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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, 1999
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
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(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, 1999
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Common Stock, $.01 par value 21,252,637 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, 1999 and December 31, 1998 3
Condensed Consolidated Statement of
Operations--Three Months Ended
March 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash
Flows--Three Months Ended March 31,
1999 and 1998 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,
1999 1998
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 61,157 $ 63,877
Accounts receivable 622 1,260
Inventories 6,005 6,612
Prepayments and other current assets 770 1,159
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Total current assets 68,554 72,908
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Equipment 5,636 5,113
Accumulated depreciation (1,700) (1,462)
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Net equipment 3,936 3,651
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Other non-current assets 4,816 5,067
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Total assets $ 77,306 $ 81,626
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 2,321 $ 2,214
Notes payable 4,998 4,997
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Total current liabilities 7,319 7,211
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Long-term debt
Senior Discount Notes, 13.25% 128,401 124,057
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Common stock purchase warrants 5,100 5,100
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Commitments - -
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Stockholders' deficit
Common stock (par value $0.01 per share;
35,000,000 authorized, 21,249,447 shares
issued and outstanding in 1999 and 1998) 212 212
Additional paid-in capital 51,374 51,374
Accumulated deficit (115,100) (106,328)
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Total stockholders' deficit (63,514) (54,742)
-------- --------
Total liabilities and stockholders' deficit $ 77,306 $ 81,626
======== ========
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,
-------------------------
1999 1998
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<S> <C> <C>
Revenues
Product sales $ 637 $ 903
Maintenance 161 148
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Total revenues 798 1,051
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Costs of goods sold
Product sales 1,294 1,192
Maintenance 165 182
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Total cost of goods sold 1,459 1,374
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Gross loss (661) (323)
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Operating expenses
Selling, general and administrative 2,989 3,887
Research and development 1,138 769
Depreciation and amortization 96 61
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Total operating expenses 4,223 4,717
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Loss from operations (4,884) (5,040)
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Other income (expenses)
Interest income 713 1,092
Interest expense (4,593) (4,045)
Loss on disposals (8) -
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Total other expenses (3,888) (2,953)
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Net loss $ (8,772) $ (7,993)
======== ========
Earnings (loss) per share
Weighted average common shares
outstanding 21,249 21,207
======== ========
Basic loss per common share $ (0.41) $ (0.38)
======== =========
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>
Three Months Ended
March 31,
------------------
1999 1998
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<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($8,772) ($7,993)
Other adjustments to reconcile
net loss to net cash used in
operating activities 6,649 1,577
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Cash used in operating activities (2,123) (6,416)
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Cash Flows Used in Investing Activities:
Capital expenditures (609) (205)
Disposal of Fixed Assets 12 --
Note Receivable -- (2,000)
Capitalized product development
costs -- (99)
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Cash used in investing activities (597) (2,304)
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Cash Flows from Financing Activities:
Net proceeds from issuance of
common stock -- 11
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Cash provided by financing
activities -- 11
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Net decrease in cash and cash
equivalents (2,720) (8,709)
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Cash and cash equivalents at beginning
of period 63,877 82,400
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Cash and cash equivalents at end of
period $61,157 $73,691
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(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.
The Company has sustained net losses and negative cash flows
from operations since its inception and management expects
these conditions to continue into the year ending December
31, 1999. Management believes that existing resources will
enable the Company to fund operations through the year ending
December 31, 2000; thereafter, the Company may need to raise
additional long-term financing to support operations and
service debt. There can be no assurance that additional
financing would be available on terms reasonable to the
Company.
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, the year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required
under generally accepted accounting principles.
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, 1999 are not necessarily
indicative of the results to be expected for the full year
ending December 31, 1999. 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, 1998, included
in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions covering a broad spectrum
of the Company's financial activities, and while the Company
believes these estimates to be prudent, there exists a
possibility that unexpected events might affect these
estimates. While actual results could differ from those
estimates, management believes that any one event would not
have a material effect on the Company's future operating
results. The Company's future results and inventory valuation
could be adversely affected by a number of factors, including
(a) the timely availability and acceptance of electronic
shelf labeling systems, (b) the impact of competitive
products and pricing, and (c) the Company's ability to obtain
system components from suppliers.
Earnings (loss) per common share is computed using the
weighted average number of common shares and common share
equivalents assumed to be outstanding during the period.
Common share equivalents consist of the Company's common
shares issuable upon exercise of stock options and stock
purchase warrants. The computation of earnings (loss) per
common share does not reflect common share equivalents that
are anti-dilutive.
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, 1999 consist of $2,306,000 of materials and
supplies and $3,699,000 of finished goods. Inventories at
December 31, 1998 consisted of $2,167,000 of materials and
supplies and $4,445,000 of finished goods. Inventories in
excess of expected requirements due to new product
introductions or product enhancements are expensed currently.
Note 4 -Sale of Senior Discount Notes and Warrants:
In January1997, the Company completed the sale, in a private
offering (the "Private Placement"), of 147,312 Units
("Units") consisting of $147,312,000 principal amount at
maturity of 13.25% Senior Discount Notes due February 1, 2004
(the "Notes") together with warrants (the "Warrants") to
purchase an aggregate of 2,538,258 shares of Common Stock, at
an exercise price of $5.23 per share, exercisable from the
period commencing on the first anniversary of closing through
February 1, 2004.
The Units were sold to investors at a price aggregating $100
million, representing a yield to maturity on the Notes of
13.25%. No cash interest will accrue on the Notes prior to
February 1, 2000. Interest will be payable thereafter on
February 1 and August 1 of each year commencing August 1,<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
2000. The Notes are non-callable prior to February 1, 2001.
Upon specified change in control events, each holder has the
right to require the Company to purchase its Note at a
specified price. The net proceeds to the Company from the
sale of the Units approximated $95 million, of which $5.1
million was attributed to the Warrants based on an estimate
of their fair value.
The indenture under which the Notes were issued places
limitations on operations and sales of assets by the Company
or its subsidiaries, requires maintenance of certain
financial ratios in order for the Company to incur additional
indebtedness (subject to specified exceptions), requires the
delivery by the Company's subsidiaries of guaranties if
specified debt is subsequently incurred by such subsidiaries,
and limits the Company's ability to pay cash dividends or
make other distributions to the holders of its capital stock
or to redeem such stock.
With the consummation of the Private Placement in January
1997, the Company commenced recording interest on an amount
equal to the gross proceeds from the Private Placement plus
prior recorded and unpaid interest at the annual rate of
13.25%. Additional expense is being recorded as a result of
the amortization of the discount recorded on the Notes (for
value attributed to the warrants) and the amortization of the
costs of issuance.
Note 5 -New Accounting Standard:
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which the Company is required to adopt
effective beginning January 1, 2000. The Company is
currently evaluating the impact on its financial statements
of adopting the standard and will comply as required;
however, the impact is not expected to be material on the
Company's financial statements.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities". This SOP is
effective January 1, 1999 and generally requires that all
start up costs, as defined, be expensed as incurred. Adoption
of this standard did not have a material effect on the
Company's financial statements.
<PAGE>
<PAGE>
Item 2. 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,
1999, approximately 170 stores in the United States were operating
such systems, out of a potential market in excess of 100,000
supermarkets and other stores. As a result, 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, and there can be no assurance that
supermarket chains will choose to install ESL systems in a
significant number of stores.
Since its inception in 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. The Company has never been
profitable and has incurred significant net operating losses and
negative cash flow from operations to date. Since inception and
through March 31, 1999, the Company has generated cumulative
revenues of $19.1 million, and has incurred a cumulative net loss
of approximately $135.7 million. The Company expects losses and
negative cash flow from operations to continue in the current
fiscal year, and the accumulated deficit will increase, while the
Company concentrates on the foregoing activities and unless it has
established a sufficient revenue generating customer base.
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 also markets its ERS ShelfNet
System on a fee based arrangement under its SayGo Plan. 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.
The Company intends, during its current fiscal year, to develop
additional strategies to accelerate market recognition and
acceptance of the system and its benefits, but there can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
system in the emerging market for ESLs.
<PAGE>
<PAGE>
In order to pursue its strategy of greater market penetration
while its operations grow, the Company has incurred indebtedness
that is substantial in relation to its stockholders' deficit. As
of March 31, 1999, the Company had recorded total outstanding
indebtedness of approximately $133.4 million and a total
stockholders' deficit of $63.5 million. As a result of its high
degree of leverage (and as more fully-described below under
"Liquidity and Capital Resource"): (i) a substantial portion of
the Company's cash flow from operations, if any, after February 1,
2000, will be required to be dedicated to the Company's interest
expense obligations and may not be available to the Company for
its operations, working capital, capital expenditures or other
purposes, (ii) the Company's ability to obtain financing that may
be needed may be limited, (iii) the Company's flexibility to
adjust to changing market conditions and ability to withstand
competitive pressures as compared to less highly-leveraged
competitors could be limited (including by reason of the covenants
contained in the Company's debt instruments), and (iv) the Company
may be more vulnerable to downturns in general economic conditions
or in its business or be unable to undertake capital expenditures
that are important for its growth strategy, any of which could
have a material adverse effect on the Company and its ability to
make payments of principal of, and interest on, its indebtedness.
Commencing August 1, 2000, cash interest on the Company's Senior
Discount Notes (the "Senior Discount Notes") will be payable semi-
annually at the rate of 13-1/4% per annum (approximately $19.5
million per year). The full accreted principal amount at maturity
of the Senior Discount Notes of $147,312,000 will become due on
February 1, 2004. The Company's ability to meet its continuing
debt service and other obligations will depend largely on the
extent to which the Company can implement successfully its
business strategy of achieving large-scale commercialization of
the ERS ShelfNet System, and there can be no assurance that the
Company will be able to implement fully its strategy, that the
anticipated results of its strategy will be realized, or that the
Company will be able to generate sufficient cash flow or otherwise
obtain funds in the future to cover interest and principal
payments associated with the Senior Discount Notes and any other
debt of the Company. See "Liquidity and Capital Resources" below.
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 document, 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 ability to obtain system
components from suppliers, the management of growth, and other
factors set forth in reports and other documents filed by the
Company with the Securities and Exchange Commission from time to
time.<PAGE>
<PAGE>
Results of Operations
Revenues. During the three month period ended March 31, 1999, the
Company's total revenues were $798,000 compared to $1,051,000 in
the corresponding quarter in 1998. The decrease in revenues in
1999 compared to 1998 reflects the impact of the Company's SayGo
transactions which recognize revenues as monthly usage and other
fees. In the first quarter of 1999, the Company placed two
systems through sales and five systems under the SayGo plan; in
the comparable period in 1998 two systems were placed through
sales.
In the three month period ended March 31, 1999, revenues were
concentrated among two significant customers within the
supermarket industry comprising 88% of total revenues. For the
three month period ended March 31, 1998, revenues were
concentrated among three significant customers comprising 94% of
total revenues. There were no software license fees for the three
month period ended March 31, 1999 compared to $122,000 of software
license fees recorded in the first quarter of 1998.
Maintenance revenues for the three months ended March 31, 1999
increased to $161,000 from $148,000 in the corresponding 1998
period, reflecting additional maintenance from a larger customer
base of installations.
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 $1,459,000 for the three months
ended March 31, 1999, from $1,374,000 for the three months ended
March 31, 1998. The gross loss (cost of goods sold in excess of
revenues) increased in the first quarter of 1999 to 83% of total
revenues, from 31% in the comparable 1998 period. The increase in
gross loss percentage is the result of the SayGo installations
during the first quarter of 1999. Additionally, inventory related
expenses increased during the three months ended March 31, 1999
from the comparable period in 1998.
Warranty and maintenance expenses included in cost of goods sold
decreased to $165,000 in the three months ended March 31, 1999
compared to $182,000 for the same period in 1998. The Company
anticipates that future warranty and maintenance expenses per
installation will decrease as a greater percentage of the
installed base consists of wireless installations, and that the
cost of goods sold as a percentage of revenues will decrease as a
result of higher manufacturing volumes of its components and as
the installation process is improved.
<PAGE>
<PAGE>
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 $2,989,000 for the three month
period ended March 31, 1999, compared to $3,887,000 for the same
period in 1998. These decreases reflect the absence of costs
associated with the proposed acquisition of Telepanel Systems,
Inc. ("Telepanel"), a reduction in severance expenses and other
general cost reductions.
In October 1997, the Company and Telepanel executed an agreement
to combine, as a result of which the Company would have become the
sole beneficial owner of the outstanding Telepanel common shares.
In April 1998, such arrangements were terminated. Results for the
quarters ended March 31, 1998 included direct transaction costs
associated with the proposed combination of $381,000, while no
such expense was recorded in 1999.
Research and Development. Research and development expenses were
$1,138,000 for the three month period ended March 31, 1999
compared to $769,000 for the same period in 1998. Such increases
reflect expanded hardware engineering activities. During the
three month period ended March 31, 1999 the Company did not
capitalize any product development software costs. In the
comparable 1998 period, $99,000 of such costs were capitalized.
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 $713,000 for the
three month period ended March 31, 1999, compared to $1,092,000
for the same period in 1998, due to the decreased cash and cash
equivalents available for investment.
Interest Expense. Interest expense increased to $4,593,000 for
the three month period ended March 31, 1999, compared to
$4,045,000 for the same period in 1998. Interest expense in 1999
and 1998 included interest on amounts borrowed from the
Connecticut Development Authority ("CDA") and non cash interest on
the Senior Discount Notes. With the consummation in January 1997
of the private sale (the "Private Placement") of 147,312 units
(the "Units") each consisting of Senior Discount Notes with a
principal amount at maturity of $1,000 and one warrant
(collectively the "1997 Warrants") to purchase 17.23 shares of
Common Stock, 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 $78 million which are available to offset future
taxable income for federal income tax purposes and expire through<PAGE>
<PAGE>
the year 2013. In consideration of the Company's accumulated
losses through March 31, 1999 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, 1999, the Company had net working capital of
$61,235,000, reflecting cash and cash equivalents of $61,157,000,
compared to net working capital of $65,697,000, reflecting cash
and cash equivalents of $63,877,000 at December 31, 1998. 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 1999.
Net cash used in operations was $2,123,000 for the three months
ended March 31, 1999, compared to net cash of $6,416,000 used for
operating activities for the three months ended March 31, 1998.
In the first three months of 1999, the net cash used in operations
also reflected a decrease in accounts receivable (net of allowance
for doubtful accounts) of $638,000 and a decrease in inventory
(net of reserves) of $607,000, compared to an increase in accounts
receivable (net of allowance for doubtful accounts) of $443,000
and an increase in inventory (net of reserves) of $2,309,000
during the comparable period in 1998. In the first three months
of 1999, the net loss of $8,772,000 included $4,203,000 of non-
cash interest expense. In the first three months of 1998, the net
loss of $7,993,000 included $3,697,000 of non-cash interest
expense.
Cash used in investing activities totaled $597,000 for the three
months ended March 31, 1999, compared to $2,304,000 of cash used
in investing activities for the three months ended March 31, 1998.
Investing activities included capital expenditures of $609,000 and
$205,000 for the three months ended March 31, 1999 and 1998,
respectively. Notes receivables of $2,000,000 resulting from an
advance made to Telepanel were outstanding as of March 31, 1998,
which was repaid in 1998. During the three month period ended
March 31, 1999, the Company did not capitalize product development
software costs while in the comparable 1998 period $99,000 of such
costs were capitalized.
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, and will
require substantial funds, for manufacturing and carrying costs
attendant to the SayGo Plan, which will not initially be covered
by revenues, calculated on the basis of usage fees paid by
customers.
Although the Company believes that the SayGo Plan has, to a
limited extent, facilitated market acceptance of the ERS ShelfNet
System, principally as a result of its diminution of the risk
perceived by new customers in an investment in new technology, the<PAGE>
<PAGE>
Company believes that retailers to whom benefits of the system
have been established may prefer to purchase the system rather
than participate in the SayGo Plan. Accordingly, the Company will
continue to offer its system under the SayGo Plan in addition to
pursuing maximum sales of the system. The Company also intends,
during its current fiscal year, to develop additional strategies
to accelerate market recognition and acceptance of the system and
its benefits, which may draw on the Company's liquid assets.
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 1996 and the
Private Placement.
The Company generated no cash from financing activities in the
first three months of 1999 compared to $11,000 provided by
financing activities, as a result of stock option exercises, in
the first three months of 1998.
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
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, 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"), repayable in August 1999 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<PAGE>
<PAGE>
months prior to conversion. The CDA also acquired warrants
expiring in August 1999 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 until August 2004),
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 expects net losses and negative cash flows from
operations to continue into the current fiscal year. The Company
has been utilizing and will continue to utilize the net proceeds
from the Private Placement in connection with the anticipated
expansion of its operations and for general corporate purposes,
including the funding of the Company's ongoing engineering,
development and marketing 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 as it implements its business strategy and as
required debt service under the Senior Discount Notes commences,
and fund operations through the year ending December 31, 2000. As
more fully described above, the Company's ability to meet its
continuing debt service and other obligations will depend, among
other factors, on the acceptance of the Company's system in its
intended market and the Company's success in implementing its
business strategy and achieving large scale commercialization of
the ERS ShelfNet System. In the event commercialization does not
result in sufficient liquidity to the Company, the Company may
need to raise additional long-term financing to support and
service debt. The Company has no current arrangement with respect
to, or sources of, any additional financing, and there can be no
assurance that any such additional financing would be available on
terms reasonable to the Company.
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 ERS 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 affect the Company.
<PAGE>
<PAGE>
Accordingly, the Company has been reviewing the ERS ShelfNet
System and its internal computer programs and systems to ensure
year 2000 compliance. During 1998, the Company established a
project team designed to address year 2000 risks in a methodical
manner, concentrating in four separate areas of activity: (i)
internal systems, (ii) products, (iii) customers and (iv)
suppliers. 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 has
engaged and will engage experts on specific projects where
required.
The project team has been reviewing the year 2000 compliance
status of the software and systems used in the Company's internal
business processes and is making necessary upgrades and
modifications. The project team has obtained appropriate
assurances of compliance from a majority of the manufacturers of
hardware and software products used by the Company internally, and
their agreement to modify or replace any non-compliant products.
If the Company is unable to obtain such assurances from the
remaining manufacturers, the project team will undertake to test
such components and, if necessary, replace them. The Company
anticipates that the software or systems that the Company deems
significant to its business will be year 2000 compliant by the end
of the second quarter of 1999, but there can be no assurance that
the Company will not experience delays in implementing compliant
products.
The project team has completed its testing of the new generation
software of the ERS ShelfNet System and has found it to be year
2000 compliant in all material respects. The project team has
also determined that the new generation software may be utilized
to upgrade non-compliant prior generation software. Although the
Company's agreements with customers generally limit liability of
the Company, there can be no assurance that customers with
installed prior generation systems may not assert claims against
the Company if they experience year 2000 problems with their
systems. Given the terms of the Company's arrangements with these
customers, the Company does not believe that any such development
will result in any material financial exposure to the Company.
As part of the Company's effort, it has begun recreating customer
environments to the extent possible, and testing data interfaces
and other applications to assist customers in year 2000
compliance. Many customers and potential customers are expending
significant resources to correct their current operations for year
2000 compliance, which may affect purchasing patterns and result
in reduced time and funds available to investigate the purchase of
the ERS ShelfNet System.
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 project team is
implementing a program to obtain appropriate assurances of year
2000 compliance from the Company's principal suppliers, and is<PAGE>
<PAGE>
endeavoring to determine the extent to which the Company is
vulnerable to their failure to remediate year 2000 issues. The
Company has obtained written certifications from a majority of
such vendors as to year 2000 compliance and plans to obtain the
remainder by the end of the second quarter of 1999. To the extent
that a supplier or vendor poses unacceptable year 2000 risks to
the Company, the Company will seek to identify alternative supply
sources. The Company believes alternative sources of system
components are available and maintains an inventory of its
products, which the Company believes is sufficient to account for
temporary supply disruptions.
The Company presently believes that the ERS ShelfNet System and
the Company's 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 approximately
$300,000, there can be no assurance that such costs will not
exceed such amount. Notwithstanding management's current
assessment that no material exposure to significant business
interruption exists, the Company plans by the end of the second
quarter of 1999 to complete contingency plans in the event its
year 2000 project is not 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.
Market Risk
The Company is subject to market risks related to changes in
interest rates and, accordingly, the Company's objective is to
minimize any impact on its financial position from these risks.
The Company's cash and cash equivalents predominantly consist of
short-term, highly-liquid U.S. treasury bills and certificates of
deposit, in order to minimize interest rate risk. The Company
does not enter into transactions involving derivative financial
instruments for speculative trading purposes.
The Company utilizes sensitivity analysis, along with other
techniques, as a basis for measuring the impacts that market risk
exposure may have on the fair value of the Company's debt and
financial instruments. If market interest rates were to increase
immediately and uniformly by ten percent from levels at March 31,
1999, the decline in fair value of the portfolio would not be
material. The Company's long-term term debt bears interest, for
the most part, at a fixed rate and, therefore, relative to its
long-term debt, an immediate ten percent change in the market
interest rates would not materially impact the Company's financial
statements.
These effects of hypothetical changes in interest rates, however,
ignore other effects the same movement may have arising from other
variables, and actual results could differ from the sensitivity
calculations of the Company. The Company regularly assesses
additional relevant variables, establishes policies and business<PAGE>
<PAGE>
practices to protect against the adverse effects of using any
given financial instruments and does not anticipate any material
losses generated by these risks.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For information concerning this item, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Market Risk," which information is incorporated
herein by reference.
<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, 1999, the
Company did not file any Current Reports on Form
8-K.
<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 17, 1999 s/Bruce F. Failing, Jr.
_____________________________ _____________________________
Date Bruce F. Failing, Jr.
Vice Chairman and Chief
Executive Officer
May 17, 1999 s/Jerry McAuliffe
_____________________________ ____________________________
Date Jerry McAuliffe
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three Months Ended March 31, 1999
Index to Exhibits
Exhibit Number Document Description
-------------- --------------------
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission for
information only and is not filed.
EXHIBIT 11
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
COMPUTATION OF NET LOSS PER COMMON SHARE
Three Months
Ended
March 31, 1999
--------------
Net Loss ($ 8,772,000)
============
Weighted average common shares outstanding 21,249,447
============
Basic (loss) per common shares ($0.41)
============
Calculation of weighted average
shares outstanding
- -------------------------------
Shares issued and outstanding at December 31, 1998 21,249,477
Issuance of shares pursuant to stock option plan 0
-----------
Weighted average common shares outstanding 21,249,477
===========
corp\ers\sec.doc\exh11
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 61,157
<SECURITIES> 0
<RECEIVABLES> 896
<ALLOWANCES> (274)
<INVENTORY> 6,005
<CURRENT-ASSETS> 68,554
<PP&E> 5,636
<DEPRECIATION> (1,700)
<TOTAL-ASSETS> 77,306
<CURRENT-LIABILITIES> 7,319
<BONDS> 128,401
0
0
<COMMON> 212
<OTHER-SE> (63,726)
<TOTAL-LIABILITY-AND-EQUITY> 77,306
<SALES> 637
<TOTAL-REVENUES> 798
<CGS> 1,294
<TOTAL-COSTS> 1,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,583
<INCOME-PRETAX> (8,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,772)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> 0
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