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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, 1998
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 13, 1998
- --------------------------- ----------------------------------
Common Stock, $.01 par value 21,248,447 shares
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<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, 1998 and December 31, 1997 3
Condensed Consolidated Statement of
Operations - Three and Nine Months
Ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of
Cash Flows-Nine Months Ended September
30, 1998 and 1997 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 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 16
<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,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 65,715 $ 82,400
Accounts receivable 884 203
Inventories 10,144 7,273
Note receivable 2,000 -
Prepayments and other current assets 1,026 978
--------- ---------
Total current assets 79,769 90,854
--------- ---------
Equipment 4,800 5,055
Accumulated depreciation (1,461) (1,753)
--------- ---------
Net equipment 3,339 3,302
--------- ---------
Other non-current assets 5,587 6,052
--------- ---------
Total assets $ 88,695 $ 100,208
========= =========
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses $ 1,479 $ 2,482
CDA Note, 7.4% 4,996 -
--------- ---------
Total current liabilities 6,475 2,482
--------- ---------
Long-term debt
Senior Discount Notes, 13.25% 119,898 108,109
CDA Note, 7.4% - 4,993
--------- ---------
Total long-term debt 119,898 113,102
--------- ---------
Common stock purchase warrants 5,100 5,100
--------- ---------
Commitments - -
--------- ---------
Stockholders' deficit
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 shares authorized,
21,245,947 and 21,187,035 shares
issued and outstanding in 1998 and
1997) 212 211
Additional paid-in capital 51,366 51,328
Accumulated deficit (94,356) (72,015)
--------- ---------
Total stockholders' deficit (42,778) (20,476)
--------- ---------
Total liabilities and stockholders' deficit $ 88,695 $ 100,208
========= =========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<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,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Product sales $ 573 $ 599 $ 2,109 $ 904
Maintenance 222 150 575 653
-------- -------- -------- --------
Total revenues 795 749 2,684 1,557
-------- -------- -------- --------
Costs of goods sold
Product sales 851 1,318 2,927 1,891
Maintenance 139 189 511 615
-------- -------- ------- --------
Total cost of goods sold 990 1,507 3,438 2,506
-------- -------- ------- --------
Gross profit (loss) (195) (758) (754) (949)
-------- -------- ------- --------
Operating expenses
Selling, general and
administrative 2,855 2,900 9,128 8,208
Research and development 966 931 2,859 2,371
Depreciation and amortization 85 75 258 191
-------- -------- ------- --------
Total operating expenses 3,906 3,906 12,245 10,770
-------- -------- ------- --------
Loss from operations (4,101) (4,664) (12,999) (11,719)
-------- -------- ------- --------
Other income (expenses)
Interest income 1,041 1,333 3,144 3,771
Interest expense (4,310) (3,796) (12,486) (10,149)
-------- -------- -------- --------
Total other expenses (3,269) (2,463) (9,342) (6,378)
-------- -------- ------- --------
Net loss $ (7,370) $(7,127) $(22,341) $(18,097)
======== ======== ======= ========
Earnings (loss) per common share
Weighted average common shares
outstanding 21,244 21,102 21,227 21,081
======== ======== ======= ========
Basic loss per common share $ (0.35) $ (0.34) $ (1.05) $ (0.86)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($22,341) ($18,097)
Other adjustments to reconcile net loss to cash
used in operating activities 8,869 8,791
-------- --------
Cash used in operating activities (13,472) (9,306)
-------- --------
Cash Flows Used in Investing Activities:
Capital expenditures (911) (1,781)
Disposal of fixed assets 32 -
Issuance of note receivable (2,000) -
Capitalized product development costs (373) (272)
-------- --------
Cash used in investing activities (3,252) (2,053)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt - 89,493
Net proceeds from issuance of common stock
purchase warrants - 5,100
Net proceeds from issuance of common stock 39 105
-------- --------
Cash provided by financing activities 39 94,698
-------- --------
Net (decrease) increase in cash and cash
equivalents (16,685) 83,339
-------- --------
Cash and cash equivalents at beginning of period 82,400 8,198
-------- --------
Cash and cash equivalents at end of period $65,715 $ 91,537
======== ========
See accompanying notes to condensed consolidated financial statements
/TABLE
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(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, 1998 are not
necessarily indicative of the results to be expected for the
full year ending December 31, 1998. 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,
1997, included in the Company's Annual Report on Form 10-K for
the year then ended.
Basic loss per common share is computed using the weighted
average number of common shares assumed to be outstanding
during the period, without consideration for common stock
equivalents. Common stock equivalents consist of the
Company's common shares issuable upon exercise of stock
options and stock purchase warrants. Due to the Company's
loss position, the Company has reported only "basic" EPS. The
presentation of "dilutive" EPS is not required as common
stock equivalents are anti-dilutive.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
Cash and cash equivalents at September 30, 1998 include
deposits of approximately $31,000, held as interest bearing
collateral for irrevocable letters of credit of the same
amounts relating to future inventory purchases.
Certain prior year amounts have been reclassified to conform
with current year presentation.
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, 1998 consist of $2,865,000 of materials and
supplies and $7,279,000 of finished goods. Inventories at
December 31, 1997 consisted of $3,286,000 of materials and
supplies and $3,987,000 of finished goods. Inventories in
excess of expected requirements 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 "Senior Discount 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 Senior
Discount Notes of 13.25%. No cash interest will accrue on the
Senior Discount 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 Senior Discount 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 Senior Discount 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.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
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.
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 the costs of issuance.
Note 5 - Termination Agreement With Telepanel
In October 1997, the Company and Telepanel Systems Inc.
("Telepanel") executed an agreement providing for the
combination of the Company and Telepanel. As a result of the
transaction, the Company would have become the sole beneficial
owner of the outstanding Telepanel common shares. In February
1998 as an interim arrangement pursuant to the combination
agreement, the Company and Telepanel entered into a joint
distribution agreement providing for the creation of a joint
venture (the "Joint Venture") that would hold specified
distribution rights. Pursuant to such arrangements in
February 1998 the Company advanced the amount of $2,000,000
to the Joint Venture, which accrued interest payable monthly,
at the prime rate plus 2.5% per annum, was guaranteed by
Telepanel and it's subsidiaries, and was secured by all of the
assets of Telepanel and it's subsidiaries (such collateral
subordinated in right to specified bank indebtedness but prior
in right to any other interest).
On March 17, 1998, the Company announced that the condition
to closing contained in the combination agreement requiring
confirmation that the transaction would qualify for pooling-
of-interests accounting treatment failed to be satisfied, and
the Company's Board of Directors determined that it did not
intend to waive the condition to combine regarding the
qualification for pooling-of-interests accounting treatment.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
On April 22, 1998, the Company and Telepanel Systems Inc.
executed a formal agreement to terminate their agreement of
October 1997 contemplating a combination of the two companies,
and executed reciprocal releases thereunder. In addition, the
parties agreed: (i) to terminate their previously announced
joint distribution agreement; (ii) that the Company would
withdraw its demand for acceleration of repayment of the
outstanding working capital advances to the Joint Venture (as
a result of the failure of the Joint Venture to pay interest
when due); and (iii) that such balances, would be due on
October 2, 1998, subject to earlier repayment from equity or
debt offerings of Telepanel.
Note 6 - Subsequent Event
The outstanding advances to Telepanel were repaid in full on
October 2, 1998.
<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, 1998, fewer than 200 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, 1998, the Company has generated cumulative
revenues of $17.2 million, and has incurred a cumulative net loss
of approximately $115.0 million.
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 <PAGE>
<PAGE>
believes this program, known as "Save As You Go" (the "SayGo
Plan"), will increase market acceptance of the ERS ShelfNet
System. However, there can be no assurance that the pricing
strategy will be accepted by customers or will be successful in
helping the Company to attain profitability.
Under the SayGo Plan, the Company will recognize revenues as
monthly usage and other fees are billed to customers. Also, under
the SayGo Plan the Company will retain ownership of the systems,
which will be reflected as non-current assets on the Company's
consolidated balance sheet and which will be depreciated on a
straight-line basis over the shorter of their economic lives or
five years. Such assets will be subject to periodic impairment
testing as prescribed by Finance Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of".
Statements contained in and preceding management's discussion and
analysis contain various forward-looking statements and
information that are based on information currently available to
management and management's beliefs and assumptions. When used in
this report, the words "anticipate", "designed to", "estimate",
"believes", "plans", and similar expressions are intended to
identify forward-looking statements, but are not the exclusive
means of identifying such statements. Such statements are subject
to risks and uncertainties, and the Company's actual results may
vary materially from those anticipated, estimated or projected due
to a number of factors, including, without limitation, the timely
availability and acceptance of new products, the rate of
development of the emerging market for ESL systems, the impact of
competitive products and pricing, the management of growth, the
impact of the year 2000 compliance issues and other factors set
forth in reports and other documents filed by the Company with the
Securities and Exchange Commission from time to time.
Results of Operations
Revenues. During the three month period ended September 30, 1998,
the Company's total revenues were $795,000 compared to $749,000 in
the corresponding quarter in 1997. Revenues for the nine months
ended September 30, 1998 were $2,684,000 compared to $1,557,000 in
the corresponding period of 1997. The Company believes that the
increase in revenues in 1998 compared to 1997 reflects the
increased demand for the Company's new generation product which is
designed to provide advantages in ease of installation, ease of
use and lower cost of ownership. The Company completed it's first
SayGo installation in the quarter ended June 30, 1998.
In the three and nine month periods ended September 30, 1998,
revenues were concentrated among two significant customers within
the supermarket industry comprising 92% and 88% respectively, of
total revenues. For the three and nine month periods ended <PAGE>
<PAGE>
September 30, 1997, revenues were concentrated among three and
four significant customers comprising 93% and 86%, respectively,
of total revenues. There were no software license fees recorded
in the third quarter of 1998 or 1997. For the nine month periods
ended September 30, 1998 and 1997 software license fees were
$122,000 and $122,000, respectively, or 5% and 8%, respectively,
of total revenues.
Maintenance revenues for the three months ended September 30, 1998
increased to $222,000 from $150,000 in the corresponding 1997
period, reflecting an increase in billable maintenance charges.
For the nine months of 1998 maintenance revenues decreased to
$575,000 from $653,000 in the first nine months of 1997 reflecting
the impact of a smaller installed base of the Company's prior
generation system.
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.
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 $990,000 for the three months
ended September 30, 1998, from $1,507,000 for the three months
ended September 30, 1997. Warranty and maintenance expenses
included in cost of goods sold decreased to $139,000 in the three
months ended September 30, 1998 compared to $189,000 for the same
period in 1997. The gross loss (cost of goods sold in excess of
revenues) decreased in the first nine months of 1998 to 28% of
total revenues, from 61% in the comparable 1997 period.
The decrease in the gross loss percentage is due to the increased
revenue volumes. The Company's indirect costs contain fixed
components for depreciation of manufacturing equipment and
amortization of product costs. As the Company's revenues
increased the fixed cost component of the indirect costs decreased
as a percentage of sales. In addition, the Company has improved
the efficiency of the installation process, reducing the
installation time per store substantially.
<PAGE>
<PAGE>
The Company anticipates that system enhancements to be implemented
in 1998 and 1999 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 even further
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 decreased to $2,855,000 for the three month
period ended September 30, 1998, compared to $2,900,000 for the
same period in 1997. This decrease reflects an effort on the part
of the Company to reduce its overhead costs, notwithstanding
inclusion in the 1998 period of costs related to the proposed
combination with Telepanel Systems, Inc. ("Telepanel"). For the
first nine months of 1998 selling, general and administrative
costs increased to $9,128,000 from $8,208,000 in the comparable
1997 period. The 1998 costs include approximately $400,000 of
expenses related to the proposed Telepanel combination, which was
terminated in April, 1998.
Research and Development. Research and development expenses were
$966,000 for the three month period ended September 30, 1998
compared to $931,000 for the same period in 1997. For the nine
months ended September 30, 1998 research and development expenses
were $2,859,000 compared to $2,371,000 for the corresponding
period of the prior year. Such increases reflect expanded
hardware engineering activities and software development costs.
Additionally, for the three and nine month periods ended September
30, 1998 the Company capitalized $126,000 and $373,000,
respectively, of product development software costs. In the
comparable 1997 periods $117,000 and $272,000, 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 decreased to $1,041,000 for the
three month period ended September 30, 1998, compared to
$1,333,000 for the same period in 1997, due to the decreased cash
and cash equivalents available for investment for the period. For
the nine months ended September 30, 1998 interest income decreased
to $3,144,000 from $3,771,000 in the corresponding period of the
prior year. Cash and cash equivalents available for investment
included the proceeds of the private placement sale (the "Private
Placement") in January 1997 of 147,312 units (the "Units"), each
consisting of 13.25% Senior Discount Notes due 2004 with a
principal amount at maturity of $1,000 (the "Senior Discount
Notes") and one warrant (collectively, the "Warrants") to purchase
17.23 shares of common stock, $.01 par value (the "Common Stock"),
of the Company, at $5.23 per share.
<PAGE>
<PAGE>
Interest Expense. Interest expense increased to $4,310,000 for
the three month period ended September 30, 1998, compared to
$3,796,000 for the same period in 1997. For the first nine months
of 1998 interest expense increased to $12,486,000 from $10,149,000
in the first nine months of 1997. Interest expense in 1998 and
1997 included interest on amounts borrowed from the Connecticut
Development Authority ("CDA") and the 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.
Income Taxes. The Company has incurred net losses since inception
which have generated net operating loss carryforwards of
approximately $82 million for federal and state income tax
purposes. These carryforwards are available to offset future
taxable income and begin to expire in the year 2008. In
consideration of the Company's accumulated losses through
September 30, 1998 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, 1998, the Company had net working capital of
$73,294,000, reflecting cash and cash equivalents of $65,715,000,
compared to net working capital of $88,372,000, reflecting cash
and cash equivalents of $82,400,000 at December 31, 1997. The
decrease in net working capital and in cash and cash equivalents
resulted primarily from the funding of the Company's operations
during the first nine months of 1998.
Net cash used in operations was $13,472,000 for the nine months
ended September 30, 1998, compared to net cash of $9,306,000 used
for operating activities for the nine months ended September 30,
1997. In the first nine months of 1998, the net loss of
$22,341,000 included $11,415,000 of non-cash interest expense not
used by operations. 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.
Cash used in investing activities totaled $3,252,000 for the nine
months ended September 30, 1998, compared to $2,053,000 of cash
used in investing activities for the nine months ended September
30, 1997. Investing activities included capital expenditures of
$911,000 and $1,781,000 for the nine months ended September 30,
1998 and 1997, respectively. The note receivable issued in April <PAGE>
<PAGE>
1998 entailed a use of cash of $2,000,000 for the nine months
ended September 30, 1998. The Company also capitalized $373,000
and $272,000 in product development costs in the respective 1998
and 1997 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 offers 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. The Company
completed its first SayGo installation during the quarter ending
June 30, 1998.
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 $39,000 in the first nine
months of 1998 as a result of stock option exercises compared to
$94,698,000 provided by financing activities in the first nine
months of 1997 as a result of the Private Placement.
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
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
(the "Indenture") places limitations on operations and sales of
assets by the Company or its subsidiaries, requires maintenance of
<PAGE>
<PAGE>
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 remains obligated to the CDA for an 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 an adjusted
conversion price calculated 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.
The Company will continue to 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.
In October 1997, the Company and Telepanel executed an agreement
(the "Combination Agreement") providing for the combination of
the Company and Telepanel, as a result of which the Company would
have become the sole beneficial owner of the outstanding Telepanel
common shares. Pursuant to the Combination Agreement, in February <PAGE>
<PAGE>
1998 the Company and Telepanel entered into a joint distribution
agreement (the "Joint Distribution Agreement") providing for the
creation of a joint venture (the "Joint Venture") to hold
specified distribution rights. Under the Joint Distribution
Agreement, in February 1998 the Company advanced the amount of
$2,000,000 to the Joint Venture, which accrued interest, payable
monthly, at the prime rate plus 2.5% per annum, was guaranteed by
Telepanel and its subsidiaries and was secured by all of the
assets of Telepanel and its subsidiaries (such collateral
subordinated in right to specified bank indebtedness but prior in
right to any other interest).
In March 1998, the Company announced that the condition to closing
contained in the Combination Agreement requiring confirmation that
the transactions thereunder would qualify for pooling-of-interests
accounting treatment failed to be satisfied, and that the
Company's Board of Directors determined that it did not intend to
waive the condition to combine regarding qualification for
pooling-of-interests accounting treatment. In April 1998, the
Company and Telepanel executed a formal agreement to terminate the
Combination Agreement, and executed reciprocal releases
thereunder. In addition, the parties agreed: (i) to terminate the
Joint Distribution Agreement, (ii) that the Company would withdraw
its demand for acceleration of repayment of the outstanding
working capital advances to the Joint Venture (as a result of the
failure of the Joint Venture to pay interest when due), and (iii)
that such balances would be due October 2, 1998, subject to
earlier repayment from equity or debt offerings of Telepanel. The
outstanding advances to Telepanel were repaid in full on October
2, 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.
Year 2000
The "year 2000" problem relates to computer systems that have time
and date-sensitive programs that were designed to read years
beginning with "19", but may not properly recognize the year 2000.
If the ShelfNet System or a computer system or software
application used by the Company or a third party dealing with the
Company fails because of the inability of the system or
application to properly read the year "2000", the results may
adversely effect the Company.
<PAGE>
<PAGE>
Accordingly, the Company is reviewing its ShelfNet System and its
internal computer programs and systems to ensure year 2000
compliance. During its current fiscal year, the Company has
established a project team designed to address year 2000 risks in
a methodical manner. The project team is coordinating the
identification and implementation of changes to computer hardware
and software applications of its ShelfNet System and will attempt
to ensure the availability and integrity of the Company's
information systems, and the reliability of its operational
systems and manufacturing processes.
The project team has been collecting pertinent information,
establishing year 2000 disposition strategies and assessing and
reporting risks. The Company's project team provides consulting
services where needed in the areas of project planning and
estimating, testing and technical issues, and runs remedial
projects where needed. The Company does not contemplate an
independent review of its year 2000 risks or estimates, but will
engage experts on specific projects where required.
Like the Company, the Company's retail customers are evaluating
their current hardware and software for year 2000 compliance and
putting plans in place to migrate and upgrade where necessary.
Some retailers are running non-compliant operating systems that
they are working to upgrade. As part of the Company's testing
effort, the Company will be recreating customer environments to
the extent possible, and testing data interfaces and other
applications to ensure year 2000 compliance.
The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and others
with whom the Company transacts business on a worldwide basis do
not comply with year 2000 requirements. The Company's project
team has initiated formal communications with significant
suppliers to determine the extent to which the Company is
vulnerable to their failure to remediate year 2000 issues. The
Company's strategy will entail proactive compliance assessment in
the case of its principal suppliers.
The Company expects to have initial year 2000 renovation and
testing completed during the first quarter of 1999 and expects to
complete its year 2000 project during the first half of 1999,
though there can be no assurance that this time schedule will be
met.
The Company presently believes that its ShelfNet System and its
internal computer systems will be year 2000 compliant in a timely
manner. However, while the Company estimates the cost of these
efforts to be less than $225,000, there can be no assurance that
such costs will not exceed such amount. Based on management's
current assessment that no material exposure to significant
business interruption exists, the Company has not adopted any
formal contingency plan in the event its year 2000 project is not<PAGE>
<PAGE>
completed in a timely manner, or in the event unforeseen
difficulties arise. The Company will appropriately modify its
strategy as additional circumstances come to its attention, but
there can be no assurance that the Company will timely identify
and remediate all significant year 2000 problems, that remedial
efforts will not involve significant additional time and expense,
or that such problems will not have an effect on the Company's
business, results of operations or financial position more
substantial than currently anticipated.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Part II-Other Information
PART II. Other Information
Item 5. OTHER INFORMATION
Stockholder Proposals. Pursuant to amendments to Rule
14a-4 (c) under the Securities Exchange Act of 1934, if
a stockholder who intends to present a proposal at the
Company's 1999 annual meeting of stockholders does not
notify the Company of such proposal on or prior to April
17, 1999 (i.e., 45 days prior to the first anniversary
date of the mailing of the Company's last proxy
statement), then, in such event, the management proxies
would be allowed to use their discretionary voting
authority when the proposal is raised at the annual
meeting even though there is no discussion of the
proposal in the 1999 proxy statement. If the date of the
annual meeting of stockholders changes by more than 30
days from the prior year, then the management proxies
would be allowed to use such discretionary authority with
respect to such proposal if notice of such proposal is
not received by the Company a reasonable time before the
Company mails its proxy materials for such meeting.
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, 1998, the
Company did not file a Current Report on Form 8-K.
The Company has filed a Current Reporting Form 8-K
dated November 6, 1998, reporting the movement of the
Company's Common Stock to the Nasdaq SmallCap Market.
No financial statements were filed 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 13, 1998 s/Bruce F. Failing, Jr.
- ----------------- ------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief Executive Officer
November 13, 1998 s/Patricia A. Carroll
- ----------------- -------------------------
Date Patricia A. Carroll
Vice President of Finance
(principal financial and accounting officer)
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three and Nine Months Ended September 30, 1998
Index to Exhibits
Exhibit Number Document Description
- -------------- --------------------
11 Computation of Basic 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.
<TABLE>
EXHIBIT 11
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net loss $7,370,000 $22,341,000
============ =============
Weighted average common shares
outstanding 21,243,702 21,227,303
============ =============
Basic loss per common share $(0.35) $(1.05)
============ =============
Calculation of weighted average
shares outstanding
Shares issued and outstanding
at December 31, 1997 21,187,035 21,187,035
Issuance of shares pursuant to
stock option plan 56,667 40,268
-------------- -------------
Weighted average common shares
outstanding 21,243,702 21,227,303
============== ==============
</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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 65,715
<SECURITIES> 0
<RECEIVABLES> 1,236
<ALLOWANCES> (352)
<INVENTORY> 10,144
<CURRENT-ASSETS> 79,769
<PP&E> 4,800
<DEPRECIATION> (1,461)
<TOTAL-ASSETS> 88,695
<CURRENT-LIABILITIES> 6,475
<BONDS> 119,898
0
0
<COMMON> 212
<OTHER-SE> (42,990)
<TOTAL-LIABILITY-AND-EQUITY> 88,695
<SALES> 2,109
<TOTAL-REVENUES> 2,684
<CGS> 2,927
<TOTAL-COSTS> 3,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,486
<INCOME-PRETAX> (22,341)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,341)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> 0
</TABLE>
