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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 March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21456
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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
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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 April 30, 1998
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Common Stock, $.01 par value 21,230,247 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--
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statement of
Operations--Three Months Ended
March 31, 1998 and 1997 4
Condensed Consolidated Statement of Cash
Flows--Three Months Ended March 31,
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 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>
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 73,691 $ 82,400
Accounts receivable 646 203
Inventories 9,582 7,273
Note receivable 2,036 --
Prepayments and other current assets 998 978
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Total current assets 86,953 90,854
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Equipment 5,260 5,055
Accumulated depreciation (2,009) (1,753)
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Net equipment 3,251 3,302
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Other non-current assets 5,838 6,052
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Total assets $ 96,042 $100,208
======== ========
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses $ 2,479 $ 2,482
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Total current liabilities 2,479 2,482
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Long-term debt
CDA Note, 7.4% 4,994 4,993
Senior Discount Notes, 13.25% 111,927 108,109
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Total long-term debt 116,921 113,102
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Common stock purchase warrants 5,100 5,100
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Commitments -- --
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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 and 25,000,000 shares authorized,
21,228,747 and 21,187,135 shares issued and
outstanding in 1998 and 1997) 212 211
Additional paid-in capital 51,338 51,328
Accumulated deficit (80,008) (72,015)
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Total stockholders' deficit (28,458) (20,476)
-------- --------
Total liabilities and stockholders' deficit $ 96,042 $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
March 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Revenues
Product sales $ 903 $ 254
Maintenance 148 266
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Total revenues 1,051 520
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Costs of goods sold
Product sales 1,192 323
Maintenance 182 242
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Total cost of goods sold 1,374 565
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Gross profit (loss) (323) (45)
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Operating expenses
Selling, general and administrative 4,058 2,017
Research and development 598 490
Depreciation and amortization 61 41
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Total operating expenses 4,717 2,548
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Loss from operations (5,040) (2,593)
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Other income (expenses)
Interest income 1,092 1,046
Interest expense (4,045) (2,723)
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Total other income (expenses) (2,953) (1,677)
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Net loss $ (7,993) $ (4,270)
======== ========
Earnings (loss) per common share
Weighted average common shares
outstanding 21,207 21,055
======== ========
Basic loss per common share $ (0.38) $ (0.20)
======== ========
See accompanying notes to condensed consolidated
financial statements
</TABLE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($7,993) ($ 4,270)
Other adjustments to reconcile net loss
to net cash used in operating activities 1,577 3,198
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Cash used in operating activities (6,416) (1,072)
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Cash Flows Used in Investing Activities:
Capital expenditures (205) (199)
Note receivable (2,000) --
Capitalized product development costs (99) (75)
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Cash used in investing activities (2,304) (274)
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Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt -- 89,900
Proceeds from issuance of common stock
purchase warrants -- 5,100
Net proceeds from issuance of common stock 11 75
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Cash provided by financing activities 11 95,075
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Net (decrease) increase in cash and
cash equivalents (8,709) 93,729
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Cash and cash equivalents at
beginning of period 82,400 8,198
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Cash and cash equivalents at end of period $73,691 $101,927
======= ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 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 month period ended March 31, 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 common 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.
Cash and cash equivalents at March 31, 1998 include deposits of
approximately $1,066,000, 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 1998.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(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 March 31,
1998 consist of $1,829,000 of materials and supplies and
$7,753,000 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 "1997 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 Private Placement
approximated $95 million.
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.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(unaudited)
Note 5 -Terminated 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 accrues interest,
payable monthly, at the prime rate plus 2.5% per annum, is
guaranteed by Telepanel and its subsidiaries and is 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). Such amounts are repayable as
hereinafter described.
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 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. On April 22, 1998, the
Company and Telepanel 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 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 5, 1998, subject to earlier
repayment from equity or debt offerings of Telepanel.
<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 March 31,
1998, approximately 140 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(R) System (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 March 31, 1998, the Company has
generated cumulative revenues of $15.6 million, and has incurred
a cumulative net loss of approximately $100.6 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
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.<PAGE>
<PAGE>
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. Such assets will be subject to periodic impairment
testing as prescribed by Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of."
Results of Operations
Revenues. During the three-month period ended March 31, 1998, the
Company's total revenues were $1,051,000 compared to $520,000 in
the corresponding quarter in 1997. The increase in revenues in
1998 compared to 1997 reflects installation of the Company's new
generation product.
In the three month period ended March 31, 1998, revenues were
concentrated among three significant customers within the
supermarket industry comprising 94% of total revenues. For the
three-month period ended March 31, 1997, revenues were
concentrated among five significant customers comprising 91% of
total revenues. For the three month periods ended March 31, 1998
and 1997 software license fees were $122,000, respectively, or
12% and 23% of product sales. Maintenance revenues for the three
months ended March 31, 1998 decreased to $148,000 from $266,000 in
the corresponding 1997 period, reflecting a reduced customer base
of the previous generation product.
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 increased to $1,374,000 for the three months
ended March 31, 1998, from $565,000 for the three months ended
March 31, 1997, reflecting increased product sales. Warranty and
maintenance expenses included in cost of goods sold decreased to
$182,000 in the three months ended March 31, 1998 compared to
$242,000 for the same period in 1997, reflecting the reduced
customer base of the previous generation products. As a result,<PAGE>
<PAGE>
the gross loss (cost of goods sold in excess of revenues)
increased in the first quarter of 1998 to 31% of total revenues,
from 9% in the comparable 1997 period.
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 has experienced high initial
material costs and installation inefficiencies. Additionally, for
the three-month period ended March 31, 1998, 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 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 $4,058,000 for the three-month
period ended March 31, 1998, compared to $2,017,000 for the same
period in 1997. This increase reflects efforts to expand the
Company's organization in anticipation of sales growth and direct
costs associated with the proposed Telepanel arrangement, which
was formally terminated in April 1998.
Research and Development. Research and development expenses were
$598,000 for the three-month period ended March 31, 1998 compared
to $490,000 for the same period in 1997. Such increases
principally reflect expanded hardware engineering activities.
Additionally, for the three-month period ended March 31, 1998 the
Company capitalized $99,000 of product development software costs.
In the comparable 1997 period $75,000 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 $1,092,000 for the
three month period ended March 31, 1998, compared to $1,046,000
for the same period in 1997. Cash and cash equivalents available
for investment included the proceeds of the private 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 "1997
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 $4,045,000 for
the three-month period ended March 31, 1998, compared to
$2,723,000 for the same period in 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 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 1997 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 $74 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 March
31, 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 March 31, 1998, the Company had net working capital of
$84,474,000, reflecting cash and cash equivalents of $73,691,000,
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 quarter of 1998.
Net cash used in operations was $6,416,000 for the three months
ended March 31, 1998, compared to net cash of $1,072,000 used in
operating activities for the three months ended March 31, 1997,
resulting primarily from the net losses of $7,993,000 and
$4,270,000, respectively, for such periods. In the first three
months of 1998, the net loss of $7,993,000 included $3,697,000 of
non-cash interest expense not used in operations. In the first
three months of 1997, the net loss of $4,270,000 included
$2,468,000 of non-cash interest expense not used in operations.
Cash used in investing activities totaled $2,304,000 for the three
months ended March 31, 1998, compared to $274,000 of cash used in
investing activities for the three months ended March 31, 1997.
Investing activities included capital expenditures of $205,000 and
$199,000 for the three months ended March 31, 1998 and 1997,
respectively. During the first quarter of 1998, the Company
recorded a note receivable in the amount of $2,000,000 in the
context of its joint distribution arrangements with Telepanel, as
described below. The Company also capitalized $99,000 and $75,000<PAGE>
<PAGE>
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 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.
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 $11,000 in the first three
months of 1998 as a result of stock option exercises compared to
$95,075,000 provided by financing activities in the first three
months of 1997 primarily 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 the 1997 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
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 1997 Warrants are, since to January 24,<PAGE>
<PAGE>
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 (the "CDA Note"),
repayable five years after the August 1994 closing and convertible
to shares of Common Stock, at an adjusted conversion price
calculated at $3.00 plus the average 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
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 accrues interest, payable
monthly, at the prime rate plus 2.5% per annum, is guaranteed by
Telepanel and its subsidiaries and is 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<PAGE>
<PAGE>
other interest). All amounts advanced by the Company to the Joint
Venture are repayable as described below.
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. On April 22, 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 5, 1998, subject to
earlier repayment from equity or debt offerings of Telepanel.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and
related arrangements, and the Company may consider additional
transactions, consistent with the provisions of the Indenture,
that will further enhance its liquidity. The Company has not
reached any determination with respect to the size or nature of
any such transaction, or whether any such transaction will be
undertaken, and there can be no assurance that any such
transaction will be effected.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Part II-Other Information
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 March 31, 1998,
the Company did not file a Current Report
on Form 8-K. The Company has filed a
Current Report on Form 8-K dated April 22,
1998 reporting the termination of its
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.
May 14, 1998 s/Bruce F. Failing, Jr.
- --------------- -----------------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief Executive Officer
May 14, 1998 s/Patricia Carroll
- --------------- ------------------------------------
Date Patricia Carroll
Vice President, Finance
(principal financial and accounting officer)
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three Ended March 31, 1998
Index to Exhibits
Exhibit Number Document Description
- -------------- --------------------
10.1 Amendment No. 2 dated April 25, 1998 to
Restated Stockholders Agreement dated
March 12, 1993
10.2 Termination Agreement dated April 22,
1998 among the Company, Telepanel
Systems Inc. and Telepanel/ERS Joint
Venture, Inc. (Incorporated by reference
to Exhibit 5(a) to Current Report on
Form 8-K dated April 22, 1998)
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.
EXHIBIT 10.1
AMENDMENT NO. 2 TO STOCKHOLDERS' AGREEMENT
Amendment No. 2 dated as of April 15, 1998 to the
Stockholders' Agreement dated as of March 12, 1993, as amended
October 29, 1997 (the "Stockholders' Agreement"), among Norton
Garfinkle, The G/N Garfinkle Trust, Bruce F. Failing, Jr., The
Failing Trust, and Elizabeth Z. Failing.
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to the Stockholders'
Agreement, whereunder they have agreed to certain rights and
restrictions with respect to the common stock, $.01 par value, of
Electronic Retailing Systems International, Inc., a Delaware
corporation (the "Company"), held thereby, as well as certain other
obligations with respect to the Company; and
WHEREAS, the parties hereto desire to modify certain terms of
the Stockholders' Agreement in accordance with this Amendment No.
2;
NOW, THEREFORE, in consideration of the mutual premises and
agreements hereinafter set forth, the parties hereto hereby agree
as follows:
1. Paragraph 5 of the Stockholders' Agreement is hereby amended
so that it provides as follows:
5. Board of Directors. As stockholders of the
Company, Garfinkle and Failing will vote all of
their shares of Common Stock, and/or use their best
efforts to cause their Related Transferees to vote,
at all times during the term of this Agreement to
provide that there will be not more than 7
directors of the Company and will vote for the
election as directors of 6 persons (or such lesser
number equivalent to the then current number of
directors) designated by Garfinkle and Failing, in
proportion to the respective holdings of shares of
Garfinkle and his Related Transferees and Failing
and his Related Transferees, and this division of
directors will be maintained in the case of
directors' vacancies, deaths, disabilities or other
events. Either Garfinkle or Failing may designate
himself as one of the directors.
2. Except as set forth or amended herein, the Stockholders'
Agreement shall remain in full force and effect, without
waiver of or abridgment of any rights of any party, and
continue to bind the parties hereto.
<PAGE>
<PAGE>
3. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment
No. 2 as of the date first above written.
GARFINKLE LIMITED PARTNERSHIP I
By: G.F. Management Corp.
s/Norton Garfinkle By s/Norton Garfinkle
- --------------------------- -----------------------------
Norton Garfinkle
THE G/N GARFINKLE TRUST GARFINKLE LIMITED PARTNERSHIP II
By: G.F. Management Corp.
By s/Norton Garfinkle By s/Norton Garfinkle
------------------------- -----------------------------
Norton Garfinkle, Trustee
s/Bruce F. Failing, Jr.
- ---------------------------
Bruce F. Failing, Jr.
THE FAILING TRUST
By s/Leigh Q. Failing
-------------------------
Leigh Q. Failing
By s/Elizabeth F. Failing
-------------------------
Elizabeth F. Failing
s/Elizabeth Z. Failing
- ---------------------------
Elizabeth Z. Failing
<TABLE>
Exhibit 11
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months
Ended
March 31, 1998
--------------
<S> <C>
Net Loss ($ 7,999,300)
============
Weighted average common shares outstanding 21,206,660
============
Earnings (loss) per common share ($0.38)
============
Calculation of weighted average shares outstanding
- --------------------------------------------------
Shares issued and outstanding at Dec. 31, 1997 21,187,035
Issuance of shares pursuant to stock option plan 19,625
------------
Weighted average common shares outstanding 21,206,660
============
</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 THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STAEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 73,691
<SECURITIES> 0
<RECEIVABLES> 916
<ALLOWANCES> (270)
<INVENTORY> 9,582
<CURRENT-ASSETS> 86,953
<PP&E> 5,260
<DEPRECIATION> (2,009)
<TOTAL-ASSETS> 96,042
<CURRENT-LIABILITIES> 2,479
<BONDS> 116,921
0
0
<COMMON> 212
<OTHER-SE> (28,670)
<TOTAL-LIABILITY-AND-EQUITY> 96,042
<SALES> 903
<TOTAL-REVENUES> 1,051
<CGS> 1,192
<TOTAL-COSTS> 1,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,045
<INCOME-PRETAX> (7,993)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,993)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0
</TABLE>
