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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 June 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
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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
------ ------
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 August 11, 1998
-------------------- -------------------------------
Common Stock, $.01 par value 21,243,647 shares
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Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
<CAPTION>
Page Number
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet-June 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statement
of Operations - Three and Six
Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statement of
Cash Flows-Six Months Ended June 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 4. Submission of Matters to a Vote of
Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
/TABLE
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<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share and share amounts)
<CAPTION>
June 30, December 31,
1998 1997
------------ --------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 69,653 $ 82,400
Accounts receivable 245 203
Inventories 10,468 7,273
Note receivable 2,000 -
Prepayments and other current assets 647 978
--------- ---------
Total current assets 83,013 90,854
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Equipment 4,487 5,055
Accumulated depreciation (1,174) (1,753)
--------- ---------
Net equipment 3,313 3,302
--------- ---------
Other non-current assets 5,757 6,052
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Total assets $ 92,083 $ 100,208
========= =========
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses $ 1,576 $ 2,482
--------- ---------
Total current liabilities 1,576 2,482
--------- ---------
Long-term debt
CDA Note, 7.4% 4,995 4,993
Senior Discount Notes, 13.25% 115,826 108,109
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Total long-term debt 120,821 113,102
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Common stock purchase warrants 5,100 5,100
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Commitments - -
--------- ---------
Stockholders' deficit
Common stock (par value $0.01 per share;
35,000,000 and 25,000,000 shares authorized,
21,233,647 and 21,187,035 shares issued
and outstanding in 1998 and 1997) 212 211
Additional paid-in capital 51,360 51,328
Accumulated deficit (86,986) (72,015)
--------- --------
Total stockholders' deficit (35,414) (20,476)
--------- --------
Total liabilities and stockholders' deficit $ 92,083 $100,208
========= ========
See accompanying notes to condensed consolidated financial statements
/TABLE
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<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Product sales $ 633 $ 51 $ 1,536 $ 305
Maintenance 205 237 353 503
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Total revenues 838 288 1,889 808
------- ------- -------- --------
Costs of goods sold
Product sales 884 250 2,076 573
Maintenance 190 184 372 426
------- ------- -------- --------
Total cost of goods sold 1,074 434 2,448 999
------- ------- -------- --------
Gross profit (loss) (236) (146) (559) (191)
------- ------- -------- --------
Operating expenses
Selling, general and
administrative 2,215 3,290 6,273 5,308
Research and development 1,295 951 1,893 1,440
Depreciation and amortization 112 75 173 116
------- ------- -------- --------
Total operating expenses 3,622 4,316 8,339 6,864
------- ------- -------- --------
Loss from operations (3,858) (4,462) (8,898) (7,055)
------- ------- -------- --------
Other income (expenses)
Interest income 1,011 1,392 2,103 2,438
Interest expense (4,131) (3,630) (8,176) (6,353)
------- ------- -------- --------
Total other expenses (3,120) (2,238) (6,073) (3,915)
------- ------- -------- --------
Net loss $(6,978) $(6,700) $(14,971) $(10,970)
======= ======= ======== ========
Earnings (loss) per common share
Weighted average common shares
outstanding 21,231 21,087 21,219 21,071
======= ======= ======== ========
Basic loss per common share $ (0.33) $ (0.32) $ (0.71) $ (0.52)
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
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Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss $(14,971) $(10,970)
Other adjustments to reconcile net loss
to cash used in operating activities 4,990 7,332
-------- --------
Cash used in operating activities (9,981) (3,638)
-------- --------
Cash Flows Used in Investing Activities:
Capital expenditures (581) (745)
Disposal of fixed assets 30 -
Issuance of note receivable (2,000) -
Capitalized product development costs (248) (155)
-------- --------
Cash used in investing activities (2,799) (900)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt - 89,553
Proceeds from issuance of common stock
purchase warrants - 5,100
Net proceeds from issuance of common stock 33 75
-------- --------
Cash provided by financing activities 33 94,728
-------- --------
Net (decrease) increase in cash
and cash equivalents (12,747) 90,190
-------- --------
Cash and cash equivalents at beginning of period 82,400 8,198
-------- --------
Cash and cash equivalents at end of period $ 69,653 $ 98,388
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 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
six month periods ended June 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 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.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
Cash and cash equivalents at June 30, 1998 include deposits
of approximately $42,000, held as interest bearing collateral
for irrevocable letters of credit of the same amounts
relating to future inventory purchases. One such letter of
credit expires in January, 1999.
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
June 30, 1998 consist of $2,898,000 of materials and supplies
and $7,570,000 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 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.
<PAGE>
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Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 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 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.<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(unaudited)
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>
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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 June 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 June 30, 1998, the Company has generated cumulative
revenues of $16.4 million, and has incurred a cumulative net loss
of approximately $107.6 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<PAGE>
<PAGE>
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 Financial Accounting Standard 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 June 30, 1998, the
Company's total revenues were $838,000 compared to $288,000 in the
corresponding quarter of 1997. Revenues for the six months ended
June 30, 1998 were $1,889,000 compared to $808,000 in the
corresponding period of 1997. The increase in revenues in 1998
compared to 1997 reflects installation of the Company's new
generation product. The Company completed its first SayGo
installation in the quarter ended June 30, 1998.
In the three and six month periods ended June 30, 1998, revenues
were concentrated between two significant customers within the
supermarket industry comprising 91% and 86%, of total revenues,
respectively. For the three and six month periods ended June 30,
1997, revenues were concentrated among four and five significant
customers comprising 81% and 85%, of total revenues, respectively.
For the six month periods ended June 30, 1998 and 1997 software
license fees were $122,000 and $122,000, respectively, or 6% and
15%, respectively, of total revenues. There were no software
license fees recorded in the second quarters of 1998 or 1997.
Maintenance revenues for the three months ended June 30, 1998
decreased to $205,000 from $237,000 in the corresponding 1997
period, reflecting a reduced customer base of the previous
generation product. For the first half of 1998 maintenance
revenues decreased to $353,000 from $503,000 in the first half of
1997.
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,<PAGE>
<PAGE>
amortization of capitalized product development costs, warranty
and maintenance costs, freight and inventory obsolescence charges.
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 $1,074,000 for the three months
ended June 30, 1998, from $434,000 for the three months ended June
30, 1997, reflecting increased product sales. Warranty and
maintenance expenses included in cost of goods sold increased to
$190,000 in the three months ended June 30, 1998 compared to
$184,000 for the same period in 1997. The gross loss (cost of
goods sold in excess of revenues) decreased in the second quarter
of 1998 to 28% of total revenues, from 51% in the comparable 1997
period.
The decrease in the gross loss as a percentage of revenues is due
primarily to the increased revenue volumes. The Company's
indirect costs contain fixed components for depreciation of
manufacturing equipment and amortization of capitalized product
development costs. As the Company's revenues have increased, the
fixed cost component of the indirect costs have decreased as a
percentage of revenues. In addition, the Company has improved the
efficiency of the installation process, reducing the installation
time per store by approximately 50 percent compared to the
installation time per store required for the prior generation
system.
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 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 $2,215,000 for the three month
period ended June 30, 1998, compared to $3,290,000 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"). In
addition, the Company shifted some of its resources to research
and development in order to better meet customer integration
requirements. For the first six months of 1998 selling, general
and administrative costs increased to $6,273,000 from $5,308,000
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.<PAGE>
<PAGE>
Research and Development. Research and development expenses were
$1,295,000 for the three month period ended June 30, 1998 compared
to $951,000 for the same period in 1997. For the six months ended
June 30, 1998 research and development expenses were $1,893,000
compared to $1,440,000 for the corresponding period of the prior
year. Such increases reflect expanded hardware engineering
activities and software development of the ERS ShelfNet System.
Additionally, for the three and six month periods ended June 30,
1998 the Company capitalized $99,000 and $248,000, respectively,
of product development software costs. In the comparable 1997
periods $80,000 and $155,000, 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 $1,011,000 for the
three month period ended June 30, 1998, compared to $1,392,000 for
the same period in 1997, due to the decreased cash and cash
equivalents available for investment during the period. For the
six months ended June 30, 1998 interest income decreased to
$2,103,000 from $2,438,000 in the corresponding period of the
prior year. 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 "Warrants") to purchase
17.23 shares of common stock, $.01 par value (the "Common Stock"),
of the Company, at $5.23 per share.
Interest Expense. Interest expense increased to $4,131,000 for
the three month period ended June 30, 1998, compared to $3,630,000
for the same period in 1997. For the first half of 1998 interest
expense increased to $8,176,000 from $6,353,000 in the first half
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 $78 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 June 30,
1998 and the uncertainty of its ability to utilize any future tax<PAGE>
<PAGE>
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 June 30, 1998, the Company had net working capital of
$81,437,000, reflecting cash and cash equivalents of $69,653,000,
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 half of 1998.
Net cash used in operations was $9,981,000 for the six months
ended June 30, 1998, compared to net cash of $3,638,000 used for
operating activities for the six months ended June 30, 1997. In
the first six months of 1998, the net loss of $14,971,000 included
$7,473,000 of non-cash interest expense not used in operations. In
the first six months of 1997, the net loss of $10,970,000 included
$6,156,000 of non-cash interest expense not used in operations.
Cash used in investing activities totaled $2,799,000 for the six
months ended June 30, 1998, compared to $900,000 of cash used in
investing activities for the six months ended June 30, 1997.
Investing activities included capital expenditures of $581,000 and
$745,000 for the six months ended June 30, 1998 and 1997,
respectively. During the first half of 1998, the Company issued
a note receivable in the amount of $2,000,000 in connection with
its joint distribution arrangements with Telepanel, as described
below. The Company also capitalized $248,000 and $155,000 in
product development costs for the six months ended June 30 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. The Company
completed its first SayGo installation during the quarter ended
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<PAGE>
<PAGE>
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 $33,000 in the first six
months of 1998 as a result of stock option exercises compared to
$94,728,000 provided by financing activities in the first six
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 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 Warrants are 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"), 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<PAGE>
<PAGE>
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
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.<PAGE>
<PAGE>
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
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 1, 1998, the Company convened its Annual
Meeting of Stockholders (the "Annual Meeting").
(b) Not applicable because (i) proxies for the Annual
Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934 together
with the Company's Proxy Statement dated May 5,
1998; (ii) there was no solicitation in opposition
to management's nominees as listed in such Proxy
Statement; and (iii) all of such nominees were
elected.
(c) At the Annual Meeting, the Company's stockholders
voted in favor of the election of management's
nominees for election as directors of the Company.
The holders of 14,907,468 shares voted in favor
of, and the holders of 62,702 shares withheld
their vote for, the election of Paul A. Biddelman;
the holders of 14,910,368 shares voted in favor
of, and the holders of 61,802 shares withheld
their vote for, the election of David Diamond; the
holders of 14,910,368 shares voted in favor of,
and the holders of 61,802 shares withheld their
vote for, the election of Bruce F. Failing, Jr.;
the holders of 14,910,368 shares voted in favor
of, and the holders of 61,802 shares withheld
their vote for, the election of Norton Garfinkle;
and the holders of 14,910,368 shares voted in
favor of, and the holders of 61,802 shares
withheld their vote for, the election of Donald E.
Zilkha.
At the Annual Meeting, the stockholders voted in
favor of a proposal to approve an amendment to the
Company's 1993 Employee Stock Option Plan in order
to increase the number of shares issuable pursuant
to the exercise of options under such plan from
1,775,000 to 3,500,000 shares of Common Stock of
the Company. The holders of 13,147,705 shares
voted in favor of, the holders of 484,297 shares
voted against, and the holders of 11,600 shares
abstained with respect to approval of such
proposal.
<PAGE>
<PAGE>
At the Annual Meeting, the Company's stockholders
voted in favor of a proposal to approve an
amendment to the Company's 1993 Director Stock
Option Plan in order to increase the number of
shares issuable pursuant to the exercise of
options under such plan from 150,000 to 750,000
shares of Common Stock of the Company. The
holders of 13,492,516 shares voted in favor of,
the holders of 139,586 shares voted against, and
the holders of 11,600 shares abstained with
respect to approval of such proposal.
(d) Not applicable.
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 June 30, 1998, the
Company filed a Current Report on Form 8-K dated
April 22, 1998 addressing, under "Item 5. Other
Events" thereunder, the execution of a termination
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.
August 13, 1998 s/Bruce F. Failing, Jr.
- --------------- -----------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief
Executive Officer
August 13, 1998 s/Patricia A. Carroll
- --------------- -----------------------------
Date Patricia A. Carroll
Vice President, Finance
(principal financial and accounting
officer)
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three and Six Months Ended June 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.
Exhibit 11
<TABLE>
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Net loss $ 6,978,000 $10,970,000
=========== ===========
Weighted average common shares outstanding 21,231,138 21,218,967
=========== ===========
Basic loss per common share $(0.33) $(0.52)
=========== ===========
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 44,103 31,932
----------- -----------
Weighted average common shares outstanding 21,231,138 21,218,967
=========== ===========
</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 SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 69,653
<SECURITIES> 0
<RECEIVABLES> 556
<ALLOWANCES> (311)
<INVENTORY> 10,468
<CURRENT-ASSETS> 83,013
<PP&E> 3,313
<DEPRECIATION> (1,174)
<TOTAL-ASSETS> 92,083
<CURRENT-LIABILITIES> 1,576
<BONDS> 120,821
0
0
<COMMON> 212
<OTHER-SE> (35,626)
<TOTAL-LIABILITY-AND-EQUITY> 92,083
<SALES> 1,536
<TOTAL-REVENUES> 1,889
<CGS> 2,076
<TOTAL-COSTS> 2,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,176
<INCOME-PRETAX> (14,971)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,971)
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0
</TABLE>
