000 which resulted in the issuance of
196,150 shares of Series C convertible preferred stock, notes in the original
principal amount of
II-4
$212,500 and warrants to purchase 42,500 shares of common stock. This
offering was exempt from registration in reliance on Rule 506 of Regulation D
of the Securities Act. The securities were issued to independent third
parties and to existing stockholders, each of who were an accredited
investor. Each of the investors received a private placement memorandum
disclosing information about the securities and our corporate, business and
financial matters. Pursuant to the terms of the Series C convertible
preferred stock, the shares were automatically converted into common stock
upon the closing of our initial public offering.
(17) On March 30, 2000, we issued a warrant to purchase 125,000
shares of common stock, exercisable at $4.80 per share through December 31,
2001, to Hall Communications, Inc. for advertising, marketing and promotional
services. This offering was exempt from registration in reliance on Section
4(2) of the Securities Act. The investor was an accredited investor.
(18) On April 13, 2000, we issued 200,000 shares of common stock in
conjunction with the receipt of a $1,500,000 loan evidenced by a promissory
note of the same date. This offering was exempt in reliance on Regulation S
of the Securities Act. The securities were offered and sold outside of the
United States to the following seven independent third party investors: (i)
566768 Ontario Limited, (ii) B.H. Capital Investments, L.P., (iii) Myra
Heller, (iv) Rachelle Heller, (v) Plazacorp Investments Limited, (vi) Queens
Centre Corner Limited and (vii) Jay Smith.
(19) In June 2000, we issued 777 shares of common stock to an
employee for services rendered. The shares were to have been issued to the
employee in October 1999, but for an oversight by us. The shares were valued
at $2,485 or $3.20 per share. This issuance of securities was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(20) In September 2000, we issued 12,176 shares of common stock to
stockholders who possessed anti-dilution protection from our prior reverse
stock splits. Due to an oversight by us, the shares of common stock were not
issued until September 2000. This issuance of securities was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(21) In August 2000, we issued 21,841 shares of common stock as a
payment of interest to holders of outstanding notes issued by us. This
issuance of securities was exempt from registration in reliance on Section
4(2) of the Securities Act.
(22) In October 2000, we issued 5,670 shares of common stock as a
payment of interest to an employee who loaned us funds. The shares were
valued at $14,250, or $3.46 per share. This issuance of securities was exempt
from registration in reliance on Section 4(2) of the Securities Act.
(23) On March 12, 2001, we issued 15,000 shares of common stock as
part of a settlement agreement relating to certain claims made against us by
a former supplier. This issuance of securities was exempt from registration
in reliance on Section 4(2) of the Securities Act.
(24) As of April 6, 2001, we have issued options pursuant to our
2000 Stock Option Plan to purchase an aggregate of 1,991,488 shares of our
common stock. The issuances of options and warrants to employees and
consultants of eRoomSystem Technologies under the 2000 Stock Option Plan were
exempt under Section 4(2) and Rule 701 of the Securities Act as transactions
pursuant to a compensatory benefit plan or written compensation contract. Of
the Rule 701 issuances, none of the securities were issued to consultants. Of
the Section 4(2) issuances, the securities were issued to existing
stockholders, officers, director, consultants or former consultants who were
either accredited or sophisticated non-accredited investors. Each of the
sophisticated non-accredited investors had access to our corporate, business
and financial information.
(25) As of April 6, 2001, with the exception of the options and
warrants discussed in this Item 26, we have issued and outstanding options
and warrants to purchase 1,275,162 shares of common stock. Of this amount, we
issued warrants to purchase 390,429 shares of common stock in conjunction
with a private placement conducted from September 1996 through March 1997 in
reliance on Section 4(2) of the Securities Act. The remaining options and
warrants to purchase 884,733 shares of common stock were issued to employees,
consultants, investors and other service providers of eRoomSystem
Technologies in reliance upon Section 4(2) of the Securities Act.
II-5
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature
page of the Form SB-2 which is incorporated herein by reference.
(b) Financial Statement Schedules
None.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to file, during any period
in which selling stockholders or warrant holders offer or sell securities, a
post-effective amendment to this registration statement to:
(1) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(3) Include any additional or changed material information on
the plan of distribution.
The undersigned Registrant further undertakes, for determining
liability under the Securities Act, to treat each post-effective amendment as
a new registration statement of the securities offered, and the offering of
the securities at the time to be the initial bona fide offering and to file a
post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referenced
in Item 24 of this Registration Statement or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of Prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, State of Nevada, on the 24th day of April.
EROOMSYSTEM TECHNOLOGIES, INC.
By: /s/ David S. Harkness
-----------------------------------
David S. Harkness
Its: Chief Executive Officer and Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David S. Harkness, as a true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign the
registration statement filed herewith and any or all amendments to said
registration statement (including post-effective amendments and registration
statements filed pursuant to Rule 462 and otherwise), and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Commission granting unto said attorney-in-fact and agent the full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the foregoing, as to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
/s/ David S. Harkness Chief Executive Officer and April 24, 2000
- ------------------------------------ Chairman (Principal Executive Officer)
David S. Harkness
/s/ Stephen M. Nelson
- ------------------------------------ President and Chief Operating Officer April 24, 2000
Stephen M. Nelson
/s/ Derek K. Ellis Chief Financial Officer, Treasurer and Secretary April 24, 2000
- ------------------------------------ (Principal Financial and Accounting Officer)
Derek K. Ellis
/s/ Gregory L. Hrncir General Counsel and Vice President April 24, 2000
- ------------------------------------ of Business Development
Gregory L. Hrncir
/s/ Lawrence S. Schroeder
- ------------------------------------ Director April 24, 2000
Lawrence S. Schroeder
- ------------------------------------ Director April 24, 2000
Dr. Alan C. Ashton
- ------------------------------------ Director April 24, 2000
S. Leslie Flegel
/s/ John J. Prehn
- ------------------------------------ Director April 24, 2000
John J. Prehn
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT NAME PAGE
- ---------- ------------- ----
1.01 Form of Underwriting Agreement relating to the registrant's initial public offering that closed on (3)
August 9, 2000
2.01 Agreement and Plan of Reorganization by and between RoomSystems International Corporation and (1)
RoomSystems, Inc. dated December 31, 1999
2.02 Transfer Pricing Agreement by and between RoomSystems International Corporation and RoomSystems, Inc. (1)
dated December 31, 1999
3.01 Amendment and Restatement of Articles of Incorporation (1)
3.02 Certificate of Correction dated May 30, 2000 (2)
3.03 Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series A (1)
convertible preferred stock
3.04 Amended and Restated Certificate of Designation, Preferences, Rights and Limitation of Series B (1)
convertible preferred stock
3.05 Certificate of Designation, Preferences, Rights and Limitation of Series C convertible preferred (1)
stock
3.06 Amended and Restated Bylaws (2)
3.07 Second Amendment and Restatement of Articles of Incorporation (3)
3.08 Second Amended and Restated Bylaws (3)
4.01 Form of Common Stock Certificate (1)
4.02 Form of Certificate for Series A convertible preferred stock (1)
4.03 Form of Certificate for Series B convertible preferred stock (1)
4.04 Form of Certificate for Series C convertible preferred stock (1)
5.01 Opinion of Kummer Kaempfer Bonner & Renshaw 101
10.01 Amended and Restated 2000 Stock Option and Incentive Plan (2)
10.02 Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes Parkway (1)
Associates Limited Partnership dated October 8, 1997
10.02A Exhibits to Lease Agreement by and between RoomSystems Finance Corporation and 3770 Howard Hughes (2)
Parkway Associates Limited Partnership dated October 8, 1997
10.03 Lease Agreement by and between RoomSystems, Inc. and Pam Joy Realty, Inc. dated October 10, 1997 (2)
10.04 Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. dated April 6, 1998 (1)
10.04A Exhibits to Master Corporate Agreement by and between Innco Corporation and RoomSystems, Inc. dated (2)
April 6, 1998
10.05 Indemnification Agreement by and between RoomSystems, Inc. and Alan C. Ashton dated August 17, 1999 (1)
10.06 Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI Partners, (1)
LLC, SKM Investment, LLC and Thunder Mountain Investments, LC dated August 17, 1999
10.06A Exhibits to Agreement of Understanding by and between
RoomSystems, Inc. and Ash Capital, LLC, C&W/RSI (2) Partners,
LLC, SKM Investment, LLC and Thunder Mountain Investments, LC
dated August 17, 1999
II-8
EXHIBIT
NUMBER DOCUMENT NAME PAGE
- ---------- ------------- ----
10.07 First Amendment to Agreement of Understanding by and between RoomSystems, Inc. and Ash Capital, LLC, (1)
C&W/RSI Partners, LLC, SKM Investment, LLC and Thunder Mountain
Investments, LC dated September 30, 1999
10.08 Promissory Note Repurchase Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated (1)
September 1, 1999
10.09 Indemnification Agreement by and between RSi BRE, Inc. and Donnelly Prehn dated September 27, 1999 (1)
10.10 Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International Corporation, (1)
RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999
10.10A Exhibits to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International (2)
Corporation, RSi BRE, Inc. and RSG Investments, LLC dated September 28, 1999
10.11 Amendment to Equipment Transfer Agreement by and between RoomSystems, Inc., RoomSystems International (1)
Corporation, RSi BRE, Inc. and RSG Investments, LLC dated November 23, 1999
10.12 Conversion Agreement by and between Steven L. Sunyich and RoomSystems, Inc. dated December 30, 1999 (1)
10.13 Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, LLC dated (1)
February 15, 2000
10.13A Exhibits to Loan and Security Agreement by and between RoomSystem Technologies, Inc. and Ash Capital, (2)
LLC dated February 15, 2000
10.14 Letter Agreement by and between eRoomSystem Technologies, Inc. and Hall Communications, Inc. dated (1)
March 30, 2000
10.15 Form of Hotel Revenue Sharing Lease Agreement (2)
10.16 Form of Noncompetition and Nondisclosure Agreement (Sales) (1)
10.17 Form of Consulting Agreement (1)
10.18 Form of Sales Representation Agreement (1)
10.19 Form of Executive Employment Agreement (1)
10.20 Form of Offshore Loan Subscription Agreement dated as of April 13, 2000 (1)
10.21 Form of Secured Subordinated Promissory Note dated as of April 13, 2000 (1)
10.22 Form of Installation, Co-Maintenance and Software Licensing and Upgrade Agreement (2)
10.23+ Master Business Lease Financing Agreement by and among AMRESCO Leasing Corporation, eRoomSystem (4)
SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated May 11, 2000
10.24 Indemnification Agreement by and between eRoomSystem Technologies, Inc. and John J. Prehn dated May (2)
31, 2000
10.25 Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated June 6, 2000 (2)
10.26 Second Amended and Restated Executive Employment Agreement of Steven L. Sunyich dated July 12, 2000 (3)
10.27 Amended and Restated Executive Employment Agreement of Derek K. Ellis dated July 12, 2000 (3)
10.28 Executive Employment Agreement of Stephen M. Nelson dated July 12, 2000 (4)
10.29 Amended and Restated Executive Employment Agreement of Gregory L. Hrncir dated July 12, 2000 (3)
10.30 Shareholders' Agreement and Proxy by and among Ash Capital, LLC, RoomSystems, Inc. and certain (1)
stockholders of RoomSystems, Inc. dated August 17, 1999
II-9
EXHIBIT
NUMBER DOCUMENT NAME PAGE
- ---------- ------------- ----
10.31 Employment Agreement of David S. Harkness dated as of December 20, 2000 (6)
10.32 Employment Agreement of Stephen M. Nelson dated as of January 29, 2001 (7)
10.33 Employment Agreement of Derek K. Ellis dated as of January 29, 2001 (7)
10.34 Employment Agreement of Gregory L. Hrncir dated as of January 29, 2001 (7)
10.35++ Amended and Restated Master Business Lease Financing Agreement by and among AMRESCO Leasing (7)
Corporation, eRoomSystem SPE, Inc., RoomSystems, Inc. and eRoomSystem Technologies, Inc. dated
February 23, 2001
16.01 Letter regarding Change in Certifying Accountant (1)
21.01 List of Subsidiaries (6)
23.01 Consent of Hansen Barnett & Maxwell 103
23.02 Consent of Kummer Kaempfer Bonner & Renshaw (included in Exhibit 5.01) 103
- --------------
(1) Previously filed as an exhibit to the registrant's Registration Statement
on Form SB-2, as filed with the Commission on April 14, 2000.
(2) Previously filed as an exhibit to the registrant's Pre-Effective
Amendment No. 1 to its Registration Statement on Form SB-2, as
filed with the Commission on June 9, 2000.
(3) Previously filed as an exhibit to the registrant's Pre-Effective
Amendment No. 2 to its Registration Statement on Form SB-2, as filed with
the Commission on July 14, 2000.
(4) Previously filed as an exhibit to the registrant's Pre-Effective
Amendment No. 3 to its Registration Statement on Form SB-2, as filed with
the Commission on July 19, 2000.
(5) Previously filed as an exhibit to the registrant's Registration Statement
on Form SB-2, as filed with the Commission on December 22, 2000.
(6) Previously filed as an exhibit to the registrant's Pre-Effective
Amendment No. 1 to its Registration Statement on Form SB-2, as filed with
the Commission on February 5, 2000.
(7) Previously filed as an exhibit to the registrant's Annual Report
on Form 10-KSB, as filed with the Commission on April 2, 2001.
+ Confidential treatment has been granted with respect to certain portions
of this agreement, including the exhibits thereto, of which certain
portions have been omitted and filed separately with the Commission.
++ Confidential treatment has been requested with respect to certain
portions of this agreement, including the exhibits thereto, of which
certain portions have been omitted and filed separately with the Commission.
II-10