================================================================
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, 1999
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-21456
-------
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1361276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
488 Main Avenue
Norwalk, Connecticut 06851
(Address of principal executive offices, including zip code)
(203) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 13, 1999
-------- ------------------------------
Common Stock, $.01 par value 21,313,593 shares
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Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet-
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statement of
Operations-Three and Six Months
Ended June 30, 1999 and 1998 4
Condensed Consolidated Statement of
Cash Flows-Six Months Ended
June 30, 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
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 19
PART II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX TO EXHIBITS 22
<PAGE>
<PAGE>
<TABLE>
Part I - Financial Information
Item 1. Financial Statements
Electronic Retailing Systems International, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share and share amounts)
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 56,838 $ 63,877
Accounts receivable 1,080 1,260
Inventories 6,034 6,612
Prepayments and other current assets 727 1,159
--------- ---------
Total current assets 64,679 72,908
--------- ---------
Equipment 5,985 5,113
Accumulated depreciation (2,064) (1,462)
--------- ---------
Net equipment 3,921 3,651
--------- ---------
Other non-current assets 4,562 5,067
--------- ---------
Total assets $ 73,162 $ 81,626
========= =========
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses $ 2,274 $ 2,214
Notes payable 4,999 4,997
--------- ---------
Total current liabilities 7,273 7,211
--------- ---------
Long-term debt
Senior Discount Notes, 13.25% 132,837 124,057
--------- ---------
Common stock purchase warrants 5,100 5,100
--------- ---------
Commitments - -
--------- ---------
Stockholders' deficit
Common stock (par value $0.01 per share;
35,000,000 authorized, 21,249,447 and
21,252,637 shares issued and outstanding
in 1999 and 1998) 213 212
Additional paid-in capital 51,374 51,374
Accumulated deficit (123,635) (106,328)
--------- ---------
Total stockholders' deficit (72,048) (54,742)
--------- ---------
Total liabilities and stockholders' deficit $ 73,162 $ 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 Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Product sales $ 671 $ 633 $ 1,308 $ 1,536
Maintenance 239 205 400 353
-------- -------- -------- --------
Total revenues 910 838 1,708 1,889
-------- -------- -------- --------
Costs of goods sold
Product sales 1,135 884 2,429 2,076
Maintenance 180 190 345 372
-------- -------- -------- --------
Total cost of goods sold 1,315 1, 074 2,774 2,448
-------- -------- -------- --------
Gross loss (405) (236) 1,066) (559)
-------- -------- -------- --------
Operating expenses
Selling, general and admini-
strative 2,593 2,215 5,582 6,273
Research and development 1,447 1,295 2,586 1,893
Depreciation and amortization 99 112 195 173
-------- -------- -------- --------
Total operating expenses 4,139 3,622 8,363 8,339
-------- -------- -------- --------
Loss from operations (4,544) (3,858) (9,429) (8,898)
-------- -------- -------- --------
Other income (expenses)
Interest income 703 1,011 1,416 2,103
Interest expense (4,689) (4,131) (9,282) (8,176)
Loss on disposals (4) - (12) -
-------- -------- -------- --------
Total other expenses (3,990) (3,120) (7,878) (6,073)
-------- -------- -------- --------
Net loss $ (8,534) $ (6,978) $(17,307) $(14,971)
======== ======== ======== ========
Earnings (loss) per share
Weighted average common shares
outstanding 21,252 21,231 21,251 21,219
======== ======== ======== ========
Basic loss per common share $ (0.40) $ (0.33) $ (0.81) $ ( 0.71)
======== ======== ======== ========
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>
Six Months Ended
June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($17,307) ($14,971)
Other adjustments to reconcile net
loss to net cash used in operating
activities 11,240 4,990
-------- --------
Cash used in operating activities (6,067) (9,981)
-------- --------
Cash Flows Used in Investing Activities:
Capital expenditures (987) (581)
Disposal of fixed assets 15 30
Note receivable -- (2,000)
Capitalized product development costs -- (248)
-------- --------
Cash used in investing activities (972) (2,799)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from exercised stock options -- 33
-------- --------
Cash provided by financing activities -- 33
-------- --------
Net decrease in cash and cash
equivalents (7,039) (12,747)
-------- --------
Cash and cash equivalents at beginning
of period 63,877 82,400
-------- --------
Cash and cash equivalents at end of period $ 56,838 $ 69,653
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 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 during 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
and six month periods ended June 30, 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
June 30, 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 June 30, 1999 consist of $2,295,000 of materials and
supplies and $3,739,000 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 January 1997, the Company completed the sale, in a
private offering (the "Private Placement"), of 147,312
Units ("Units") consisting of $147,312,000 principal amount
at maturity of 13.25% Senior Discount Notes due February 1,
2004 (the "Notes") together with warrants (the "Warrants")
to purchase an aggregate of 2,538,258 shares of Common
Stock, at an exercise price of $5.23 per share, exercisable
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
from the period commencing on the first anniversary of
closing through February 1, 2004.
The Units were sold to investors at a price aggregating
$100 million, representing a yield to maturity on the Notes
of 13.25%. No cash interest will accrue on the Notes prior
to February 1, 2000. Interest will be payable thereafter
on February 1 and August 1 of each year commencing August
1, 2000. The Notes are non-callable prior to February 1,
2001. Upon specified change in control events, each holder
has the right to require the Company to purchase its Note
at a specified price. The net proceeds to the Company from
the sale of the Units approximated $95 million, of which
$5.1 million was attributed to the Warrants based on an
estimate of their fair value.
The indenture under which the Notes were issued places
limitations on operations and sales of assets by the
Company or its subsidiaries, requires maintenance of
certain financial ratios in order for the Company to incur
additional indebtedness (subject to specified exceptions),
requires the delivery by the Company's subsidiaries of
guaranties if specified debt is subsequently incurred by
such subsidiaries, and limits the Company's ability to pay
cash dividends or make other distributions to the holders
of its capital stock or to redeem such stock.
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, 2001. 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.
<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 June
30, 1999, approximately 195 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 June 30, 1999, the Company has generated
cumulative revenues of $20.0 million, and has incurred a
cumulative net loss of approximately $144.2 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,
<PAGE>
<PAGE>
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.
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 June 30, 1999, the Company had recorded total outstanding
indebtedness of approximately $137.8 million and a total
stockholders' deficit of $72.0 million. As a result of its high
degree of leverage (and as more fully-described below under
"Liquidity and Capital Resources"): (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.
<PAGE>
<PAGE>
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.
Results of Operations
Revenues. During the three month period ended June 30, 1999,
the Company's total revenues were $910,000 compared to $838,000
in the corresponding quarter in 1998. Revenues for the six
months ended June 30, 1999 were $1,708,000 compared to
$1,889,000 in the corresponding period of 1998. The decrease in
revenues in 1999 compared to 1998 reflects the absence of
software license fees for the six month period ended June 30,
1999 compared to $122,000 of non-recurring software license fees
recorded in the first six months of 1998.
In the three and six month periods ended June 30, 1999, revenues
were concentrated among two significant customers within the
supermarket industry comprising 88% and 86% of total revenues.
For the three and six month periods ended June 30, 1998,
revenues were concentrated among two significant customers
comprising 91% and 86% of total revenues.
Maintenance revenues for the three months ended June 30, 1999
increased to $239,000 from $205,000 in the corresponding 1998
period and for the first half of 1999 maintenance revenues
increased to $400,000 from $353,000 in the first half of 1998,
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,
<PAGE>
<PAGE>
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 $1,315,000 for the three months
ended June 30, 1999, from $1,074,000 for the three months ended
June 30, 1998, and to $2,774,000 for the six months ended June
30, 1999 from $2,448,000 for the six months ended June 30, 1998.
The gross loss (cost of goods sold in excess of revenues)
increased in the second quarter of 1999 to 45% of total
revenues, from 28% in the comparable 1998 period, and to 62%
during the first half of 1999 compared to 30% during the same
period of the prior year. The increase in gross loss as a
percent of revenues is primarily the result of an increase in
the inventory reserve and non-recurring charges relating to
providing additional customer support.
Warranty and maintenance expenses included in cost of goods sold
decreased to $180,000 in the three months ended June 30, 1999
compared to $190,000 for the same period in 1998, and to
$345,000 in the six months ended June 30, 1999 compared to
$372,000 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.
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 $2,593,000 for the three
month period ended June 30, 1999 compared to $2,215,000 for the
same period in 1998. These increases reflect increased salaries
and travel and entertainment related expenses related to the
expansion of ERS' organization in anticipation of sales growth.
For the first six months of 1999 selling, general and
administrative costs decreased to $5,582,000 from $6,273,000 in
the comparable 1998 period, reflecting 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 six months ended June 30, 1998 included direct
transaction costs associated with the proposed combination of
$536,000, while no such expense was recorded in 1999.
<PAGE>
<PAGE>
Research and Development. Research and development expenses
were $1,447,000 and $2,586,000, respectively, for the three and
six month periods ended June 30, 1999 compared to $1,295,000 and
$1,893,000 for the same periods in 1998. Such increases reflect
expanded hardware engineering activities. During the three and
six month periods ended June 30, 1999 the Company did not
capitalize any product development software costs. In the
comparable 1998 periods, $99,000 and $248,000, respectively, 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 $703,000 for the
three month period ended June 30, 1999 compared to $1,011,000
for the same period in 1998, and to $1,416,000 for the first
half of 1999 compared to $2,103,000 for the same period in 1998,
due to the decreased cash and cash equivalents available for
investment.
Interest Expense. Interest expense increased to $4,689,000 for
the three month period ended June 30, 1999, compared to
$4,131,000 for the same period in 1998. For the first half of
1999 interest expense increased to $9,282,000 from $8,176,000 in
the first half of 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 $81 million which are available to offset
future taxable income for federal income tax purposes and expire
through the year 2013. In consideration of the Company's
accumulated losses through June 30, 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.
<PAGE>
<PAGE>
Liquidity and Capital Resources
As of June 30, 1999, the Company had net working capital of
$57,406,000, reflecting cash and cash equivalents of
$56,838,000, 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 half of 1999.
Net cash used in operations was $6,067,000 for the six months
ended June 30, 1999, compared to net cash of $9,981,000 used for
operating activities for the six months ended June 30, 1998. In
the first six months of 1999, the net cash used in operations
also reflected a decrease in inventory (net of reserves) of
$578,000, compared to an increase in inventory (net of reserves)
of $3,195,000 during the comparable period in 1998. In the
first six months of 1999, the net loss of $17,307,000 included
$8,496,000 of non-cash interest expense. In the first six months
of 1998, the net loss of $14,971,000 included $7,719,000 of non-
cash interest expense.
Cash used in investing activities totaled $972,000 for the six
months ended June 30, 1999, compared to $2,799,000 of cash used
in investing activities for the six months ended June 30, 1998.
Investing activities included capital expenditures of $987,000
and $581,000 for the six months ended June 30, 1999 and 1998,
respectively. Notes receivables of $2,000,000 resulting from an
advance made to Telepanel were outstanding as of June 30, 1998,
which was repaid in 1998. During the six month period ended June
30, 1999, the Company did not capitalize product development
software costs while in the comparable 1998 period $248,000 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 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
<PAGE>
<PAGE>
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 six months of 1999 compared to $34,000 provided by
financing activities, as a result of stock option exercises, in
the first six 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.
In August 1999, the Company repaid to the CDA, in accordance
with its terms, an aggregate of $5,000,000 principal amount of
indebtedness, which prior to repayment was convertible to shares
of Common Stock at an adjusted conversion price calculated at
<PAGE>
<PAGE>
$3.00 plus the average price of the Common Stock during the
twelve months prior to conversion. In August 1999, warrants to
purchase 699,724 shares (as adjusted) of Common Stock, held by
the CDA and 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, expired without exercise. If
the Company relocates outside of Connecticut before August 2004,
the Company remains obligated to pay a penalty to the CDA of
$250,000.
The Company expects net losses and negative cash flows from
operations to continue during 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.
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)
<PAGE>
<PAGE>
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 third 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 software 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
<PAGE>
<PAGE>
of year 2000 compliance from the Company's principal suppliers,
and is 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 third 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 third 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
June 30, 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
<PAGE>
<PAGE>
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 10, 1999, 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 14
under the Securities Exchange Act of 1934 together
with the Company's Proxy Statement dated May 14,
1999; (ii) there was no solicitation in opposition
to management's nominees as listed in such Proxy
Statement; and (iii) all 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 17,133,978 shares voted in favor of,
and the holders of 7,890 shares withheld their vote
for, the election of David Diamond; the holders of
17,133,978 shares voted in favor of, and the
holders of 7,890 shares withheld their vote for,
the election of Bruce F.Failing, Jr.; the holders
of 17,133,978 shares voted in favor of, and the
holders of 7,890 shares withheld their vote for,
the election of Norton Garfinkle; the holders of
17,133,978 shares voted in favor of, and the
holders of 7,890 shares withheld their vote for,
the election of Sheldon Weinig; and the holders of
17,133,978 shares voted in favor of, and the
holders of 7,890 shares withheld their vote for,
the election of Donald E. Zilkha.
(d) Not applicable.
Item 5. 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, 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.
August 13, 1999 s/ Bruce F. Failing, Jr.
- ---------------- ---------------------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief Executive Officer
August 13, 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 June 30, 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
<TABLE>
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Net loss ($ 8,534,000) ($17,307,000)
============= =============
Weighted average common shares
outstanding 21,251,691 21,250,575
============= =============
Basic (loss) per common share ($0.40) ($0.81)
============= =============
Calculation of weighted average
shares outstanding
- -------------------------------
Shares issued and outstanding at
December 31, 1998 21,249,477 21,249,477
Issuance of shares pursuant to
stock option plan 2,244 1,128
------------- -------------
Weighted average common shares
outstanding 21,251,691 21,250,575
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC. CONDENSED
CONSOLIDATED FINANCIAL STAETMENTS AT AND FOR THE THREE MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 56,838
<SECURITIES> 0
<RECEIVABLES> 1,354
<ALLOWANCES> (274)
<INVENTORY> 6,034
<CURRENT-ASSETS> 64,679
<PP&E> 5,985
<DEPRECIATION> (2,064)
<TOTAL-ASSETS> 73,162
<CURRENT-LIABILITIES> 7,273
<BONDS> 132,837
0
0
<COMMON> 213
<OTHER-SE> (72,261)
<TOTAL-LIABILITY-AND-EQUITY> 73,162
<SALES> 671
<TOTAL-REVENUES> 910
<CGS> 1,135
<TOTAL-COSTS> 1,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,689
<INCOME-PRETAX> (8,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,534)
<EPS-BASIC> (0.40)
<EPS-DILUTED> 0
</TABLE>
