===============================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission file number 0-21456
-------
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1361276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
488 Main Avenue
Norwalk, Connecticut 06851
(Address of principal executive offices, including zip code)
(203) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 1997
- ---------------------------- -------------------------------
Common Stock, $.01 par value 21,114,689 shares
===============================================================
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
Page Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet-
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statement of
Operations - Three and Nine Months
Ended September 30, 1997 and 1996 4
Condensed Consolidated Statement of
Cash Flows-Nine Months Ended September
30, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share and share amounts)
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 91,537 $ 8,198
Accounts receivable 382 1,061
Inventories 2,670 821
Prepayments and other current assets 1,522 232
-------- --------
Total current assets 96,111 10,312
-------- --------
Equipment 3,505 2,444
Accumulated depreciation (1,548) (1,798)
-------- --------
Net equipment 1,957 646
-------- --------
Other non-current assets 6,181 1,302
-------- --------
Total assets $104,249 $ 12,260
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,462 $ 1,548
-------- --------
Total current liabilities 1,462 1,548
-------- --------
Long-term debt
CDA Note, 7.4% 4,991 4,989
Senior Discount Notes, 13.25% 104,454 -
-------- --------
Total long-term debt 109,445 4,989
-------- --------
Common stock purchase warrants 5,100 -
-------- --------
Commitments - -
-------- --------
Stockholders' equity
Preferred stock (par value $1.00 per
share, 2,000,000 shares authorized,
none issued and outstanding) - -
Common stock (par value $0.01 per share;
35,000,000 and 25,000,000 shares
authorized, 21,114,689 and 21,047,106
shares issued and outstanding in 1997
and 1996) 211 210
Additional paid-in capital 51,270 50,655
Accumulated deficit (63,239) (45,142)
-------- --------
Total stockholders' (deficit) equity (11,758) 5,723
-------- --------
Total liabilities and stockholders' equity $104,249 $ 12,260
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Product sales $ 599 $ 1,376 $ 904 $ 3,675
Maintenance 150 247 653 595
------- -------- ------- --------
Total revenues 749 1,623 1,557 4,270
------- -------- ------- --------
Cost of goods sold
Product sales 1,318 1,429 1,891 3,955
Maintenance 189 273 615 718
------- -------- ------- --------
Total cost of goods sold 1,507 1,702 2,506 4,673
------- -------- ------- --------
Gross profit (loss) (758) (79) (949) (403)
------- -------- ------- --------
Operating expenses
Selling, general and administrative 3,253 1,659 8,843 5,112
Research and development 578 222 1,736 786
Depreciation and amortization 75 41 191 123
------- -------- ------- --------
Total operating expenses 3,906 1,922 10,770 6,021
------- -------- ------- --------
Loss from operations (4,664) (2,001) (11,719) (6,424)
------- -------- ------- --------
Other income (expenses)
Interest income 1,333 129 3,771 179
Interest expense (3,796) (97) (10,149) (283)
------- -------- ------- --------
Total other income (expenses) (2,463) 32 (6,378) (104)
------- -------- ------- --------
Net loss $(7,127) $ (1,969) $(18,097) $ (6,528)
======= ======== ======== ========
Earnings (loss) per Share
Weighted average common shares
outstanding 21,102 19,930 21,081 14,528
======= ======== ======== ========
Earnings (loss) per common share $ (0.34) $ (0.10) $ (0.86) $ (0.47)
======= ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($18,097) ($6,528)
Other adjustments to reconcile net loss
to net cash used in operating activities 8,791 201
-------- -------
Cash used in operating activities (9,306) (6,327)
-------- -------
Cash Flows Used in Investing Activities:
Capital expenditures (1,781) (245)
Capitalized product development costs (272) (513)
-------- -------
Cash used in investing activities (2,052) (758)
-------- -------
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt 89,493 1,650
Proceeds from issuance of common stock
purchase warrants 5,100 -
Proceeds from exercise of stock options 105 -
Net proceeds from issuance of common stock - 12,111
Payment upon conversion of preferred stock - (235)
-------- -------
Cash provided by financing activities 94,698 13,526
-------- -------
Net increase (decrease) in cash and
cash equivalents 83,339 6,441
-------- -------
Cash and cash equivalents at beginning of period 8,198 3,210
-------- -------
Cash and cash equivalents at end of period $ 91,537 $ 9,651
======== =======
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
Note 1 -Basis of Consolidation:
Electronic Retailing Systems International, Inc. ("ERS" or the
"Company"), was incorporated in 1993 under the laws of the State
of Delaware as a holding company for the business and assets of
Electronic Retailing Systems International, Inc., incorporated in
1990 under the laws of Connecticut, and an affiliated
partnership. The unaudited condensed consolidated financial
statements include the accounts of the Company and all of its
subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Note 2 -Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-
X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of the results of the interim
periods. Operating results for the three and nine month periods
ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31,
1997. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended
December 31, 1996, included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
Earnings (loss) per common share is computed using the weighted
average number of common shares and common share equivalents
assumed to be outstanding during the period. Common share
equivalents consist of the Company's common shares issuable upon
exercise of stock options and stock purchase warrants. The
computation of earnings (loss) per common share does not reflect
common share equivalents that are anti-dilutive.
Cash and cash equivalents at September 30, 1997 include deposits
of approximately $3,904,000, held as interest bearing collateral
for irrevocable letters of credit of the same amounts relating to
future inventory purchases. Such letters of credit expire on
various dates throughout 1997.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
Note 3 -Inventories:
Inventories are stated at the lower of cost (determined on a
first in, first out basis) or market value. Inventories at
September 30, 1997 consist of $1,168,000 of materials and
supplies and $1,502,000 of finished goods. Inventories at
December 31, 1996 consisted of $188,000 of materials and supplies
and $633,000 of finished goods. Inventories in excess of expected
requirements due to new product introductions or product
enhancements are expensed currently.
Note 4 - Sale of Senior Discount Notes and Warrants:
On January 24,1997, the Company completed the sale, in a private
offering (the "Private Placement"), of 147,312 Units ("Units")
consisting of $147,312,000 principal amount at maturity of 13.25%
Senior Discount Notes due February 1, 2004 (the "Notes") together
with warrants (the "Warrants") to purchase an aggregate of
2,538,258 shares of Common Stock, at an exercise price of $5.23
per share, exercisable from the period commencing on the first
anniversary of closing through February 1, 2004.
The Units were sold to investors at a price aggregating $100
million, representing a yield to maturity on the Notes of 13.25%.
No cash interest will accrue on the Notes prior to February 1,
2000. Interest will be payable thereafter on February 1 and
August 1 of each year commencing August 1, 2000. The Notes are
non-callable prior to February 1, 2001. Upon specified change in
control events, each holder has the right to require the Company
to purchase its Note at a specified price. The net proceeds to
the Company from the sale of the Units approximated $95 million,
of which $5.1 million was attributed to the Warrants based on an
estimate of their fair value.
The indenture under which the Notes were issued places
limitations on operations and sales of assets by the Company or
its subsidiaries, requires maintenance of certain financial
ratios in order for the Company to incur additional indebtedness
(subject to specified exceptions), requires the delivery by the
Company's subsidiaries of guaranties if specified debt is
subsequently incurred by such subsidiaries, and limits the
Company's ability to pay cash dividends or make other
distributions to the holders of its capital stock or to redeem
such stock.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
With the consummation of the Private Placement in January 1997,
the Company commenced recording interest on an amount equal to
the gross proceeds from the Private Placement plus prior recorded
and unpaid interest at the annual rate of 13.25%. Additional
expense is being recorded as a result of the amortization of the
discount recorded on the Notes (for value attributed to the
warrants) and the amortization of the costs of issuance.
The Company has engaged Patricof & Co. in connection with certain
corporate finance services and, in addition to three-year
warrants issued in the second quarter of 1997 exercisable with
respect to 250,000 shares of Common Stock at an exercise price of
$5.24 per share, Patricof & Co. may receive fees that become due
if certain transactions are consummated.
Note 5 -New Accounting Standard:
In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 128 "Earnings per Share" ("FAS
128") to be effective for financial statements for periods ending
after December 15, 1997.
The changes required by FAS 128 adjust the calculation of
earnings per share ("EPS") under generally accepted accounting
principles in the U.S. to be more consistent with international
standards. Under the new standard, companies will replace the
reporting of "primary" EPS with "basic" EPS. Basic EPS is
calculated by dividing the income or loss available to common
stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common
stock equivalents. "Fully diluted" EPS will be replaced by
"diluted" EPS, which will be similar to fully diluted EPS as
previously computed.
Due to the Company's generation of losses there is no difference
anticipated between "primary" EPS as reported by the Company and
"basic" EPS as computed under FAS 128.
Note 6 -Subsequent Event
On October 29, 1997, ERS and Telepanel Systems, Inc. a developer,
manufacturer and supplier of electronic shelf label systems
located in Markham, Ontario, Canada, announced a definitive
agreement to combine pursuant to 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, such exchange ratio subject to adjustment downwards<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
in certain circumstances. 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,
through a voting trust, to vote at meetings of stockholders of
ERS and receive dividends equivalent to those paid on a share of
ERS common stock. 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
approvals.
<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The market for electronic shelf labeling ("ESL") systems is in
the development stage, and the Company estimates that, as of
September 30, 1997, approximately 125 stores in the United States
were operating such systems, out of a potential market in excess
of 100,000 supermarkets and other stores. Large supermarket
chains have tested the productivity benefits as well as the
technical functionality of ESL systems in pilot stores, as a
result of which the Company believes they are in a position to
consider rolling out the systems. The Company's objective is to
be the worldwide leader in the emerging ESL system market as
product adoption and penetration increases.
Because the market for ESL systems is in the development stage,
market acceptance of and demand for these systems are subject to
a high level of uncertainty. The Company's success will depend
upon the rate at and extent to which retailers choose to install
ESL systems throughout their stores. The initial acceptance and
rate of installation by retailers may be affected by numerous
factors beyond the Company's control, including the customer's
assessment of the benefits of and the need for ESL systems and
the customer's available capital resources.
Since its inception in April 1990, the Company has been engaged
primarily in the development, design, market testing and, more
recently, sale of the ERS ShelfNet System. The Company
subcontracts to third parties the manufacture and assembly of the
components comprising the ERS ShelfNet System. In addition, the
Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued
development of the ERS ShelfNet System. Since inception and
through September 30, 1997, the Company has generated cumulative
revenues of $14.1 million, and has incurred a cumulative net loss
of approximately $83.8 million, which includes non-cash charges
in the amount of $8.6 million for stock option compensation
expense.
The Company historically has marketed the ERS ShelfNet System for
sale at prices generally in excess of $100,000 per store. The
purchase of an ESL system from the Company has therefore
represented a significant capital expenditure for capital-
constrained retailers. The Company now intends also to market its
ERS ShelfNet System on a fee based arrangement whereby the
Company will own the system and, with no upfront cash cost to the
retailer, furnish the system to retailers (generally for a period
of up to five years), who will pay monthly fees to the Company
based largely on their actual usage of the system. The Company
believes this program, known as "Save As You Go" (the "SayGo<PAGE>
<PAGE>
Plan"), will increase market acceptance of the ERS ShelfNet
System. However, there can be no assurance that the pricing
strategy will be accepted by customers or will be successful in
helping the Company to attain profitability.
Under the SayGo Plan, the Company will recognize revenues as
monthly usage and other fees are billed to customers. Also, under
the SayGo Plan the Company will retain ownership of the systems,
which will be reflected as long-term assets on the Company's
consolidated balance sheet and which will be depreciated on a
straight-line basis over the shorter of their economic lives or
five years.
Results of Operations
Revenues. During the three month period ended September 30, 1997,
the Company's total revenues were $749,000 compared to $1,623,000
in the corresponding quarter in 1996. Revenues for the nine
months ended September 30, 1997 were $1,557,000 compared to
$4,270,000 in the corresponding period of 1996. The Company
believes that the decrease in revenues in 1997 compared to 1996
reflects the decreased demand for the Company's previous
generation product attendant to plans to introduce a new
generation product designed to provide advantages in ease of
installation, ease of use and lower cost of ownership.
In the three and nine month periods ended September 30, 1997,
revenues were concentrated among three and four significant
customers within the supermarket industry comprising 93% and 86%,
respectively, of total revenues. For the three and nine month
periods ended September 30, 1996, revenues were concentrated
among two significant customers comprising 83% and 75%,
respectively, of total revenues. There were no software license
fees recorded in the third quarter of 1997, and for the nine
month periods ended September 30, 1997 and 1996 software license
fees were $122,000 and $243,000, respectively, or 8% and 6% of
total revenues.
Maintenance revenues for the three months ended September 30,
1997 decreased to $150,000 from $247,000 in the corresponding
1996 period, reflecting a reduced customer base of the previous
generation product. For the first nine months of 1997,
maintenance revenues increased to $653,000 from $595,000 in the
first nine months of 1996.
The Company anticipates that past patterns in revenues may not be
indicative of future results of operations as the Company
introduces its SayGo Plan, under which the Company will recognize
revenues as monthly usage and other fees are billed to customers.
<PAGE>
<PAGE>
Cost of goods sold. Cost of goods sold consists of the cost of
hardware components of the ERS ShelfNet System, system
installation costs, depreciation of tools and dies owned by the
Company and utilized in the manufacturing of hardware components,
amortization of capitalized product development costs, warranty
and maintenance costs, freight and inventory obsolescence.
In connection with introduction of the SayGo Plan, the Company
will depreciate the cost of hardware components of its system
over the shorter of their estimated useful lives or five years.
Cost of goods sold decreased to $1,507,000 for the three months
ended September 30, 1997, from $1,702,000 for the three months
ended September 30, 1996, and to $2,506,000 for the first nine
months of 1997, from $4,673,000 in the first nine months of 1996.
Warranty and maintenance expenses included in cost of goods sold
decreased to $189,000 in the three months ended September 30,
1997 compared to $273,000 for the same period in 1996, and to
$615,000 in the first nine months of 1997 from $718,000 in the
first nine months of 1996, which included reductions in warranty
costs. The gross loss (cost of goods sold in excess of revenues)
increased in the third quarter of 1997 to 101% of total revenues,
from 5% in the comparable 1996 period, while the gross loss in
the first nine months of 1997 increased to 61% of total revenues
from 9% in the 1996 corresponding period, reflecting reduced
installation volumes.
The increase in gross loss is primarily the result of the
Company's transition to a new generation of wireless products.
During this transition, the Company experienced high initial
material costs and installation inefficiencies. Additionally,
because of a reduction in product sales in the third quarter and
for the nine month period ended September 30, 1997, depreciation
of manufacturing equipment and amortization of product
development costs comprised a significant share of the cost of
sales.
The Company anticipates that system enhancements to be
implemented in 1997 and 1998 will decrease future warranty and
maintenance expenses per installation and, in the future, that
the cost of goods sold will decrease as a percentage of revenues
as a result of higher manufacturing volumes of its components and
as the installation process is improved.
Selling, General and Administrative. Selling, general and
administrative costs consist of costs associated with selling and
administrative staff, overhead, market research and development,
and customer service personnel. Selling, general and
administrative costs increased to $3,253,000 for the three month
period ended September 30, 1997, compared to $1,659,000 for the
same period in 1996. For the first nine months of 1997 selling,
general and administrative costs increased to $8,843,000 from
$5,112,000 in the comparable 1996 period. These increases reflect
<PAGE>
efforts to expand the Company's organization in anticipation of
sales growth. In addition, results for the nine month period
include the effect of a special non-cash charge of $510,000 for
the issuance of common stock purchase warrants.
Research and Development. Research and development expenses were
$578,000 for the three month period ended September 30, 1997
compared to $222,000 for the same period in 1996. For the nine
months ended September 30, 1997 research and development expenses
were $1,736,000 compared to $786,000 for the corresponding period
of the previous year. Such increases reflect expanded hardware
engineering activities. Additionally, for the three and nine
month periods ended September 30, 1997 the Company capitalized
$117,000 and $272,000 of product development software costs. In
the comparable 1996 periods $119,000 and $513,000, respectively,
of such costs were capitalized. These product development costs
are amortized over the shorter of the estimated useful life of
the related software product or process or three years.
Interest Income. Interest income increased to $1,333,000 for the
three month period ended September 30, 1997, compared to $129,000
for the same period in 1996, due to increased cash and cash
equivalents available for investment, including the proceeds of
the sale, in a private offering (the "Private Placement"), of
147,312 Units consisting of $147,312,000 principal amount at
maturity of 13.25% Senior Discount Notes due February 1, 2004
(the "Senior Discount Notes") together with warrants (the
"Warrants") to purchase an aggregate of 2,538,258 shares of
common stock, $.01 par value (the "Common Stock") consummated on
January 24, 1997. For the nine months ended September 30, 1997
interest income increased to $3,771,000 from $179,000 in the
corresponding period of the prior year.
Interest Expense. Interest expense increased to $3,796,000 for
the three month period ended September 30, 1997, compared to
$97,000 for the same period in 1996. For the first nine months of
1997 interest expense increased to $10,149,000 from $283,000 in
the first nine months of 1996. Interest expense in 1997 and 1996
included interest on amounts borrowed from the Connecticut
Development Authority ("CDA") and additionally, in 1997, non-cash
interest on the 13.25% Senior Discount Notes. With the
consummation of the Private Placement in January 1997, the
Company commenced recording interest on an amount equal to the
gross proceeds from the Private Placement plus prior recorded and
unpaid interest at the annual rate of 13.25%. Additional expense
is being recorded as a result of the amortization of the discount
recorded on the Senior Discount Notes (for value attributed to
the Warrants) and the amortization of costs of issuance.
<PAGE>
<PAGE>
Income Taxes. The Company has incurred net losses since inception
which have generated net operating loss carryforwards of
approximately $52 million for federal and state income tax
purposes, which are available to offset future taxable income and
expire through the year 2012 for federal income tax purposes. In
consideration of the Company's accumulated losses through
September 30, 1997 and the uncertainty of its ability to utilize
any future tax benefits resulting from these losses, the impact
of this potential tax benefit has been eliminated in the
Company's unaudited condensed consolidated financial statements.
Liquidity and Capital Resources
As of September 30, 1997, the Company had net working capital of
$94,649,000, reflecting cash and cash equivalents of $91,537,000,
compared to net working capital of $8,764,000, reflecting cash
and cash equivalents of $8,198,000 at December 31, 1996. The
increase in net working capital and in cash and cash equivalents
resulted primarily from the approximately $95 million in net
proceeds raised in the Private Placement.
Net cash used in operations was $9,306,000 for the nine months
ended September 30, 1997, compared to net cash of $6,327,000 used
for operating activities for the nine months ended September 30,
1996. In the first nine months of 1997, the net loss of
$18,097,000 included $9,871,000 of non-cash interest expense not
used by operations. The net cash used in operations in the first
nine months of 1996 was comprised primarily of the net loss of
$6,528,000.
Cash used in investing activities totaled $2,053,000 for the nine
months ended September 30, 1997, compared to $758,000 of cash
used in investing activities for the nine months ended September
30, 1996. Investing activities included capital expenditures of
$1,780,000 and $245,000 for the nine months ended September 30,
1997 and 1996, respectively. The Company also capitalized
$272,000 and $513,000 in product development costs in the
respective 1997 and 1996 periods.
In addition to selling the ERS ShelfNet System to customers at a
price generally in excess of $100,000 per store, under the SayGo
Plan the Company will offer the system on a fee based arrangement
whereby the Company retains ownership of the system. As a result,
the Company will have substantial cash requirements for
manufacturing and carrying costs attendant to the introduction of
the SayGo Plan, which will not initially be covered by revenues,
calculated on the basis of usage fees paid by customers.
Accordingly, the Company will require substantial funds in order
to support the introduction of the SayGo Plan.
<PAGE>
<PAGE>
To date, the Company has not generated positive cash flow from
operations, and has historically funded its operations primarily
through loans from its stockholders; the sale of interests in an
affiliated partnership; the initial public offering of its Common
Stock consummated in May 1993; its arrangements with the CDA; the
sale of Series A Preferred Stock, $1.00 par value, to the
Company's principal stockholders and members of its Board of
Directors and their affiliates; an offshore public offering and
contemporaneous private placement of Common Stock in July 1996
and the Private Placement.
Cash from financing activities provided $94,698,000 in the first
nine months of 1997 as a result of the Private Placement,
compared to $13,526,000 provided by financing activities in the
first nine months of 1996. The Company borrowed the remaining
$1,650,000 under its facility with the CDA during the 1996
period, and also completed an offshore public offering and
contemporaneous private placement of Common Stock in exchange for
aggregate proceeds of approximately $12 million.
The aggregate of $5,000,000 principal amount of indebtedness to
the CDA (the "CDA Note") is repayable five years after the August
1994 closing and is convertible to shares of Common Stock, at
$3.00 plus the average market price of the Common Stock during
the twelve months prior to conversion. At closing, the CDA
acquired five-year warrants to purchase 699,724 shares (as
adjusted) of Common Stock, exercisable at an adjusted price
calculated at $2.58 plus the average market price of the Common
Stock during the twelve months prior to exercise. Under its
arrangements with the CDA, the Company will be obligated to
comply with certain covenants (some of which remain in effect for
up to ten years from closing), whether or not the CDA Note has
been paid in full, or be subject to certain penalties including
immediate repayment of the CDA Note in full. In the event of
specified changes in control of the Company coupled with
prepayment of its note, the Company has rights to repurchase such
warrants and shares at the fair market value thereof (calculated
pursuant to such arrangements), and thereby, subject to the
foregoing, extinguish such covenants. In all events (and
notwithstanding any such repurchase), if the Company relocates
outside of Connecticut before August 2004, all advances made by
the CDA are subject to acceleration, together with a penalty of
$250,000.
In January 1997, the Company completed the private sale of
147,312 Units, consisting of $147,312,000 principal amount at
maturity of its Senior Discount Notes and Warrants, which were
sold to investors at a price aggregating $100 million ($95
million net proceeds to the Company). The Senior Discount Notes
mature on February 1, 2004, with accrual of cash interest at the
rate of 13.25% per annum commencing February 1, 2000, such
interest payable thereafter on February 1 and August 1 of each
year commencing August 1, 2000. The Senior Discount Notes may be<PAGE>
<PAGE>
called, at the Company's option, in whole or in part, at any time
after February 1, 2001, and upon specified change in control
events, each holder has the right to require the Company to
purchase its Senior Discount Note, at specified prices.
The indenture under which the Senior Discount Notes were issued
places limitations on operations and sales of assets by the
Company or its subsidiaries, requires maintenance of certain
financial ratios in order for the Company to incur additional
indebtedness (subject to specified exceptions), requires the
delivery by the Company's subsidiaries of guaranties if specified
debt is subsequently incurred by such subsidiaries, and limits
the Company's ability to pay cash dividends or make other
distributions to the holders of its capital stock or to redeem
such stock. The Warrants are, subsequent to January 24, 1998,
exercisable through February 1, 2004 with respect to an aggregate
of 2,538,258 shares of Common Stock, at a per share price of
$5.23.
The Company will utilize the net proceeds from the Private
Placement in connection with the anticipated expansion of its
operations, including for manufacturing and carrying costs
attendant to the SayGo Plan, and for general corporate purposes,
including the funding of the Company's ongoing engineering and
development efforts. The Company believes the proceeds of the
Private Placement, together with its other cash and cash
equivalents, will be sufficient to meet the Company's currently
anticipated operating and capital expenditure requirements for
the foreseeable future.
On October 29, 1997, the Company and Telepanel Systems Inc.
("Telepanel") executed a Combination Agreement dated such date
(the "Combination Agreement"), which provides for the combination
of the company and Telepanel pursuant to a plan of arrangement
under Canadian law (the "Arrangement"). Under the terms of the
transaction (the "Transaction"), Telepanel will be recapitalized
and each common share, without par value (collectively, the
"Telepanel Common Shares"), of Telepanel will be exchanged for
.5566 of an exchangeable share (a newly created class of shares)
of Telepanel (collectively, the "Exchangeable Shares"). Each
Exchangeable Share will entitle the holder thereof to dividend
and other rights economically equivalent to those of one share of
ERS Common Stock and, through a voting trust, to vote at meetings
of stockholders of the Company. The Exchangeable Shares will be
exchangeable, at the option of the holder, for ERS Common Stock,
on a share-for-share basis. As a result of the Transaction, the
Company will become the sole beneficial owner of the outstanding
Telepanel Common Shares.
<PAGE>
<PAGE>
Based on the exchange ratio (the "Exchange Ratio") of .5566
Exchangeable Shares for each Telepanel Common Share, the Company
will ultimately be required to issue up to 9,992,460 shares of
ERS Common Stock in exchange for all Exchangeable Shares issuable
upon exchange of the currently outstanding Telepanel Common
Shares. In addition, the Company will be required to issue up to
approximately 2,764,799 shares of ERS Common Stock in respect of
Exchangeable Shares exchanged for further Telepanel Common Shares
issuable pursuant to outstanding options, warrants and
convertible securities of Telepanel. In the event that, prior to
the effective date of the Arrangement, Telepanel consummates
specified additional financings through the issuance of
convertible securities, the Exchange Ratio will be adjusted so as
not to be less than .5166 Exchangeable Shares for each Telepanel
Common Share.
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 stockholders of
ERS and of Telepanel, the approval (without material condition or
costs) of the plan of arrangement contemplated by the Combination
Agreement by the Ontario Court of Justice (General Division), the
receipt of certain consents from the holders of debt of ERS and
Telepanel, and the receipt of certain accountants' letters
relating to the Transaction's qualification for pooling-of-
interests accounting treatment. It is currently anticipated that
the Arrangement will become effective within ten business days of
the requisite stockholder approval in the first quarter of 1998.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects
and related arrangements, and the Company may consider additional
transactions, consistent with the provisions of the indenture,
that will further enhance its liquidity. The Company has not
reached any determination with respect to the size or nature of
any such transaction, or whether any such transaction will be
undertaken, and there can be no assurance that any such
transaction will be effected. The Company has engaged Patricof &
Co. in connection with certain corporate finance services and, in
addition to three-year warrants issued in the second quarter of
1997 exercisable with respect to 250,000 shares of Common Stock
at an exercise price of $5.24 per share, Patricof may receive
fees that become due if certain transactions are consummated.<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
PART II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed or incorporated by reference
as part of this Quarterly Report on Form 10-Q are
listed on the attached Index to Exhibits.
(b) Current Reports on Form 8-K
During the quarter ended September 30, 1997, the
Company did not file a Current Report on Form 8-
K. The Company filed a Current Report on Form 8-K
dated October 29, 1997 addressing, under "Item 5.
Other Events" thereunder, the execution of the
Combination Agreement with Telepanel. No
financial statements were included with such
report.
<PAGE>
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
November 14, 1997 s/Bruce F. Failing, Jr.
- ----------------- --------------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief Executive
Officer
November 14, 1997 s/Michael Luetkemeyer
- ----------------- --------------------------------
Date Michael Luetkemeyer
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three and Nine Months Ended September 30, 1997
Index to Exhibits
Exhibit Number Document Description
- -------------- --------------------
10(a) Combination Agreement dated October 29,
1997 between the Company and Telepanel
Systems Inc. (Incorporated by Reference
to Exhibit 5(a) of the Current Report
on Form 8-K dated October 29, 1997).
11 Computation of Net Loss Per Common
Share
27 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission for
information only and is not filed.
<PAGE>
<TABLE>
Exhibit 11
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Net loss ($ 7,127,000) ($18,097,000)
============ ============
Weighted average common shares outstanding 21,101,815 21,081,480
============ ============
Earnings (loss) per common share ($0.34) ($0.86)
============ ============
Calculation of weighted average shares
outstanding
- --------------------------------------
Shares issued and outstanding Dec. 31, 1996 21,047,106 21,047,106
Issuance of shares pursuant to stock option plan 54,709 34,374
------------ ------------
Weighted average common shares outstanding 21,101,815 21,081,480
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ELECTRONIC
RETAILING SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 91,537
<SECURITIES> 0
<RECEIVABLES> 583
<ALLOWANCES> (201)
<INVENTORY> 2,670
<CURRENT-ASSETS> 96,111
<PP&E> 3,505
<DEPRECIATION> (1,548)
<TOTAL-ASSETS> 104,249
<CURRENT-LIABILITIES> 1,462
<BONDS> 109,445
0
0
<COMMON> 211
<OTHER-SE> (11,969)
<TOTAL-LIABILITY-AND-EQUITY> 104,249
<SALES> 904
<TOTAL-REVENUES> 1,557
<CGS> 1,891
<TOTAL-COSTS> 2,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,149
<INCOME-PRETAX> (18,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,097)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> 0
</TABLE>
