Telepanel Systems Inc. — M&A Activity 1997

Nov 5, 1997

MATERIAL CHANGE REPORT
PURSUANT TO
SECTION 75(2) OF THE SECURITIES ACT (ONTARIO) (THE “ACT”)

SECTION 67(1) OF THE SECURITIES ACT (BRITISH COLUMBIA)

SECTION 118(2) OF THE SECURITIES ACT (ALBERTA)

SECTION 84(1) OF THE SECURITIES ACT (SASKATCHEWAN)

SECTION 81(2) OF THE SECURITIES ACT (NOVA SCOTIA)

SECTION 76(2) OF THE SECURITIES ACT (NEWFOUNDLAND)

1. Reporting IssuerTelepanel Systems Inc. (“Telepanel”)
   245 Riviera Drive
   Markham, Ontario
   L3R 5J9
2. Date of Material ChangeOctober 29, 1997
3. Press ReleaseThe press release prescribed by section 75(1) of the Act (and attached hereto) was issued on October 29, 1997.
4. Summary of Material ChangeOn October 29, 1997, Telepanel and Electronic Retailing Systems International, Inc. (“ERS”) announced they had signed a definitive agreement to enter into a combination. Under the terms of the combination, Telepanel shareholders will be entitled to receive 0.5566 Telepanel Exchangeable Shares for each Telepanel Common Share. The Telepanel Exchangeable Shares can be exchanged for an ERS Common Share at the option of a holder. Each Exchangeable Share, while outstanding, will carry the right to vote at meetings of ERS stockholders and receive dividends equivalent to those paid on a share of common stock. The combination is structured as a plan of arrangement and is subject to the approval of Telepanel and ERS shareholders, the Ontario Court of Justice and other regulatory authorities and third parties, and confirmation that the transaction will qualify for pooling-of-interests accounting treatment. The combination is expected to be completed in the first quarter of 1998.
5. Full Description of Material ChangeThe Combination Agreement between ERS and Telepanel provides for the combination of ERS and Telepanel in a transaction in which each holder of Telepanel common shares will receive 0.5566 Exchangeable Shares for each Telepanel common share held. The Exchangeable Shares will be securities of Telepanel that entitle their holders to dividend and other rights economically equivalent to those of the ERS Common Stock and, through a voting trust, to vote at meetings of stockholders of ERS. The Exchangeable Shares are exchangeable at the option of the holder for ERS Common Stock on a share-for-share basis. As a result of the Arrangement, ERS will become the sole beneficial owner of the outstanding Telepanel Common Shares.

Reasons for the Transaction. ERS and Telepanel believe that the Transaction will allow them to combine their individual resources, assets and expertise and thereby enhance their ability to compete in the emerging electronic shelf labelling (“ESL”) industry. The Transaction is intended to provide a single technology standard based on a critical mass of customers, supported by substantial financial resources, to increase market adoption of ESL technology. The ERS ShelfNet System that will be marketed by the combined companies is designed to increase retailer productivity by utilising wireless ESLs to provide applications, in addition to electronic price changing, that enhance on-shelf display of merchandising information, shelf level inventory monitoring and implementation of shelf-management systems.

The Exchangeable Shares. The Exchangeable Shares will be exchangeable, at any time at the option of the holder, on a one-for-one basis for shares of ERS Common Stock. Pursuant to the Voting, Support and Exchange Trust Agreement, the Trustee, as holder of the Voting Share, will be entitled to a number of votes on all matters on which holders of ERS Common Stock are entitled to vote equal to the number of Exchangeable Shares outstanding from time to time that are not held by ERS or subsidiaries of ERS. By furnishing instructions to the Trustee, such holders of Exchangeable Shares will be able to exercise the same voting rights with respect to ERS as they would have after exchange of their Exchangeable Shares for ERS Common Stock. Holders of Exchangeable Shares will also be entitled to receive dividends economically equivalent to any dividends paid on the ERS Common Stock. The Voting, Support and Exchange Trust Agreement will restrict ERS from paying dividends on the ERS Common Stock unless equivalent dividends are paid on the Exchangeable Shares. Holders of Exchangeable Shares will also be entitled to participate in any liquidation of ERS on the same basis as holders of ERS Common Stock.

The Exchangeable Shares will, in effect, have no separate economic rights against or in Telepanel and will have no separate voting rights in Telepanel (other than certain limited class rights required under the Canada Business Corporations Act and the right to vote on any change in the fundamental terms of the shares themselves or the related terms in the voting, support and exchange trust agreement). In these cases, the voting rights are subject to automatic redemption upon the occurrence of the Automatic Redemption Date.

Exchange of Exchangeable Shares for ERS Common Stock. Holders of the Exchangeable Shares will be entitled at any time following the Effective Time, upon delivery of a certificate representing Exchangeable Shares and a duly executed Retraction Request, to require Telepanel to redeem such Exchangeable Shares in exchange for an equivalent number of shares of ERS Common Stock. However, Telepanel must deliver all such requests for redemption to ERS, whereupon ERS instead of Telepanel has the right to purchase the Exchangeable Shares that are the subject of the request for redemption in exchange for an equivalent number of shares of ERS Common Stock. If this right is not exercised, Telepanel is required to effect the requested redemption. On December 31, 2002 (subject to acceleration in certain circumstances), the Exchangeable Shares are subject to automatic redemption by Telepanel in exchange for an equivalent number of shares of ERS Common Stock. ERS has the overriding right, but not the obligation, to acquire the outstanding Exchangeable Shares in exchange for an equivalent number of shares of ERS Common Stock on the last business day prior to the Automatic Redemption Date. In exercising such overriding right, ERS will not be required to purchase Exchangeable Shares from itself. If ERS exercises the overriding right, Telepanel’s obligation to redeem the Exchangeable Shares on the Automatic Redemption Date will terminate.

Management of ERS Following Consummation of the Arrangement. The Combination Agreement provides, in part, that the board of directors of ERS will be expanded, at the Effective Time, to consist of nine members, five of whom are currently directors of ERS, three of whom are currently directors of Telepanel and the remaining one of whom has been designated by both ERS and Telepanel. ERS has agreed that, during the period from the Effective Time until its second anniversary, ERS shall nominate and recommend such persons for re-election to the ERS board of directors upon expiration of their terms. At the Effective Time, the principal executive authority of ERS will be exercised by a Corporate Executive Committee comprised of the Chairman and two Vice Chairmen of the board of ERS, who will consist of Norton Garfinkle, currently Chairman of the Board of ERS, Bruce F. Failing, Jr., currently Vice Chairman of the Board and Chief Executive Officer of ERS and Christopher Skillen, currently President and Chief Executive Officer of Telepanel.

Effective Time of the Arrangement. The Arrangement will become effective after the requisite shareholder, Court and regulatory approvals have been obtained and are final and all other conditions to the Arrangement have been satisfied or waived. It is presently anticipated that the Arrangement will become effective within ten business days of the requisite stockholder approval in the first quarter of 1998.

Conditions to the Arrangement. The obligations of ERS and Telepanel to consummate the Arrangement are subject to the satisfaction or waiver, where permissible, of certain conditions set forth in the Combination Agreement, including obtaining approval of the ERS Stockholders and the Telepanel Shareholders, the approval (without material condition or costs) of the Plan of Arrangement by the Court, the receipt of certain consents from the holders of ERS and Telepanel debt and the receipt of certain accountants letters relating to the Transaction’s qualification for pooling-of-interests accounting treatment, under U.S. GAAP.

Termination. The Combination Agreement may be terminated prior to the Effective Date, whether before or after approval of the ERS Stockholders or the Telepanel Shareholders. In circumstances specified in the Combination Agreement, including (i) mutual agreement, (ii) breaches of representations, warranties or covenants by the other party which have a material adverse effect, (iii) failure of the ERS Stockholders or the Telepanel Shareholders to approve the Transaction or the Arrangement Resolution, respectively, (iv) failure of the conditions precedent to closing to be satisfied by May 31, 1998 other than as a result of a breach by the terminating party, and (v) issuance of a final and non-appealable permanent injunction or alternative order preventing consummation of the Arrangement. Under certain circumstances, Telepanel may be required to pay to ERS, or ERS may be required to cause the payment to Telepanel of, a termination fee equal to five percent of the value of Telepanel, depending on the circumstances of the termination.

Accounting Treatment. It is expected that the Transaction will be accounted for as a pooling-of-interests under U.S. GAAP.

Stock Exchange Listings. The Combination Agreement contemplates the listing of the Exchangeable Shares on the TSE subject to the satisfaction of customary requirements of the TSE. There is no current intention to list the Exchangeable Shares on any other stock exchange in Canada, the United States or any other jurisdiction. The ERS Common Stock is traded on The Nasdaq Stock Market, and on the AIM. There is no current intention to list the ERS Common Stock on any other stock exchange in Canada, the United States or any other jurisdiction.

1. Reliance on Section 75(3) of the ActNot applicable.
2. Omitted InformationNot applicable.
3. Senior OfficersThe senior officers of Telepanel who are knowledgeable about this material change are:

Christopher Skillen
President and Chief Executive Officer
(905) 477-7877

John Heaven
Vice President, Finance
(905) 477-7877
4. Statement of Senior OfficerThe foregoing accurately discloses the material change referred to herein.

Dated at Toronto, Ontario this 4th day of November, 1997.

John HeavenVice-President, Finance

Contact:	Bruce F. Failing, Jr. Electronic Retailing Systems International, Inc. 203-849-2500	Chris Skillen Telepanel Systems Inc. 905-477-7877
	Roanne Kulakoff Kekst and Company 212-521-4800 ERS Investors	Mallory Factor Inc. 212-350-0000 Telepanel Investors/Press
	Joe Gavaghan Leslie Fletcher Lois Paul Partners 617-238-5700 ERS Press	Irving Straus Straus Corporate Communications 212-768-2477 Telepanel Investors/Press

FOR IMMEDIATE RELEASE

Electronic Retailing Systems and Telepanel Sign Agreement to Merge

Combined Entity Becomes Electronic Shelf Labeling Market Leader, With

Established ESL Technology Standard

Norwalk CT, and Markham, Ontario, Canada - October 29, 1997 - Electronic Retailing Systems International Inc. (“ERS”) (NASDAQ: ERSI) and Telepanel Systems, Inc. (NASDAQ:TLSIF & TSE:TLS), two of the leading providers of electronic shelf labeling systems, announced today a definitive agreement to merge.

The merger creates the electronic shelf labeling market leader. With a patented software base, strong world-wide distribution partnerships with the leading point-of-sale systems providers, including Symbol Technologies and IBM, and an existing installed base of more than 160 systems, the new company is positioned to establish its technology as the industry standard.

The combination, which is intended to have no immediate tax consequences to most Canadian and U.S. Telepanel shareholders, will be effected as a plan of arrangement under Canadian Law. Under the terms of the transaction, Telepanel will be recapitalized with each Telepanel common share exchanged for .5566 of an Exchangeable Share (a newly-created class of shares) of Telepanel. Each Exchangeable Share will be exchangeable at the option of the holder for one share of ERS common stock and, while outstanding, will carry the right to vote at meetings of stockholders of ERS and receive dividends equivalent to those paid on a share of ERS common stock. Deutsche Morgan Grenfell and Patricof & Company advised the companies and delivered opinions as to the fairness of the transaction.

The transaction is expected to close in the first quarter of 1998 and is subject to the approval of both companies’ shareholders, confirmation that the transaction will qualify for pooling-of-interests accounting treatment, the approval by a Canadian court and other third party and regulatory approval. At current valuations, the market capitalization of the combined entity on a fully diluted basis will exceed $200 million.

The combined company will have a board of nine directors, five to be designated by ERS, three by Telepanel and one by both companies. It will be managed by an executive committee which will include Norton Garfinkle, the current Chairman of ERS, Bruce Failing, the current CEO of ERS, and Chris Skillen, the current CEO of Telepanel.

The combined company’s patented combination of software and wireless electronic shelf labeling technology replaces paper price tags on retail shelves with liquid crystal display labels that transmit pricing and other information to and from the shelf edge. ERS and Telepanel believe that this patented combination has clear advantages over earlier generation electronic shelf labeling systems including ease of installation and use, lower costs of ownership, and portability. This offers retailers, ranging from grocery chains to mass merchandisers, opportunities for increased productivity by providing more accurate and immediate automated price changes, shelf level inventory monitoring and implementation of shelf management plan-o-grams through integration with point-of-sale and other back office systems.

“We believe that market development for electronic shelf labels will parallel that of the point-of-sale scanner market,” commented Bruce Failing, CEO of ERS. “This merger will give us the technology, the support and the referenceable installed base to drive the growth of the market.”

“Both IBM and Symbol Technologies, two of the leaders of point-of-sale scanner systems, have recognized the respective strengths of Telepanel and ERS,” continued Failing. “The combined power of these distribution alliances should accelerate the adoption of the ERS/Telepanel systems on a world-wide basis.”

“Because electronic shelf labeling is designed to substantially increase retailer margins, it is attracting significant industry attention,” stated Chris Skillen, CEO of Telepanel. “By combining our business with ERS, we’ll be better positioned to address increasingly technology driven needs of all retailers. Even better, our customers won’t have to choose between two standards. They’ll get the best from both companies’ extensive investments in research and development.”

“This transaction should create increased value for our shareholders, customers and employees,” stated Norton Garfinkle, Chairman of ERS. “Post merger, no other company will have the powerful combination of our advanced technology, strong alliances and installed base. It’s a win for everyone.”

This press release includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not constitute historical facts and involve risks and uncertainties, including, but not limited to, the possibility that adverse economic or other factors may cause actual results to be materially different than current estimates and projections. Additional detailed information concerning a number of factors that could cause actual results to differ materially from the information contained in this press release is contained in the reports and other documents of ERS and Telepanel filed with the Securities and Exchange Commission from time to time.