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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1361276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
488 Main Avenue
Norwalk, Connecticut 06851
(Address of principal executive offices, including zip code)
(203) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 14, 1999
-------------------- --------------------------------
Common Stock, $.01 par value 21,282,637
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<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
Page Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet--
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statement of
Operations--Three and Nine Months Ended
September 30, 1999 and 1998 4
Condensed Consolidated Statement of Cash
Flows--Nine Months Ended September 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 10
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
<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>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 48,484 $ 63,877
Accounts receivable 1,358 1,260
Inventories 5,724 6,612
Prepayments and other current assets 958 1,159
--------- ---------
Total current assets 56,524 72,908
--------- ---------
Equipment 5,814 5,113
Accumulated depreciation (2,296) (1,462)
--------- ---------
Net equipment 3,518 3,651
--------- ---------
Other non-current assets 4,302 5,067
--------- ---------
Total assets $ 64,344 $ 81,626
========= =========
Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses $ 2,077 $ 2,214
Notes payable - 4,997
--------- ---------
Total current liabilities 2,077 7,211
--------- ---------
Long-term debt
Senior Discount Notes, 13.25% 137,470 124,057
--------- ---------
Common stock purchase warrants 5,100 5,100
--------- ---------
Commitments - -
--------- ---------
Stockholders' deficit
Common stock (par value $0.01
per share; 35,000,000 authorized,
21,282,637 and 21,249,447 shares
issued and outstanding in 1999
and 1998) 212 212
Additional paid-in capital 51,390 51,374
Accumulated deficit (131,905) (106,328)
--------- ---------
Total stockholders' deficit (80,303) (54,742)
--------- ---------
Total liabilities and stockholders'
deficit $ 64,344 $ 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Product sales $ 1,005 $ 573 $ 2,313 $ 2,109
Maintenance 233 222 633 575
-------- -------- -------- --------
Total revenues 1,238 795 2,946 2,684
-------- -------- -------- --------
Costs of goods sold
Product sales 908 851 3,337 2,927
Maintenance 233 139 578 511
-------- -------- -------- --------
Total cost of goods sold 1,141 990 3,915 3,438
-------- -------- -------- --------
Gross profit (loss) 97 (195) (969) (754)
-------- -------- -------- --------
Operating expenses
Selling, general and
administrative 2,653 2,855 8,235 9,128
Research and development 1,444 966 4,030 2,859
Depreciation and amortization 100 85 295 258
-------- -------- -------- --------
Total operating expenses 4,197 3,906 12,560 12,245
-------- -------- -------- --------
Loss from operations (4,100) (4,101) (13,529) (12,999)
-------- -------- -------- --------
Other income (expenses)
Interest income 671 1,041 2,087 3,144
Interest expense (4,839) (4,310) (14,121) (12,486)
Loss on disposals (1) - (13) -
-------- -------- -------- --------
Total other expenses (4,169) (3,269) (12,047) (9,342)
-------- -------- -------- --------
Net loss $ (8,269) $ (7,370 $(25,576) $(22,341)
======== ======== ======== ========
Earnings per share
Weighted average common shares
outstanding 21,272 21,244 21,258 21,227
======== ======== ======== ========
Net loss per common share $ (0.39) $ (0.35) $ (1.20) $ (1.05)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net loss ($25,576) ($22,341)
Other adjustments to reconcile net loss to
net cash used in operating activities 15,481 8,869
-------- --------
Cash used in operating activities ( 10,095) (13,472)
-------- --------
Cash Flows Used in Investing Activities:
Capital expenditures (330) (911)
Disposal of fixed assets 16 32
Note Receivable -- (2,000)
Capitalized product development costs -- (373)
-------- --------
Cash used in investing activities (314) (3,252)
-------- --------
Cash Flows from Financing Activities:
Repayment of Debt (5,000) --
Net proceeds from exercised stock options 16 39
-------- --------
Cash (used) provided by
financing activities (4,984) 39
-------- --------
Net decrease in cash and cash equivalents (15,393) (16,685)
-------- --------
Cash and cash equivalents at beginning
of period 63,877 82,400
-------- --------
Cash and cash equivalents at end of period $ 48,484 $ 65,715
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 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 nine month periods
ended September 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
September 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
September 30, 1999 consist of $2,149,000 of materials and
supplies and $3,575,000 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 from the period
commencing on the first anniversary of closing through February
1, 2004.
<PAGE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
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.
During the fourth quarter of 1999, the Company purchased
in the open market $45,250,000 aggregate principal amount at
maturity of the Notes, for an aggregate purchase price to the
Company of $7,014,000. The Company's Board of Directors has
authorized the purchase of Notes in the open market, with the
amount and timing of transactions dependent upon a number of
factors, including the price and availability of Notes, general
market conditions, and competing alternate uses of funds, and
may be discontinued at any time.
The following unaudited pro forma summary presents the
consolidated results of operations as if the purchase of the
Notes had been done at the beginning of the respective periods.
The following pro forma balance sheet accounts reflect the Company's
purchase of the Notes had the purchase been done as of the following
dates. These results do not purport to be indicative of what would have
occurred had the purchase actually been done as of such dates or
of results which may occur in the future:
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
Nine Months Ended
September 30,
1999 1998
---- ----
(in thousands)
Interest income 1,823 2,854
Interest expense (9,856) (8,739)
Gain on retirement of debt 24,528 29,597
September 30, December 31,
1999 1998
------------- ------------
Assets:
Cash 41,106 56,376
Other non-current assets 2,928 3,520
Liabilities:
Senior Discount Notes,
13.25% 95,267 85,972
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
September 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 September 30, 1999, the Company has
generated cumulative revenues of $21.2 million, and has incurred
a cumulative net loss of approximately $152.5 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
<PAGE>
<PAGE>
five years. The Company has begun, 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.
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 September 30, 1999, the Company had recorded total
outstanding indebtedness of approximately $137.5 million and a
total stockholders' deficit of $80.3 million. See "Liquidity
and Capital Resources" below for information concerning the
Company's open market purchases of certain outstanding
indebtedness during the fourth quarter. 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. The full
accreted principal amount at maturity of the Senior Discount
Notes 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 September 30,
1999, the Company's total revenues were $1,238,000 compared to
$795,000 in the corresponding quarter in 1998. Revenues for the
nine months ended September 30, 1999 were $2,946,000 compared to
$2,684,000 in the corresponding period of 1998. The increase in
revenues in 1999 compared to 1998 reflects the increased sales
of the Company's new generation product.
In the three and nine month periods ended September 30, 1999,
revenues were concentrated among two significant customers
within the supermarket industry comprising 86% of total revenues
in each period. For the three and nine month periods ended
September 30, 1998, revenues were concentrated among two
significant customers comprising 92% and 88% of total revenues,
respectively.
Maintenance revenues for the three months ended September 30,
1999 increased to $233,000 from $222,000 in the corresponding
1998 period, and the first nine months of 1999 maintenance
revenues increased to $633,000 from $575,000 in the first nine
months 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 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.
<PAGE>
<PAGE>
Cost of goods sold increased to $1,141,000 for the three months
ended September 30, 1999, from $990,000 for the three months
ended September 30, 1998, and to $3,915,000 for the nine months
ended September 30, 1999 from $3,438,000 for the nine months
ended September 30, 1998. In the third quarter of 1999 the gross
profit (revenues in excess of cost of goods sold ) as a
percentage of revenues was 8% resulting from a decline in
inventory related costs. In the comparable period in 1998 the
gross loss (cost of goods sold in excess of revenues) as a
percentage of revenues was 25%. The gross loss was 33% during
the first nine months of 1999 compared to 28% during the same
period of the prior year. The increase in gross loss as a
percent of revenues was primarily the result of an increase in
the inventory reserve during the nine months of 1999. See
Liquidity and Capital Resources" below.
Warranty and maintenance expenses included in cost of goods sold
increased to $233,000 in the three months ended September 30,
1999 compared to $139,000 for the same period in 1998, and to
$578,000 in the nine months ended September 30, 1999 compared to
$511,000 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 decreased to $2,653,000 for the three
month period ended September 30, 1999, compared to $2,855,000
for the same period in 1998. For the first nine months of 1999
selling, general and administrative costs decreased to
$8,235,000 from $9,128,000 in the comparable 1998 period. The
decrease in selling, general and administrative expense reflects
a reduction in severance expense and general cost reductions
and, during the nine-month period, the absence of costs
associated with the proposed acquisition of Telepanel Systems
Inc. ("Telepanel").
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 nine months ended September 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 $1,444,000 and $4,030,000, respectively, for the three and
nine month periods ended September 30, 1999 compared to $966,000
and $2,859,000 for the same periods in 1998. Such increases
reflect expanded hardware engineering activities. During the
three and nine month periods ended September 30, 1999 the
Company did not capitalize any product development software
costs. In the comparable 1998 periods, $126,000 and $373,000,
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 $671,000 for the
three month period ended September 30, 1999 compared to
$1,041,000 for the same period in 1998, and to $2,087,000 for
the first nine months of 1999 compared to $3,144,000 for the
same period in 1998 due to the decreased cash and cash
equivalents available for investment.
Interest Expense. Interest expense increased to $4,839,000 for
the three month period ended September 30, 1999, compared to
$4,310,000 for the same period in 1998. For the first nine
months of 1999 interest expense increased to $14,121,000 from
$12,486,000 in the first nine months of 1998. Interest expense
in 1999 and 1998 included interest on amounts borrowed from the
Connecticut Development Authority ("CDA"), which matured in
August 1999, 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 $85 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 September 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 September 30, 1999, the Company had net working capital of
$54,447,000, reflecting cash and cash equivalents of
$48,484,000, 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 nine months of 1999 and
repayment of the indebtedness to the CDA, which matured in
August 1999.
Net cash used in operations was $10,095,000 for the nine months
ended September 30, 1999, compared to net cash of $13,472,000
used for operating activities for the nine months ended
September 30, 1998. In the first nine months of 1999, the net
cash used in operations also reflected a decrease in inventory
(net of reserves) of $888,000, compared to an increase in
inventory (net of reserves) of $2,871,000 during the comparable
period in 1998. In the first nine months of 1999, the net loss
of $25,576,000 included $12,978,000 of non-cash interest
expense. In the first nine months of 1998, the net loss of
$22,341,000 included $11,415,000 of non-cash interest expense.
Cash used in investing activities totaled $314,000 for the nine
months ended September 30, 1999, compared to $3,252,000 of cash
used in investing activities for the nine months ended September
30, 1998. Investing activities included capital expenditures of
$330,000 and $911,000 for the nine months ended September 30,
1999 and 1998, respectively. Notes receivables of $2,000,000
resulting from an advance made to Telepanel were outstanding as
of September 30, 1998, which was repaid in the fourth quarter
of 1998. During the nine month period ended September 30, 1999,
the Company did not capitalize product development software
costs while in the comparable 1998 period $373,000 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
<PAGE>
<PAGE>
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 has begun, 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.
Cash used in financing activities in the first nine months of
1999 totaled $4,984,000, resulting from the repayment of
indebtedness to the CDA, which matured in August 1999, offset by
stock option exercises, compared to $39,000 provided by
financing activities, as a result of stock option exercises, in
the first nine 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
<PAGE>
<PAGE>
an aggregate of 2,538,258 shares of Common Stock, at a per share
price of $5.23.
During the fourth quarter of 1999, the Company purchased in the
open market $45,250,000 aggregate principal amount at maturity
of the Senior Discount Notes, for an aggregate purchase price to
the Company of $7,014,000. The Company's Board of Directors
has authorized the purchase of Senior Discount Notes in the open
market, with the amount and timing of transactions dependent
upon a number of factors, including the price and availability
of Senior Discount Notes, general market conditions, and
competing alternate uses of funds, and may be discontinued at
any time.
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
$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 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
<PAGE>
<PAGE>
any such additional financing would be available on terms
reasonable to the Company. During the fourth quarter of 1999,
the Company engaged Jefferies & Co, Inc. and BNY Capital Markets
Inc. to advise it in connection with the development or
consideration of proposals relating to the Senior Discount
Notes.
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)
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 all the major manufacturers of
hardware and software products used by the Company internally,
and their agreement to modify or replace any non-compliant
products. The Company anticipates that the software or systems
that the Company deems significant to its business are year 2000
compliant, 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
<PAGE>
<PAGE>
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 completed recreation of
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 has implemented a program to obtain appropriate assurances
of year 2000 compliance from the Company's principal suppliers,
and is continuing to endeavor 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. 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 are year 2000 compliant.
However, while the Company estimates the cost of these efforts
to be less than approximately $63,000, there can be no assurance
that such costs will not exceed such amount. In light of
management's current assessment that no material exposure to
significant business interruption exists, the Company has
developed contingency plans consisting of: (i) identifying
alternative vendors and suppliers of software, components and
services that are year 2000 compliant, (ii) preparing to switch
to any such vendor or supplier, if necessary, and (iii) staffing
on call support subsequent to the new year to assist customers
who may experience year 2000 related problems. The Company will
appropriately modify its strategy as additional circumstances
come to its attention, but there can be no assurance that the
Company will timely identify and remediate all significant year
2000 problems, that remedial efforts will not involve
significant additional time and expense, or that such problems
will not have an effect on the Company's business, results of
operations or financial position more substantial than currently
anticipated.
<PAGE>
<PAGE>
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
September 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
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed or incorporated by
reference as part of this Quarterly Report
on Form 10-Q are listed on the attached
Index to Exhibits.
(b) Current Reports on Form 8-K
During the quarter ended September 30, 1999,
the Company filed a Current Report on Form
8-K dated September 13, 1999, reporting the
movement of the Company's Common Stock to
the OTC Bulletin Board from the SmallCap
Market. No financial statements were filed
with such report.
<PAGE>
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
November 12, 1999 s/ Bruce F. Failing, Jr.
- ----------------- ---------------------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief Executive Officer
November 12, 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 September 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.
<TABLE>
Exhibit 11
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net loss ($ 8,269,000) $(25,576,000)
============ ============
Weighted average common shares
outstanding 21,271,876 21,257,753
============ ============
Basic loss per common share ($0.39) ($1.20)
============ ============
Calculation of weighted average
shares outstanding
- -------------------------------
Shares issued and outstanding at
December 31, 1998 21,249,477 21,249,447
Issuance of shares pursuant to
stock option plan 22,429 8,306
------------ ------------
Weighted average common shares
outstanding 21,271,876 21,257,753
============ ============
corp\ers\sec.doc\99-exh.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE THREE MONTHS ENDED
SEPTEMBER 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> SEP-30-1999
<CASH> 48,484
<SECURITIES> 0
<RECEIVABLES> 1,564
<ALLOWANCES> (206)
<INVENTORY> 5,724
<CURRENT-ASSETS> 56,524
<PP&E> 5,814
<DEPRECIATION> (2,296)
<TOTAL-ASSETS> 64,344
<CURRENT-LIABILITIES> 2,077
<BONDS> 137,470
0
0
<COMMON> 212
<OTHER-SE> (75,415)
<TOTAL-LIABILITY-AND-EQUITY> 64,344
<SALES> 1,005
<TOTAL-REVENUES> 1,238
<CGS> 908
<TOTAL-COSTS> 1,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,839
<INCOME-PRETAX> (8,269)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,269)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,269)
<EPS-BASIC> (0.39)
<EPS-DILUTED> 0
</TABLE>
