UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
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) (Zip Code)
Registrant's telephone number, including area code: 203-849-2500
-------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
Indicate by a 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 as 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
----- -----
<PAGE>
<PAGE>
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant. The aggregate
market value shall be computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such
common equity, as of a specified date within 60 days prior to the date
of filing.
Aggregate market value as of March 15, 1999 $15,944,740
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.
Common Stock, $.01 par value,
as of March 15, 1999 21,249,447 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are
incorporated by reference herein, and the part of the Form 10-K into
which the document is incorporated: Proxy Statement to be filed with
respect to the 1999 Annual Meeting of Stockholders-Part III.
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
General
Electronic Retailing Systems International, Inc. (the "Company" or
"ERS") develops and provides electronic shelf label ("ESL") systems
designed to allow supermarket chains and other retailers to increase
productivity, reduce labor costs and improve management information
systems. The ERS ShelfNet(R) system (the "ERS ShelfNet System") has
been designed as a productivity enhancing center store automation
system, which replaces paper price tags on retail shelves with
electronic liquid crystal display units and provides a suite of
applications to enhance a retailer's pricing, inventory, shelf
management, merchandising and promotional activities. The ERS ShelfNet
System is comprised of proprietary hardware and software that
electronically link a store's shelves to its point-of-sale ("POS")
systems and central computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software
and communications hardware, which are designed to interface with
other store and vendor applications. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning
alphanumeric messages. An ERS store-based local area network has up
to 20,000 individual ESLs connected to a central server. The ERS
ShelfNet System is designed to allow retailers to:
Implement price changes almost instantaneously from the store's
central computer or directly from corporate or regional
headquarters;
Ensure pricing integrity by accurately displaying and monitoring
product prices;
Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
Increase the speed and accuracy of placing product displays and
promotional material by reducing and simplifying the tasks
required of store employees; and
Audit inventory more efficiently and improve computerized
inventory ordering systems.
<PAGE>
<PAGE>
ERS believes these features enable retailers to reduce labor costs,
increase productivity and pricing accuracy, and improve inventory
management, thereby raising such retailers' gross margins and lowering
their operating costs in the highly competitive U.S. retailing market.
For the foreseeable future, the Company's revenues will be derived
primarily from the ERS ShelfNet System. The market for ESL systems,
such as the ERS ShelfNet System, is in the development stage, and
market acceptance of, and demand for, these systems are subject to a
high level of uncertainty. The Company's success will be dependent
upon, among other things, the extent to which retailers choose to
install ESL systems. The demand for such systems may be affected by
numerous factors, many of which are beyond the Company's control,
including the actual savings and benefits experienced by the
individual stores using the ESL systems, and there can be no assurance
that supermarket chains will choose to install ESL systems in a
significant number of their stores.
As of December 31, 1998, the Company's ESL systems were installed
in 70 U.S. retail stores, including stores owned by such leading
supermarket chains as Stop & Shop Supermarket Company ("Stop & Shop"),
H.E. Butt Grocery Co. ("HEB"), Big Y Foods, Inc. ("Big Y"), Shaw's
Supermarkets, Inc. ("Shaw's"), The J.H. Harvey Company ("Harvey's")
and K Mart Corporation ("K Mart"), and in chain drug stores owned by
Rite-Aid Corporation ("Rite-Aid"), in addition to two stores outside
of the U.S. The Company estimates that, as of December 31, 1998, of
the approximately 30,300 supermarkets in the United States,
approximately 170 stores were operating ESL systems.
As more fully described under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources," the Company is highly leveraged, and at
December 31, 1998 recorded total outstanding indebtedness of $129.1
million and a stockholders' deficit of $54.7 million. The Company
expects its net losses and negative cash flows from operations to
continue into the current fiscal year. Although management believes
the Company's resources will enable the Company to fund operations
through the year ending December 31, 2000, thereafter 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. If the Company is unable
to place the system as a result of lack of market acceptance or
otherwise, the Company will be unable to implement fully, or realize
the anticipated results, of its strategy and may need to raise
additional long-term financing to support operations 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.
<PAGE>
<PAGE>
This Annual Report on Form 10-K contains 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.
Business Strategy
The Company's objective is to achieve increasing revenue through
greater market penetration of the ERS ShelfNet System. To achieve
this objective, the Company is pursuing a strategy that includes the
following key elements:
. Initial Focus on Supermarket Sector. The Company
intends initially to focus its marketing efforts on the
supermarket sector because of the Company's established
relationships with supermarket chains and because of the
Company's belief that supermarket operators generally are
more receptive than other retailers to utilizing technology
to reduce operating costs and improve productivity. The
Company estimates that, as of December 31, 1998, of the
approximately 30,300 supermarkets in the United States,
approximately 170 stores were operating ESL systems.
. Reduce Manufacturing Costs. The Company intends to
continue its efforts to reduce the cost of manufacturing its
wireless ESLs through the application of established chip
manufacturing techniques to the ESL's integrated circuit, the
integration of various components in the ESL and the
achievement of significant economies of scale expected as a
result of the higher manufacturing volumes the Company
believes will arise from the implementation of its marketing
plans.
. Value-Added Applications. In order to increase the
appeal of the Company's system to prospective customers (by
increasing the level of potential cost savings) and to
encourage existing customers to adopt the new generation
system and to install additional systems, the Company intends
to develop additional productivity enhancing applications for
the ERS ShelfNet System.
<PAGE>
Contemporaneously with the introduction of its new generation
system, the Company launched a marketing and pricing program providing
for a fee-based arrangement called "Save-As-You-Go" (the "SayGo
Plan"), in order to address the capital expenditure for retailers
represented by the sale price of the ERS ShelfNet System, generally
in excess of $100,000 per store. Under the SayGo Plan, the Company
owns the system and, with no upfront cash cost to the retailer,
furnishes the system to retailers who pay monthly fees to the Company
based on their actual usage of the system.
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 also believes that
retailers to whom the benefits of the ERS ShelfNet System have been
established may prefer to purchase the system rather than participate
in the SayGo Plan. During the year ended December 31, 1998, of the 23
systems installed by the Company, six were acquired by customers under
the SayGo Plan and the remainder were purchased. Accordingly, the
Company will continue to offer the ERS ShelfNet System under the SayGo
Plan in addition to pursuing maximum sales of the system.
The Company also intends, during its current fiscal year, to
develop additional strategies to accelerate market recognition and
acceptance of the system and its benefits. There can be no assurance
that any such approaches will be material to the determination of
additional retailers to install the Company's systems in the emerging
market for ESLs.
Retail Industry Overview
The Company's target market consists of retailers that stock a
large number of stockkeeping units ("SKUs"), operate in highly
competitive environments, have relatively low margins and change
prices frequently. Such retailers include supermarkets, discount mass
merchandisers, chain drug stores and convenience stores. The Company
believes that such retailers generally seek automated solutions to
reduce labor costs and improve efficiencies in operations. The
approximate number of supermarkets, discount mass merchandisers, chain
drug stores and convenience stores in the United States is set forth
in the table below. The table does not include the European market,
where the aggregate number of comparable stores is greater than in the
United States.
<PAGE>
<PAGE>
Type of Store Number of Stores
------------- ----------------
Supermarkets 30,300
Discount mass merchandisers 9,900
Chain drug stores 19,500
Convenience stores 56,000
--------
Total 115,700
========
Source: Progressive Grocer Annual Report, April 1998; Chain Store
Guide 1998.
The Company believes that many of its target retailers are
capital constrained and have compared potential investments in the
ERS ShelfNet System to alternative capital expenditures. Such
alternative uses of capital include purchasing additional stores,
remodeling and refurbishing existing stores, making acquisitions
and investing in technology, including ESL systems. The Company's
SayGo Plan is designed to eliminate a retailer's upfront cash cost
to install the ERS ShelfNet System, instead assessing charges
largely for services the retailer actually uses. Thus, the ERS
ShelfNet System will constitute an operating expense (that the
Company estimates to be more than offset by cost savings and
benefits) rather than a capital expenditure for retailers,
allowing retailers to conserve capital for other projects while
also choosing to install the ERS ShelfNet System.
Supermarket Sector
The supermarket sector is mature, intensely competitive and
tends to have margins that are among the lowest in the retailing
industry. The Company estimates that an average supermarket stocks
approximately 19,500 SKUs, most of which are available at
competitive stores, and runs frequent promotions with respect to
many of these items. As a result, a supermarket's success depends
in large part on the efficiency of its operations, which in turn
affects its ability to offer competitive prices and maintain
acceptable operating margins. Supermarkets are under constant
pressure to reduce costs, manage inventory more effectively and
offer competitive prices.
Historically, supermarkets have been among the first
retailers to adopt technologies designed to reduce labor and other
costs, improve operations and enhance customer service. For
example, POS scanners were first introduced in the supermarket
sector and have achieved the greatest level of market penetration
there. While fewer than 15 supermarkets in the United States had
POS scanners in 1974, by 1995 approximately 95% of all chain
supermarket stores and approximately 80% of independent
supermarket stores had installed POS scanners. POS systems have
enabled retailers to reduce labor costs, improve pricing integrity<PAGE>
<PAGE>
crease efficiency while also providing additional applications
such as electronic funds transfer and computerized inventory
management. The Company believes that supermarkets and other
retailers will more quickly adopt other technological innovations
as a result of their experience with POS scanners. As a result,
and because of the Company's established relationships with
supermarket chains and its installed base of ERS ShelfNet Systems
in supermarkets, the Company intends to continue to focus its
marketing efforts in the supermarket sector.
Challenges Facing Retailers That Affect the Company
The Company has designed the ERS ShelfNet System to address
retailer productivity, labor costs, merchandising and competitive
market share issues, as summarized below:
Manual Price Changes
Although POS systems have enabled supermarkets to achieve
efficiencies at the "front end" of the store, the center of the
typical store has not been automated and remains labor intensive.
The Company estimates that an average supermarket carries
approximately 19,500 SKUs and changes approximately 2,500 prices
per week at the shelf with newly printed paper labels. These price
changes require numerous manual steps resulting in (i) significant
labor costs and (ii) delays in implementing price changes
following special promotions or increases in wholesale costs, both
of which adversely affect supermarket profitability.
Pricing Integrity
In addition to being labor intensive and time-consuming,
manual implementation of price changes is also more susceptible to
pricing inaccuracy. Stores with inaccurate prices risk customer
dissatisfaction as well as fines and penalties levied by
governmental agencies. As a result, supermarket operators incur
significant expense in auditing pricing integrity and correcting
pricing inaccuracies.
Merchandising Management
Supermarkets actively promote products at the shelf with a
variety of merchandising materials such as "hangers" or "bibs",
which are affixed to the shelf or a product's price label and
alert consumers to pricing or promotional activities. Supermarkets
install and remove bibs manually, with employees generally
spending time in the aisle hanging and removing bibs from sale
items. Store managers walk the aisle auditing promotional items
against a printed list. The Company believes that current in-aisle
promotional maintenance and promotional compliance procedures are
an unnecessarily time-consuming, inaccurate and costly process.
<PAGE>
<PAGE>
Replenishment/Inventory Management
Supermarkets can lose sales (and their corresponding
margins) when products are inadvertently missing from designated
shelves arranged according to shelf set schematics (called
"planograms"), often due to lost or damaged paper labels. In
addition, damaged and handwritten paper labels result in increased
order entry errors, which increases both out-of-stocks (resulting
in lost sales) and labor costs associated with the product
ordering process.
Shelfset Management
Typically, supermarkets carefully develop planograms for
the management of products and product categories in the stores,
on the belief that products perform best in the aggregate when
arranged on shelves in the quantities and with the facings
prescribed by the planogram. When paper labels are lost, damaged
or moved, deviations from the planogram occur, possibly resulting
in a higher incidence of out-of-stock items, loss of sales of
potentially high margin items, continued stocking of discontinued
or unauthorized products, and increased time and labor associated
with new cut-ins to a shelfset that differ from the planogram.
ERS ShelfNet Applications
The ERS ShelfNet System has been designed (i) to replace
paper price tags on retail shelves with electronic liquid crystal
display units, and (ii) to provide a suite of applications to
address the challenges to retailers of manual price changes,
pricing integrity, merchandising management, replenishment/
inventory management and shelfset management. The ERS ShelfNet
System's applications are designed to include the following
features to address the needs of retailers:
Retail Challenge ERS Solution
Manual Price
Changes . . . . . . . . . . . The ERS ShelfNet System allows retailers to
implement price changes almost
instantaneously from the store's central
computer or directly from corporate or
regional headquarters, which the Company
believes facilitates significant labor
savings from manual implementation of price
changes. In addition, electronic price
changes are significantly faster to
implement, which the Company believes leads
to increased margins as prices may be
increased promptly following special
promotions or increases in wholesale
prices.
<PAGE>
<PAGE>
Pricing Integrity . . . . . . . . The ERS ShelfNet System electronically
links a store's POS systems and its ESLs,
virtually eliminating discrepancies between
prices displayed on the store shelves and
prices charged at checkout. This assurance
of pricing integrity permits retailers to
reduce or eliminate manual pricing audits
and fines paid to governmental entities for
pricing inaccuracies. In addition, such
pricing accuracy can result in fewer price
checks and errors at checkout, can result
in faster checkout times, improved cashier
productivity and increased customer
satisfaction.
Merchandising
Management . . . .. . . . . . . . The ERS ShelfNet System is designed to
increase the speed and accuracy of placing
product displays and promotional material
by displaying a signal on the ESLs of
products that require the addition or
removal of merchandising bibs or hangers.
This is intended to eliminate the time-
consuming and potentially inaccurate manual
process of checking promotional items
against a printed list. The ERS system is
designed to enable conduct of audits of
promotional programs quickly and accurately
in the store aisle.
Replenishment/
Inventory
Management . . . .. . . . . . . . The ERS ShelfNet System is designed to
allow authorized store personnel to change
ESLs from a price display to an out-of-
stock message. This procedure replaces the
current system of noting out-of-stocks
manually, with the use of a label scanner,
which requires follow-up by the store
employee. The ERS ShelfNet System
facilitates simple notation of out-of-
stocks during normal stocking procedures,
with the system automatically generating an
out-of-stock report that can be resolved
quickly by store management. In addition,
the display of an out-of-stock message,
rather than removal of a paper label, holds
the shelf placement for the missing
product, increasing planogram integrity.
<PAGE>
<PAGE>
Shelfset Management .. . . . . . . The ERS ShelfNet System is designed to
maintain shelfsets more easily, because the
ESLs stay locked in place and cannot be
moved back and forth as can paper tags. In
addition, the ESL is designed to display
product facing information and section,
shelf, and bay locations for simple, more
accurate and less paper-intensive planogram
implementations or changes. These features
are intended to reduce labor associated
with shelfset management and stocking and
increase planogram compliance and
monitoring.
The ERS ShelfNet System
The Company's ESL system replaces paper price tags on retail
shelves with liquid crystal display labels and transmits pricing and other
information to and from the shelf edge. The Company's new generation ERS
ShelfNet System provides spread spectrum microwave transmission of data
directly to wireless ESLs. The enhanced ERS ShelfNet System is designed
to provide additional flexibility and convenience to customers by
expanding potential coverage by the Company's ESLs to the entire store
and allowing the retailer to change store placement of the ESLs more
easily. The Company believes that the cost of installing and maintaining
its wireless ESLs will be lower than that of its prior ESL system, which
required the wiring of store aisles.
Each ERS ShelfNet System generally consists of 10,000 to
20,000 ESLs and the necessary communication and support
infrastructure to link the ESLs with the store's central computer
and POS systems. The Company's new generation system consists of
the following components:
Electronic Shelf Label
Each ESL is a mini data transceiver contained in a plastic
case, which displays price and other information by means of a
wide-angle view liquid crystal display window. The ESL is also
able to display pricing and other promotional information for the
consumer and inventory and reorder information for store
employees, and is equipped with two buttons designed to allow
store staff to interact with the store computers from the ESL on
the shelf. The Company offers five different sizes and types of
ESLs for use in different applications, such as SKUs for coolers
and freezers. The Company's prior generation ESLs are powered<PAGE>
<PAGE>
by the rails to which they are connected, whereas the wireless
ESLs are powered by long-life batteries.
Spread Spectrum Wireless Network
Communication to the ESLs is managed by a high frequency,
real-time communication system that uses spread spectrum
technology. Active cell antennae in the store ceiling send and
receive signals to and from wireless ESLs in their respective
coverage areas. The cells form a radio frequency infrastructure in
which multiple, non-overlapping cells may be active
simultaneously, while overlapping cells synchronize their
transmissions, permitting spectrum re-use. The redundancy of
transmission provided by ERS' spread spectrum network helps to
eliminate interference problems and to ensure that complete
information is clearly communicated.
Communication Hub
The local area network's communication hub, located in the
store's back office area, has two functions: (i) the hub
distributes signals to the ESLs through computerized information
processors which relay information to active cell antennae in the
store ceiling and from the antennae to the individual product ESLs
located on the shelf and (ii) the hub receives information from
the information processors which has been relayed by the antennae
in the ceiling after receipt from the ESLs located on the shelf.
System Controller
The system controller is a personal computer or the existing
in-store processor, also located in the store's back office area,
which is linked directly to the store's electronic POS system. The
system software resides in the system controller, and allows the
same pricing data that is incorporated into the POS system to be
used with the ERS ShelfNet System simultaneously. The system
controller communicates the pricing or other data directly to and
from the communication hub. The system controller is designed to
receive information from the store's corporate or regional
headquarters (such as product price or promotional information)
and to communicate data to such headquarters (such as product
order information).
Software System
The Company's ESL system is designed to be compatible with
electronic POS scanning systems and is compatible with systems
provided by the three major worldwide suppliers of POS systems,
IBM, NCR, and Fujitsu-ICL. The Company's system may also be
interfaced with major store operating systems, such as OS/2,
Windows NT and Unix. Because the "intelligence" of the ERS
ShelfNet System is located in the system controller and not the
individual ESLs, the Company is able to incorporate new functions<PAGE>
<PAGE>
into its system by upgrading software without replacing any
hardware.
The Company's system can be linked to an in-store laser
printer capable of printing paper overlays for ESLs, paper labels
for non-electronic shelves and other promotional items. The
Company furnishes its customers with specific procedures and
guidelines for each application that show store managers how to
utilize the ERS system and software tools, and a data collection
and analysis format to document productivity increases and to
monitor ongoing improvements in store operations.
Marketing and Sales
The Company will continue to focus its marketing efforts on
major national and regional supermarket chains. The Company
believes that each supermarket chain will typically choose a
single supplier of ESL systems to maximize chainwide efficiency.
Therefore, the Company's marketing strategy is to make
installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such
installations by installing systems through the rest of the
chain's stores. In response to retailing trends, the Company has
also increased its marketing efforts to mass merchandisers and,
during the year ended December 31, 1998, entered into arrangements
with Rite-Aid, a chain drug store.
Based upon its experience to date, the Company expects that
the adoption process for the ERS ShelfNet System will occur in
four successive phases, as follows:
Detailed review of store procedures and systems and
documentation of expected cost savings and benefits;
Agreement for multi-store adoption of the ERS ShelfNet
System subject to design, installation and
implementation of a single store evaluation system and
concurrent design of integration plans, operating
procedures and training programs for broader use by the
retailer;
Installation of the first group of stores within a chain,
defined by a geographic or merchandising region, to
establish final chain-wide operating procedures; and
Chain-wide commercial rollout.
The Company currently markets its products directly to
major retail chains through a marketing and sales force. The
Company's marketing and sales personnel have significant retail
experience, including experience in the POS system and local area
network industries. The Company's marketing staff works with
existing and potential customers to define their needs for ESL<PAGE>
<PAGE>
systems and to coordinate their implementation of the ERS ShelfNet
System. The Company exhibits its system at major trade shows and
produces and distributes promotional materials to increase market
awareness of the Company's system.
In addition, the Company will continue to investigate the
feasibility of marketing its system through indirect channels such
as value added resellers and distributors. The Company has
obtained letters of intent, subject to definitive contract terms,
to enter into reseller arrangements from Stores Automated Systems,
Inc., with respect to the United States, and from Seal Electronica
Ltda., with respect to Brazil. In 1997, the Company entered into
a five-year agreement with Symbol Technologies, Inc. ("Symbol"),
granting Symbol the right, subject to specified exceptions and
exclusion of certain markets in the United States, to resell the
Company's products worldwide and, subject to achievement of
specified market penetration objectives, the exclusive right to
resell the Company's products in Europe. Pursuant to such
arrangements and subject to meeting certain minimum sales
criteria, Symbol would also have the right to manufacture the
Company's ESL system. The Company has not yet generated revenues
under its arrangements with Symbol.
The Company historically has marketed its ERS ShelfNet
System for sale, at prices generally in excess of $100,000 per
store. The Company also markets the ERS ShelfNet System under its
SayGo Plan, which the Company believes has, to a limited extent,
facilitated market acceptance of its system, principally as a
result of diminution of the risk perceived by new customers in an
investment in new technology. Under the terms of the SayGo Plan,
the Company owns the system and, with no upfront cash cost to the
retailer, furnishes the system to retailers who pay monthly fees
to the Company based largely on their actual usage of the system.
Under the SayGo Plan, the Company furnishes the system to
qualified customers, identified by the Company as those retailers
who meet minimum requirements with respect to price change
potential per store and number of ESLs ordered. The Company's
contract with such customers typically provides for charges to be
billed to the customer monthly based on usage of the system. The
SayGo Plan allows the customer to terminate the program and return
the Company's system at any time after the first twelve months.
The customer's fees cease upon termination, except for agreed upon
amounts in certain circumstances.
The Company also intends, during its current fiscal year,
to develop additional strategies to accelerate market recognition
and acceptance of the system and its benefits. There can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
systems in the emerging market for ESLs.
<PAGE>
<PAGE>
System sales revenue from the Company's hardware and
software products is recognized at the time of shipment to
customers, or upon completion of an installation of a trial
system, while revenue from providing installation services to
customers is recognized upon the completion of an installation.
Under the SayGo Plan, the Company recognizes revenues as monthly
usage and other fees are billed to customers, and depreciates the
cost of hardware components of its systems over the shorter of
their estimated useful lives or five years.
Maintenance revenue for services provided under maintenance
contracts is recognized over the service contract period, and
other revenue for parts and services is recognized when provided.
In connection with implementing the SayGo Plan, the Company incurs
substantial cash requirements for manufacturing and carrying costs
which are not initially covered by revenues.
The Company has collaborated with supermarket retailers and
suppliers of in-store wireless networks, printing services,
merchandise planning systems and other retail systems providers in
order to develop a better understanding of customer needs and to
offer comprehensive customer solutions. The Company will continue
to pursue such efforts and will seek additional strategic partners
to assist the Company in the broad market adoption and roll-out of
the Company's new generation system.
Customers
As of December 31, 1998, the Company's ESL systems were
installed in 70 U.S. retail stores, including those owned by such
leading supermarket chains as Stop & Shop, HEB, Big Y, Shaw's,
Harvey's and K Mart, and in chain drug stores owned by Rite-Aid,
in addition to two stores outside of the U.S.
As of December 31, 1998, the Company had installed its new
generation system in ten Shaw's stores, five Stop & Shop stores,
one Harvey's store, one supermarket in Brazil and five Rite-Aid
stores. As of such date, the Company had also installed its new
generation ShelfServer software in seven Shaw's stores in order to
upgrade previously installed ERS systems. As of December 31, 1998,
the Company had received purchase orders covering two new
generation systems from Stop & Shop, one system from Shaw's and
five systems from Rite-Aid, which the Company expects to install
in 1999, and had entered into agreements with each of Waremart
Inc. ("Waremart") and E.W. James & Sons Supermarkets, Inc. ("E.W.
James") for the installation of a new generation system. Under the
terms of the agreements, Waremart and E.W. James have undertaken
to install the ShelfNet System in three and 28 additional stores,
respectively, subject to satisfaction with the performance of the
system.
<PAGE>
<PAGE>
During the year ended December 31, 1998, Stop & Shop and
Shaw's accounted for 59% and 29%, respectively, of the Company's
consolidated revenues; during the year ended December 31, 1997,
Stop & Shop, Shaw's, and HEB accounted for 41%, 22% and 11%,
respectively, of the Company's consolidated revenues; and during
the year ended December 31, 1996, Stop & Shop, Big Y and Shaw's
accounted for 46%, 20% and 13%, respectively, of the Company's
consolidated revenues. The failure of such customers to continue
to utilize systems from the Company could have a material adverse
effect on the business of the Company. Additionally, customers who
account for significant portions of the Company's revenues may
have the ability to negotiate prices for the Company's products
and services that are more favorable to such customers and that
result in lower profit margins for the Company.
The Company is actively engaged in pursuing its efforts to
procure additional orders for its systems, and may also in the
ordinary course of its business enter into letters of intent
contemplating the installation of its system. Such letters of
intent are not binding obligations, will be subject to conditions
such as the negotiation and execution of definitive contract
terms, and there can be no assurance that any such arrangements
will be consummated.
Installation and Customer Service
The ERS ShelfNet System is designed to be installed in a
store without disrupting normal store operations. In connection
with the introduction of its new generation system, the Company
intends to use a team comprised of one Company employee and two
sub-contracted installers to install communications infrastructure
and software and, if rail strips are also ordered by the customer,
up to an additional five sub-contracted installers to install such
hardware. The ESLs generally will be programmed by the customer or
at the Company's facilities and shipped to the site where they
will be installed by the customer.
The Company's customer service group is staffed with
employees experienced in POS and other retail systems. The
Company's SayGo Plan commits the Company to a standard
maintenance contract, at no additional charge, with extended
maintenance services available at additional charges to the
customer.
Manufacturing
The Company utilizes third parties to manufacture and
assemble the components comprising the ERS ShelfNet System. The
Company's ESLs currently incorporate a microprocessor which is
supplied solely by Sanyo Semiconductor Corporation ("Sanyo"). <PAGE>
<PAGE>
While the Company, on the basis of its familiarity with the design
of such microprocessor and the capabilities of other sources,
believes that other suppliers could produce equivalent
microprocessors within approximately four months of notification
by the Company, any inability to obtain microprocessors from its
current supplier in sufficient quantities could result in a
temporary interruption of the Company's production of ESLs and any
such replacement supplier could charge more for such production or
produce a lower-quality unit, thus diminishing the Company's
revenues and income from operations. The Company's policy is to
maintain an inventory of microprocessors sufficient to meet
substantially all of its requirements during any such period. The
Company intends to evaluate, from time to time, establishing
relationships with other manufacturers of microprocessors to
provide a second source of supply for its ESLs.
The Company intends to maintain its practice of utilizing
manufacturing subcontractors, and has a supply arrangement with
Surface Mount Technology Ltd., of Hong Kong, for the assembly of
ESLs. The Company also continues to utilize Modulus, Inc. as a
domestic source for the assembly of its ESLs. Although the Company
has not experienced interruptions or delays in the manufacture or
assembly of its systems, and believes that alternative sources of
system components are readily available, the termination of the
Company's relationship with one or more of its contract
manufacturers or legal or regulatory changes in any country in
which such manufacturer resides may result in a temporary
interruption in the manufacture and assembly of the Company's
system and, thus, in the delay or loss of placements of the ERS
ShelfNet System, with a corresponding loss of revenues.
Engineering and Development
The Company's principal engineering and development efforts
have been conducted through software and hardware development
groups located at its facilities in Connecticut and Massachusetts.
These groups focus on improvements to current technology and also
on new applications of existing technology. The Company's
engineering staff also generates the functional specifications and
development schedules for each of the Company's customers. The
Company has also from time to time engaged third parties to design
hardware components based upon requirements or specifications
developed by the Company, and entered into arrangements with
hardware and software developers to augment the Company's internal
activities in the area of long-term product development. The
Company's arrangements with such developers are typically subject
to termination by the Company without penalty, and continuation of
such arrangements will in each case depend upon the satisfactory
achievement by such developers of specified milestones or other
satisfactory performance by them.
<PAGE>
<PAGE>
During the years ended December 31, 1998, 1997 and 1996,
the Company incurred expenses for research and development
activities of, respectively, $3,928,000, $3,409,000 and
$1,614,000. During the years ended December 31, 1998, 1997 and
1996, the Company capitalized an aggregate of $373,000, $375,000
and $592,000, respectively, in costs of internal labor and outside
services associated with product development.
Intellectual Property
The Company has aggressively pursued an intellectual
property rights strategy to protect its product developments. The
Company's policy is to file patent applications to protect its
technology, inventions and improvements that are important to the
development of its business, and to seek copyright protection with
respect to its software. The Company also relies upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain its competitive
position.
The Company holds 16 United States patents and has 12
additional United States patent applications pending, and 20
foreign patent applications pending. The Company also has other
applications under preparation and intends to continue to file
patent applications on its novel products and systems. Certain of
these patents and patent applications are directed to salient
features of the Company's ESL system, in particular relating to
the ESL and associated hardware, and the communications network
linking the components of the system.
The Company's wholly-owned subsidiary, Amacrine
International, Inc. ("Amacrine"), is entitled to use, and to grant
sublicenses with respect to, certain patents directed to an
alphanumeric display module and radio frequency communications
system, which Amacrine designed and developed for Telepanel
Systems Inc. ("Telepanel") under a technical services agreement
which existed between such companies. The Company has become aware
of certain statements made by Telepanel, which the Company
believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents or will
otherwise protect its rights.
The Company attempts to protect certain computer software
and service applications through the use of copyright and trade
secret law. The Company relies on non-disclosure agreements with
its employees, customers, consultants, and strategic partners.
Although the Company believes that patents and other
intellectual property rights are important to its business, there
can be no assurance that patents will issue from any applications
therefor, or if patents issue, that the claims allowed will be of
adequate scope to protect the Company's technology or that issued<PAGE>
<PAGE>
patents or other technology rights will not be challenged or
invalidated. The Company's business could be adversely affected by
increased competition in the event that any patent granted to it
is adjudicated to be invalid or is inadequate in scope to protect
the Company's operations, or if any of the Company's other
arrangements related to technology are breached or violated.
In 1993 in connection with the settlement of certain
litigation, the Company was granted a limited non-exclusive
license in the United States, Canada, the United Kingdom,
Australia, Japan and Germany covering certain United States and
foreign patents, of which Telepanel is the exclusive licensee. The
United States and other patents underlying Telepanel's patent
rights applicable to such license have now expired.
Although the Company believes that its products and
technology do not infringe intellectual property rights of others,
there can be no assurance that third parties will not assert
infringement claims in the future or that such claims will not be
successful. Furthermore, the Company could incur substantial costs
in defending itself in patent infringement suits brought by others
and in prosecuting suits against patent infringers.
Competition
The Company believes that the only ESL system suppliers
offering a product currently competing with the Company's system
in the United States are Telepanel, Pricer and, recently, NCR and
Hobart Corporation ("Hobart"). Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the
Telepanel system. NCR and Hobart also have developed and have
introduced ESL systems in the United States. Outside of the United
States, in addition to Pricer, the Company expects to compete with
a number of companies with ESL systems under development.
The emerging ESL system market is characterized by rapid
technological advances and evolving industry standards, and the
Company may be subject to a high degree of potential competition
with additional companies which may attempt to develop or market
competing ESL systems. These companies may be larger than the
Company and have greater financial and other resources than the
Company. In the future, the Company may face competition from
vendors of POS systems, or scanner manufacturers which offer
products related to POS systems, who may elect to enter the market
for ESL systems. The ERS ShelfNet System is also subject to
competition from vendors selling traditional paper labeling
methods, as well as providers of hand-held portable data
terminals.
The principal competitive factors in the Company's business
are product functionality, price/performance and reliability. The
Company believes that it competes favorably on each of these
factors.<PAGE>
<PAGE>
Employees
As of December 31, 1998, the Company had 96 full-time
employees, consisting of 38 engaged in engineering, development
and manufacturing support, 19 in marketing and sales activities,
28 in customer services and 11 in general administrative and
executive functions. At such date, the Company had an additional
13 part-time employees, engaged primarily in customer service
functions. The Company does not have a collective bargaining
agreement with any of its employees and considers its relationship
with its employees to be excellent.
Government Regulation
Accuracy in pricing on the part of supermarkets has been an
objective of state and local regulation. At least 22 states
currently have laws or regulations requiring some form of "unit
pricing" (which require prices and price per measure to be
displayed either on the package or the shelf), and at least seven
states (and other local jurisdictions) have laws requiring "item
pricing" (which require the marking of prices on individual
consumer packages for some or all products in the retail store).
The existence of item pricing laws applicable to any of the
Company's intended customers increases such customers' costs of
providing price information to consumers and may decrease or
eliminate some of the potential benefits of implementation of the
ERS ShelfNet System. In the State of Minnesota, item pricing is
not required if the price is clearly presented on the shelf and
consumers are offered the means by which to mark individual items.
In the State of Connecticut, the item pricing law allows the
State's Commissioner of Consumer Protection to exempt from item
pricing requirements stores employing an approved ESL system. The
Commonwealth of Massachusetts has authorized and is conducting
trials of ESL systems in support of its consideration of
regulation which may encourage the installation of such systems.
The United States Federal Communications Commission has
established standards for radio frequency emissions from computer
products, and certain components utilized in the Company's ESL
system must comply with such criteria. All components currently
incorporated into the ERS ShelfNet System comply with such
standards, and the Company does not anticipate any material delays
in securing any required certification for components under
development by the Company. Certain foreign countries also
regulate radio frequency emissions.
Executive Officers
The executive officers of the Company, and their respective
ages and positions with the Company, are as follows:
<PAGE>
<PAGE>
Name Age Position
---- --- --------
Norton Garfinkle 68 Chairman of the Board
Bruce F. Failing, Jr 50 Vice Chairman of the
Board and Chief
Executive Officer
Michael Persky 35 President
Jerry McAuliffe 35 Vice President, Chief
Financial Officer
Morty Bachar 42 Vice President,
Engineering
Paul Lavoie 38 Vice President, Retail
Marketing
Norman Tsang 34 Vice President, Marketing
Mr. Garfinkle, the Company's Chairman of the Board, is a
founder of the Company. Since 1970, Mr. Garfinkle has also been
the Chairman of Cambridge Management Corporation, which
manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as
Chairman of its affiliates, including Oxford Management
Corporation, which specialize in the research and development of
new technologies. From 1985 to 1988, Mr. Garfinkle was Chairman of
Oral Research Laboratories, Inc., a manufacturer of dental hygiene
products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to
1988. In December 1995, pursuant to an agreement with New York
State authorities, Mr. Garfinkle admitted to a misdemeanor
relating to his 1989 New York State return and paid all taxes
required by the agreement.
Mr. Failing, the Company's Vice Chairman of the Board and
Chief Executive Officer, is a founder of the Company, and served
as President through February 1997. In 1973, Mr. Failing co-
founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive
Officer of Actmedia, Inc. until its sale in 1989.
Mr. Persky has been President and Chief Operating Officer of
the Company since April 1998, having joined the Company and become
Vice President-Marketing in 1997. Prior to joining the Company,
Mr. Persky was Vice President-Marketing for Executone, Inc., a
manufacturer of telephone systems, since 1996. From prior to 1994
to 1996, Mr. Persky held various marketing positions with Octel
Communications (formerly VMX, Inc.), a voice mail supplier, the
last of which was as Marketing Director, Europe, Middle East and
Africa.
<PAGE>
<PAGE>
Mr. McAuliffe has been Vice President, Chief Financial
Officer of the Company since January 1999. From 1997 until joining
the Company, Mr. McAuliffe was Chief Financial Officer of Ubiq
Communications, Inc., a specialty wireless messaging and
information company, and from prior to 1994 to 1997 served as
Chief Financial Officer of Ovid Technologies, Inc., a software
and internet based information technology company.
Mr. Bachar has been Vice President, Engineering of the
Company since January 1999, having joined the Company as Director,
Project Management in August 1998. During 1998, Mr. Bachar served
as Vice President of Engineering of Voyetra Turtle Bech, a
developer of multimedia software and hardware products, and from
1996 to 1997 was Director of Development and Project Management
for Executone, Inc. From 1994 to 1995, Mr. Bachar was Director of
Special Projects of IPC Information Systems, Inc., a
telecommunications company.
Mr. Lavoie has been Vice President, Retail Marketing of the
Company since January 1999, having joined the Company as Vice
President, Marketing in 1998. From 1994 to 1998, Mr. Lavoie held
various marketing positions with News America Marketing, Inc.
(formerly, Actmedia, Inc.), the last of which was as Senior Vice
President, Retail Marketing.
Mr. Tsang has been Vice President, Marketing of the Company
since January 1999. Prior to joining the Company, Mr. Tsang was
Vice President, Marketing of Star Markets Company, a regional
supermarket and natural foods chain from March 1995 to December
1998. From prior to 1994 to March 1995, Mr. Tsang was a
consultant with McKinsey & Company, a strategic consulting
company.
ITEM 2. PROPERTIES
The Company's executive offices are located at 488 Main
Avenue, Norwalk, Connecticut, where the Company leases
approximately 29,400 square feet of space under a lease requiring
payment of annual rent (in addition to utility charges and
increases in operating expenses and real estate taxes) in an
amount, currently, at approximately $480,000 increasing to
approximately $684,000 in the final year of the lease (which
expires August 2007), subject to the Company's right to terminate
the lease in July 2002 or July 2004 upon payment of specified
sums. Of the Company's currently leased space in Norwalk,
approximately 6,100 square feet is devoted to office and
administrative uses, approximately 11,000 square feet to
engineering and development activities, approximately 6,100 square
feet to marketing, sales and customer service functions, and
approximately 6,200 square feet, which the Company began leasing
on January 1, 1998, is currently not being used and is currently
the subject of sublease negotiations by the Company with a third
party.<PAGE>
<PAGE>
The Company holds an option to lease the remaining portion
of all space (up to approximately 35,000 square feet in aggregate)
as it becomes available in the building that houses its executive
offices. The lease term and cost per square foot for all
additional space would be on terms comparable to those of the
original lease. The Company has no present plans to exercise this
option.
The Company has entered into a lease arrangement in
Boxborough, Massachusetts, with respect to approximately 22,500
square feet, which expires in September 2002 and requires annual
rent (in addition to increases in operating expenses and real
estate taxes) in an amount currently of approximately $268,000,
increasing to approximately $290,000 in the final year of the
lease. The space is used for engineering and development
activities. The Company leases additional space at other smaller
locations where required to support operations. The foregoing
facilities are regarded by management as adequate in all material
respects for the current requirements of the Company's business.
As described under Note 6 of the Notes to the Company's
Consolidated Financial Statements included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K", the Company's indebtedness to the Connecticut Development
Authority (the "CDA") is secured by the assets of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation incidental to
the conduct of its business and affairs. Management does not
believe that the outcome of any such litigation will have a
material adverse effect on the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is currently traded on the
over-the-counter market, with price quotations reported on the
Nasdaq SmallCap Market under the symbol "ERSI." Prior to November
6, 1998, the Company's Common Stock was quoted on the Nasdaq
National Market. The following table sets forth, for the calendar
periods indicated, the range of quarterly high and low sales
prices for the Common Stock, as reported on the Nasdaq National
Market prior to November 6, 1998 and on the Nasdaq SmallCap Market
from and after such date. Quotations represent prices between<PAGE>
<PAGE>
dealers and do not include retail mark-ups, mark-downs or
commissions.
1997 High Low
First Quarter $7.38 $3.38
Second Quarter 7.50 4.63
Third Quarter 7.44 5.13
Fourth Quarter 7.13 3.31
1998 High Low
First Quarter $5.00 $3.00
Second Quarter 4.50 2.50
Third Quarter 4.50 2.56
Fourth Quarter 3.94 1.00
Since July 11, 1996, the Common Stock has also been
admitted to trading on the Alternative Investment Market of the
London Stock Exchange.
As of March 15, 1999, the number of record holders of the
Company's Common Stock was 566.
The Company has never paid or declared any cash dividends
on its Common Stock and does not intend to pay cash dividends on
its Common Stock in the foreseeable future. The Company intends to
retain its earnings, if any, for the future operation and
expansion of its business. The payment of dividends in the future
will depend upon the restrictions imposed by the indenture
pursuant to which the Senior Discount Notes were issued, the
Company's available earnings, the capital requirements of the
Company, its general financial condition and other factors deemed
pertinent by the Board of Directors. See Note 6 of the Notes to
the Company's Consolidated Financial Statements included in
response to "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-
Liquidity", which information is incorporated herein by reference.
(b) Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following tables reflect summary historical
consolidated financial data with respect to the Company for the
periods indicated and should be read in conjunction with the
Company's Consolidated Financial Statements included in response
to "Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<PAGE>
<PAGE>
The following selected consolidated statement of operations
and balance sheet data, insofar as it relates to each of the five
years in the period ended December 31, 1998, has been derived from
audited consolidated financial statements, including the
consolidated balance sheet as of December 31, 1998 and 1997 and
the related consolidated statement of operations for each of the
three years in the period ended December 31, 1998 and the notes
thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues.................... $ 3,764 $ 1,972 $ 5,002 $ 2,973 $ 2,376
Cost of goods sold.......... 8,095 3,699 6,204 4,113 3,822
------ ------- ------- -------- --------
Gross loss................ (4,331) (1,727) (1,202) (1,140) (1,446)
------ ------- ------- -------- -------
Operating expenses:
Selling, general and
administrative............ 12,671 12,394 6,310 6,896 6,425
Research and development... 3,928 3,409 1,614 2,547 2,185
Depreciation and amorti-
zation.................... 375 301 162 107 149
Stock option compensation -- -- 44 27 1,119
------ ------- ------- -------- -------
Total operating expenses.. 16,974 16,104 8,130 9,577 9,878
------ ------- ------- -------- -------
Loss from operations...... (21,305) (17,831) (9,332) (10,717) (11,324)
------ ------- -------- --------- -------
Other income (expenses):
Interest income............ 3,982 4,982 302 134 288
Interest expense........... (16,886) (14,024) (382) (291) (65)
Loss on disposals .. (104) -- -- -- --
Gain (loss) on short-term
investments............... -- -- -- 6 (177)
------ ------- -------- -------- -------
Total other (expense)
income ............. (13,008) (9,042) (80) (151) 46
------ ------- -------- -------- -------
Net loss.................. $(34,313) $(26,873) $ (9,412) $(10,868) $(11,278)
======== ======== ======== ======== ========<PAGE>
Earnings per share:
Weighted average number
of common shares out-
standing................. 21,233 21,096 16,169 11,743 11,682
======== ======== ======== ======== ========
Basic loss per common
share(1)................. $ (1.62) $ (1.27) $ (0.60) $ (0.95) $ (0.97)
======== ======== ======== ======== ========
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Consolidated Balance
Sheet Data:
Net working capital....... $ 65,697 $ 88,372 $ 8,764 $ 5,283 $ 3,452
Total assets.............. 81,626 100,208 12,260 8,316 5,195
Long-term debt............ 124,057 113,102 4,989 3,335 1,981
Common stock purchase
warrants................. 5,100 5,100 -- -- --
Stockholders' (deficit)
equity................... (54,742) (20,476) 5,723 3,215 2,268
- -----------------------
(1) In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share". Due to the Company's loss position, the Company has
reported "basic" loss per common share. The presentation of "dilutive" loss
per common share is not required as common stock equivalents are anti-
dilutive.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The market for ESL systems is in the development stage, and
the Company estimates that, as of December 31, 1998, approximately
170 stores in the United States were operating such systems, out
of a potential market in excess of 100,000 supermarkets and other
stores. As a result, market acceptance of and demand for these
systems are subject to a high level of uncertainty. The Company's
success will depend upon the rate at and extent to which retailers
choose to install ESL systems throughout their stores. The initial
acceptance and rate of installation by retailers may be affected
by numerous factors beyond the Company's control, including the
customer's assessment of the benefits of and the need for ESL
systems and the customer's available capital resources, and there
can be no assurance that supermarket chains will choose to install
ESL systems in a significant number of their stores.
Since its inception in 1990, the Company has been engaged
primarily in the development, design, market testing and sale of
the ERS ShelfNet System. The Company subcontracts to third parties
the manufacture and assembly of the components comprising the ERS<PAGE>
<PAGE>
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 December 31, 1998, the Company
has generated cumulative revenues of $18.3 million, and has
incurred a cumulative net loss of approximately $126.9 million.
The Company expects losses and negative cash flow from operations
to continue into the current fiscal year, and the accumulated
deficit will increase, while the Company concentrates on the
foregoing activities and unless and until it has established a
sufficient revenue-generating customer base.
The Company historically has marketed the ERS ShelfNet
System for sale at prices generally in excess of $100,000 per
store. The purchase of an ESL system from the Company has
therefore represented a significant capital expenditure for
capital-constrained retailers. The Company also markets its ERS
ShelfNet System on a fee based arrangement under its SayGo Plan.
Under the SayGo Plan, the Company will recognize revenues as
monthly usage and other fees are billed to customers. Also, under
the SayGo Plan the Company will retain ownership of the systems,
which will be reflected as long-term assets on the Company's
consolidated balance sheet and which will be depreciated on a
straight-line basis over the shorter of their economic lives or
five years. The Company intends, during its current fiscal year,
to develop additional strategies to accelerate market recognition
and acceptance of the system and its benefits, but there can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
system in the emerging market for ESLs.
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 December 31, 1998, the Company had recorded total
outstanding indebtedness of approximately $129.1 million and a
total stockholders' deficit of $54.7 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<PAGE>
<PAGE>
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.
Results of Operations
Year ended December 31, 1998 compared to
year ended December 31, 1997
Revenues. The Company's revenues were $3,764,000 in 1998,
compared to $1,972,000 in 1997, reflecting the increased demand
for ERS' new generation product. In 1998, revenues were
concentrated among two significant customers within the
supermarket industry comprising 88% of total revenues, with one
customer accounting for 59% thereof. Approximately 41% of revenues
in 1997 was attributable to a single customer, with three
customers accounting for 74% of total revenues. For each of the
years ended December 31, 1998 and 1997 software license fees were
$122,000, or 4% and 11% of product sales, respectively. For the
year ended December 31, 1998, maintenance revenues increased to
$864,000 from $825,000 in the prior year, due primarily to an
increase in the number of installed locations.
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.
Under 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 $8,095,000 in 1998 from
$3,699,000 in 1997, resulting in a gross loss (cost of goods sold
in excess of revenues) in 1998 of 115% of total revenues compared
to 88% in 1997. The increase in gross loss as a percent of
revenues is primarily the net effect of an increase in the
inventory reserve, offset by reduced material cost and by a
decrease in depreciation related to manufacturing equipment and
amortization of product development costs, as a share of cost of
goods sold, resulting from increased installation volumes. During
1998, the Company recorded a charge of $2,970,000 representing an
increase in its reserve for inventory valuation.
Warranty and maintenance expenses included in the cost of
goods sold decreased to $654,000 in 1998 from $758,000 in 1997,
attributable to maturity of the product. ERS 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 $277,000, to $12,671,000 in 1998,
compared to $12,394,000 in 1997. The 1998 results reflect an
increase in compensation related expense from 1997 consisting of
an increase in severance related costs and slightly higher
salaries offset by an overall decrease in employee headcount. The
1997 results include the effect of a special non-cash charge of
$510,000 for the issuance of common stock purchase warrants.
As more fully described in Note 12 of the Notes to the
Company's Consolidated Financial Statements included in response
to "Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K," 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 years ended December 31, 1998 and 1997 include
direct transaction costs associated with the proposed combination
of $381,000 and $585,000, respectively.
Research and Development. Research and development expenses
increased $519,000 to $3,928,000 in 1998 from $3,409,000 in 1997.
Such increases reflect expanded hardware and software engineering
activities, primarily greater functionality of the Company's new
system, creation of improved POS data integration tools and the
development of training programs. During the years ended December
31, 1998 and 1997, the Company also capitalized product
development costs of $373,000 and $375,000, respectively. <PAGE>
<PAGE>
Interest Income. Interest income decreased to $3,982,000
in 1998 compared to $4,982,000 in 1997, due to decreased cash and
cash equivalents available for investment.
Interest Expense. Interest expense increased to $16,886,000
in 1998 compared to $14,024,000 in 1997. Interest expense
represents interest on amounts borrowed from the CDA and,
additionally, 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
an 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
for federal income tax purposes of approximately $73.7 million,
which are available to offset future taxable income and expire
through the year 2013 for federal income tax purposes. In
consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize any future tax benefits
resulting from these losses, a full valuation allowance has been
provided against the impact of this potential tax benefit in the
Company's consolidated financial statements as of December 31,
1998 and 1997 (see Note 11 of the Notes to the Company's
Consolidated Financial Statements included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K").
Year ended December 31, 1997 compared to
year ended December 31, 1996
Revenues. The Company's revenues were $1,972,000 in 1997,
compared to $5,002,000 in 1996. The Company believes that the
decrease of $3,030,000 in revenues in 1997 compared to 1996
reflected the decreased demand for ERS' previous generation
product attendant to plans to introduce a new generation product.
In 1997, revenues were concentrated among three significant
customers within the supermarket industry comprising 74% of total
revenues, with one customer accounting for 41% thereof.
Approximately 46% of revenues in 1996 was attributable to a single
customer, with three customers accounting for 79% of total
revenues. For the years ended December 31, 1997 and 1996 software
license fees were $122,000 and $243,000, respectively, or 11% and
6% of product sales. For the year ended December 31, 1997,
maintenance revenues decreased to $825,000 from $896,000 in the<PAGE>
<PAGE>
prior year, due primarily to a reduced customer base of the
previous generation product.
Cost of Goods Sold. Cost of goods sold decreased to
$3,699,000 in 1997, from $6,204,000 in 1996. Warranty and
maintenance expenses included in the cost of goods sold decreased
to $758,000 in 1997 from $966,000 in 1996, attributable to
maturity of the product. The gross loss (cost of goods sold in
excess of revenues) in 1997 increased to 88% of total revenues
from 24% in the 1996 corresponding period, reflecting reduced
installation volumes.
The increase in gross loss as a percent of revenues was
primarily the result of ERS' transition to a new generation of
wireless products. During this transition, ERS experienced high
initial material costs and installation inefficiencies.
Additionally, because of a reduction in product sales in 1997,
depreciation of manufacturing equipment and amortization of
product development costs comprised a significant share of costs
of goods sold.
Cost of goods sold in 1996 also included a special provision
for excess inventory of $750,000 recorded in the fourth quarter of
1996, in connection with the introduction of the new generation
ESL system.
Selling, General and Administrative. Selling, general and
administrative costs increased $6,084,000, to $12,394,000 in 1997,
compared to $6,310,000 in 1996. This reflects increased salary,
recruiting and rental expense related to efforts to expand ERS'
organization in anticipation of sales growth. In addition, results
include direct transaction costs associated with the proposed
Telepanel arrangement of approximately $585,000 and the effect of
a special non-cash charge of $510,000 for the issuance of common
stock purchase warrants.
Research and Development. Research and development expenses
were $3,409,000 in 1997 compared to $1,614,000 in 1996. The
increase in research and development expenses reflects expanded
hardware and software engineering activities and the development
of training programs. During the years ended December 31, 1997 and
1996, the Company also capitalized product development costs of
$375,000 and $592,000, respectively. These product development
costs are amortized over the shorter of the estimated useful life
of the related software product or process or three years.
Interest Income. Interest income increased to $4,982,000
in 1997 compared to $302,000 in 1996, due to increased cash and
cash equivalents available for investment, including the proceeds
of the Private Placement of 147,312 Units consisting of
$147,312,000 principal amount at maturity of Senior Discount Notes
together with the 1997 Warrants to purchase an aggregate of
2,538,258 shares of Common Stock consummated on January 24, 1997.<PAGE>
<PAGE>
Interest Expense. Interest expense increased to $14,024,000
in 1997 compared to $382,000 in 1996. Interest expense represents
interest on amounts borrowed from the CDA and additionally, in
1997, non-cash interest on the Senior Discount Notes.
Income Taxes. In consideration of the Company's accumulated
losses 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
consolidated financial statements as of December 31, 1997 and 1996
(see Note 11 of the Notes to the Company's Consolidated Financial
Statements included in response to "Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 8-K").
Liquidity and Capital Resources
As of December 31, 1998, the Company had net working capital
of $65,697,000 reflecting cash and cash equivalents of $63,877,000
compared to net working capital of $88,372,000, reflecting cash
and cash equivalents of $82,400,000 at December 31, 1997. The
decrease in net working capital and in cash and cash equivalents
resulted primarily from funding the Company's operations during
1998.
Net cash used in operations was $16,606,000 in 1998,
compared to net cash of $16,831,000 used for operating activities
in 1997, resulting primarily from the net losses of $34,313,000
and $26,873,000, respectively, for such periods. In 1998, the net
loss of $34,313,000 included $15,441,000 of non-cash interest
expense, compared to $12,798,000 of such expense in the prior
year. The 1998 net cash used in operations also reflected an
increase in trade accounts receivable (net of allowance for
doubtful accounts) of $1,057,000 and a decrease in inventory (net
of reserves) of $660,000, compared to a decrease in accounts
receivable (net of allowance for doubtful accounts) of $842,000
and an increase of inventory (net of reserves) of $6,452,000
during the prior year. The Company recorded a charge during 1998
of $2,970,000 representing an increase in its reserve for
inventory valuation. During 1998, current liabilities decreased by
$268,000 reflecting a decrease in outstanding trade payables,
compared to an increase of $934,000 in the prior year.
Cash used in investing activities totaled $1,964,000 in 1998
compared to $3,709,000 in 1997. Investing activities included
capital expenditures of $1,730,000 and $3,334,000 in 1998 and
1997, respectively. The Company also incurred $373,000 and
$375,000 in 1998 and 1997, respectively, in product development
costs.
<PAGE>
<PAGE>
In addition to selling the ERS ShelfNet System to customers
at a price generally in excess of $100,000 per store, under the
Company's 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 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, its initial public
offering of Common Stock consummated in 1993, its arrangements
with the CDA, the sale of Series A Preferred Stock, $1.00 par
value ("Series A Preferred Stock"), to the Company's principal
stockholders and members of the Company's Board of Directors and
their affiliates, an offshore public offering and contemporaneous
private placement of Common Stock in 1996 and the Private
Placement.
Cash from financing activities provided $47,000 in 1998 from
the exercise of stock options, compared to $94,742,000 in 1997 as
a result of the Private Placement. In January 1997, the Company
completed the private sale of 147,312 Units, consisting of
$147,312,000 principal amount at maturity of its Senior Discount
Notes and the 1997 Warrants, which were sold to investors at a
price aggregating $100 million ($95 million net proceeds to the
Company). The Senior Discount Notes mature on February 1, 2004,
with accrual of cash interest at the rate of 13-1/4% 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 Notes at
specified prices.
<PAGE>
<PAGE>
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, since January 24, 1998,
exercisable through February 1, 2004 with respect to an aggregate
of 2,538,258 shares of Common Stock, at a per share price of
$5.23.
The Company remains obligated to the CDA for an aggregate
of $5,000,000 principal amount of indebtedness (the "CDA Note"),
repayable in August 1999 and convertible to shares of Common Stock
at an adjusted conversion price calculated at $3.00 plus the
average market price of the Common Stock during the twelve months
prior to conversion. The CDA also acquired warrants expiring in
August 1999 to purchase 699,724 shares (as adjusted through
December 31, 1998) of Common Stock, exercisable at an adjusted
price calculated at $2.58 plus the average market price of the
Common Stock during the twelve months prior to exercise. Under its
arrangements with the CDA, the Company will be obligated to comply
with certain covenants (some of which remain in effect until
August 2004), whether or not the CDA Note has been paid in full,
or be subject to certain penalties including immediate repayment
of the CDA Note in full. In the event of specified changes in
control of the Company coupled with prepayment of its note, the
Company has rights to repurchase such warrants and shares at the
fair market value thereof (calculated pursuant to such
arrangements), and thereby, subject to the foregoing, extinguish
such covenants. In all events (and notwithstanding any such
repurchase), if the Company relocates outside of Connecticut
before August 2004, all advances made by the CDA are subject to
acceleration, together with a penalty of $250,000.
The Company expects net losses and negative cash flows from
operations to continue into the current fiscal year. The Company
has been utilizing and will continue to utilize the net proceeds
from the Private Placement in connection with the anticipated
expansion of its operations and for general corporate purposes,
including the funding of the Company's ongoing engineering,
development and marketing efforts. The Company believes the
proceeds of the Private Placement, together with its other cash
and cash equivalents, will be sufficient to meet the Company's
currently anticipated operating and capital expenditure
requirements as it implements its business strategy and as
required debt service under the Senior Discount Notes commences,
and fund operations through the year ending December 31, 2000. As
more fully described above, the Company's ability to meet its
continuing debt service and other obligations will depend, among<PAGE>
<PAGE>
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 operations
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)
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 intends to obtain appropriate
assurances of compliance from 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, the project team will
undertake to test such components and, if necessary, replace them.
The Company anticipates that the software or systems that the
Company deems significant to its business will be year 2000
compliant by the end of the second quarter of 1999, but there can
be no assurance that the Company will not experience delays in
implementing compliant products.
<PAGE>
<PAGE>
The project team has completed preliminary 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. The project team anticipates completing its testing of
the new generation software by the end of the first quarter of
1999 and will undertake any necessary corrective measures during
the second and third quarters of 1999. Although the Company's
agreements with customers generally limit liability of the
Company, there can be no assurance that customers with installed
prior generation systems may not assert claims against the Company
if they experience year 2000 problems with their systems. Given
the terms of the Company's arrangements with these customers, the
Company does not believe that any such development will result in
any material financial exposure to the Company.
As part of the Company's effort, it will recreate customer
environments to the extent possible, and test data interfaces and
other applications to assist customers in year 2000 compliance.
Many customers and potential customers are expending significant
resources to correct their current operations for year 2000
compliance, which may affect purchasing patterns and result in
reduced time and funds available to investigate the purchase of
the ERS ShelfNet System.
The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and others
with whom the Company transacts business on a worldwide basis do
not comply with year 2000 requirements. The project team is
implementing a program to obtain appropriate assurances of year
2000 compliance from the Company's principal suppliers, and is
endeavoring to determine the extent to which the Company is
vulnerable to their failure to remediate year 2000 issues. The
Company has obtained certain written certifications from such
vendors as to year 2000 compliance and plans to obtain the
remainder by the end of the second quarter of 1999. To the extent
that a supplier or vendor poses unacceptable year 2000 risks to
the Company, the Company will seek to identify alternative supply
sources. As more fully described under "Item 1. Business-
Manufacturing", the Company believes alternative sources of system
components are available and maintains an inventory of its
products, which the Company believes is sufficient to account for
temporary supply disruptions.
The Company presently believes that the ERS ShelfNet System
and the Company's internal computer systems will be year 2000
compliant in a timely manner. However, while the Company
estimates the cost of these efforts to be less than approximately
$300,000, there can be no assurance that such costs will not
exceed such amount. Notwithstanding management's current
assessment that no material exposure to significant business
interruption exists, the Company plans by the end of the second<PAGE>
<PAGE>
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 December
31, 1998,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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
For information concerning this item, see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations-Market Risk," which information is
incorporated herein by reference.
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information concerning this item, see "Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K",
which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1. Business-
Executive Officers" and the Proxy Statement to be filed with
respect to the 1999 Annual Meeting of Stockholders (the "Proxy
Statement"), which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
For information concerning this item, see the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the Proxy
Statement which information is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements:
The consolidated financial statements filed in this
Annual Report on Form 10-K are listed in the attached Index to
Consolidated Financial Statements and Schedules.
2. Financial Statement Schedules:
No consolidated financial statement schedules are
filed in this Annual Report on Form 10-K because they are not
required or are inapplicable or the required information is
otherwise shown in the consolidated financial statements or notes
thereto.
<PAGE>
<PAGE>
3. Exhibits:
The exhibits required to be filed as part of this
Annual Report on Form 10-K are listed in the attached Index to
Exhibits.
(b) Current Reports on Form 8-K:
During the quarter ended December 31, 1998, the
Company filed a Current Report on Form 8-K dated November 6, 1998
reporting, under "Item 5. Other Events" thereunder, the movement
of the Company's Common Stock to the Nasdaq SmallCap Market. No
financial statements were included with such report.
<PAGE>
<PAGE>
POWER OF ATTORNEY
The issuer and each person whose signature appears below hereby
appoint Norton Garfinkle, Bruce F. Failing, Jr. and Jerry
McAuliffe as attorneys-in-fact with full power of substitution,
severally, to execute in the name and on behalf of the registrant
and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which
amendments may make such changes in the report as the attorney-in-
fact acting deems appropriate and to file any such amendment to
the report with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1999 ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By s/Bruce F. Failing, Jr.
------------------------
Bruce F. Failing, Jr.
Vice Chairman of the Board
and Principal Executive
Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
s/Bruce F. Failing, Jr. Vice Chairman of the Board March 31, 1999
- ----------------------- and Principal Executive
Bruce F. Failing, Jr. Officer
s/Jerry McAuliffe Vice President and March 31, 1999
- ----------------------- Principal Financial and
Jerry McAuliffe Accounting Officer
S/Paul A. Biddelman Director March 31, 1999
- -----------------------
Paul A. Biddelman
s/David Diamond Director March 31, 1999
- ----------------------
David Diamond
s/Norton Garfinkle Director March 31, 1999
- ----------------------
s/Sheldon Weinig Director March 31, 1999
- -----------------------
Sheldon Weinig
s/Donald E. Zilkha Director March 31, 1999
- -----------------------
Donald E. Zilkha
/TABLE
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements:
Report of Independent AccountantS. . . . . F-2
Consolidated Balance Sheet, December 31,
1998 and 1997. . . . . . . . . . . . . . F-3
Consolidated Statement of Operations for
the years ended December 31, 1998, 1997
and 1996 . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows
for the years ended December 31, 1998,
1997 and 1996. . . . . . . . . . . . . . F-5
Consolidated Statement of Changes in
Stockholders' (Deficit) Equity for the
years ended December 31, 1998, 1997
and 1996 . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. F-7
Financial Statement Schedules:
No Financial Statement Schedules are included herein because they
are not required, are inapplicable, or the information is otherwise
shown in the consolidated financial statements or the notes
thereto.
F-1<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Electronic Retailing Systems International, Inc.
In our opinion, the consolidated financial statements listed in the
index on page F-1 present fairly, in all material respects, the
financial position of Electronic Retailing Systems International,
Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
March 29, 1999
F-2
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Consolidated Balance Sheet
(in thousands, except per share and share amounts)
<CAPTION>
December 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 2) $ 63,877 $82,400
Accounts receivable - net of allowance
for doubtful accounts of $352 in 1998
and $229 in 1997 1,260 203
Receivables from affiliates (Note 3) -- 36
Installations in progress 398 202
Inventories - net of reserves of $3,991 in
1998 and $1,021 in 1997 (Note 2) 6,612 7,273
Prepayments and other current assets 761 740
--------- --------
Total current assets 72,908 90,854
--------- --------
Furniture and equipment (Note 2) 5,113 5,055
Accumulated depreciation (1,462) (1,753)
--------- --------
Furniture and equipment, net 3,651 3,302
--------- --------
Debt issuance costs (Note 2) 4,475 5,038
Other non-current assets 592 1,014
--------- --------
Total assets $ 81,626 $100,208
========= ========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued expenses $ 1,877 $ 2,128
Accrued salaries and benefits 337 354
Notes payable 4,997 -
-------- -------
Total current liabilities 7,211 2,482
-------- -------
Long-term debt (Note 6) 124,057 113,102
-------- -------
Common stock purchase warrants (Note 6) 5,100 5,100
Commitments and contingencies (Note 8) - -
Stockholders' deficit
Preferred stock, undesignated (par value
$1.00 per share; 2,000,000 shares
authorized,none issued and outstanding) - -
Common stock (par value $0.01 per share;
35,000,000 authorized; 21,249,447 and
21,187,035 shares issued and outstanding
in 1998 and 1997, respectively) 212 211
Additional paid-in capital 51,374 51,328
Accumulated deficit (106,328) (72,015)
------- -------
Total stockholders' deficit (54,742) (20,476)
------- -------
Total liabilities and stockholders'
deficit $ 81,626 $100,208
======== =======
See accompanying notes to consolidated financial statements
</TABLE>
F-3<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Consolidated Statement of Operations
(in thousands, except per share amounts)
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues
Product sales $ 2,900 $ 1,147 $ 4,106
Maintenance 864 825 896
-------- -------- ---------
Total revenues 3,764 1,972 5,002
-------- -------- ---------
Cost of goods sold
Product sales 7,441 2,941 5,238
Maintenance 654 758 966
-------- -------- ---------
Total cost of goods sold 8,095 3,699 6,204
-------- -------- ---------
Gross loss (4,331) (1,727) (1,202)
-------- -------- ---------
Operating expenses
Selling, general and administrative
(including amounts to related parties
of $192 in 1998, $125 in 1997 and $34
in 1996) (Note 3) 12,671 12,394 6,310
Research and development (Note 9) 3,928 3,409 1,614
Depreciation and amortization 375 301 162
Stock option compensation (Note 10) - - 44
-------- -------- ---------
Total operating expenses 16,974 16,104 8,130
-------- -------- ---------
Loss from operations (21,305) (17,831) (9,332)
-------- -------- ---------
Other income (expenses)
Interest income 3,982 4,982 302
Interest expense (16,886) (14,024) (382)
loss on disposals (104) - -
-------- -------- ---------
Total other income (expenses) (13,008) (9,042) (80)
-------- -------- ---------
Net loss $(34,313) $(26,873) $ (9,412)
======== ======== =========
Earnings per Share
Weighted average common shares
outstanding 21,233 21,096 16,169
======== ======== =========
Basic loss per common share (Note 2) $ (1.62) $ (1.27) $ (0.60)
======== ======== =========
See accompanying notes to consolidated financial statements
</TABLE> F-4<PAGE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net loss $ (34,313) $(26,873) $ (9,412)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,994 1,799 660
Loss on disposal of fixed assets 104
Common stock purchase warrants - 510 -
Provision for inventory obsolescence 3,099 392 843
Provision for doubtful accounts 165 252 168
Stock option compensation - - 44
Accrued interest 15,441 12,798 -
Accounts receivable (1,222) 606 126
Inventories (2,438) (6,844) 209
Other current and non-current assets (168) (405) 30
Current liabilities (268) 934 (217)
--------- --------- ----------
Net cash used in operating activities (16,606) (16,831) (7,549)
--------- --------- ----------
Cash Flows from Investing Activities:
Capital expenditures (1,730) (3,334) (397)
Capitalized product development costs (373) (375) (592)
Disposal of fixed assets 139 - -
--------- --------- ---------
Net cash used in investing
activities (1,964) (3,709) (989)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from the issuance of long-
term debt - 89,478 -
Net proceeds from the issuance of common stock 47 164 12,111
Net proceeds from the issuance of long-term
note - - 1,650
Net proceeds from the issuance of common stock
purchase warrants - 5,100 -
Cash payments to preferred stockholders
upon conversion - - (235)
--------- --------- --------
Cash provided by financing activities 47 94,742 13,526
--------- --------- --------
Net (decrease) increase in cash and cash
equivalents (18,523) 74,202 4,988
--------- --------- --------
Cash and cash equivalents at beginning of
period 82,400 8,198 3,210
--------- --------- ---------
Cash and cash equivalents at end of period $ 63,877 $82,400 $8,198
========= ========= =========
There were no cash payments for income taxes in the years 1998, 1997 and
1996. Cash payments for interest expense were $401, $339 and $380 in 1998,
1997 and 1996, respectively. In 1996, preferred stock was converted to 3,138,900
shares of common stock in a non cash transaction.
See accompanying notes to consolidated financial statements
</TABLE>
F-5
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Consolidated Statement of Changes in Stockholders' (Deficit) Equity
(in thousands, except share amounts)
<CAPTION>
Additional
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit Total
--------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 123 $ 117 $ 38,474 $ (35,499) $ 3,215
--------- --------- --------- ---------- -------
Vesting of previously issued
stock options 44 44
Issuance of 65,860 common shares
with exercise of stock options 1 1
Issuance of 2,310 shares of
preferred stock as dividends 2 229 (231) -
Issuance and sale of 4,963,500
common shares in offshore
offering, and issuance of
218,957 common shares to
placement agent 52 10,087 10,139
Issuance and sale of 911,657
common shares in private
placement 9 1,982 1,991
Conversion of Series A preferred
stock and issuance of 3,138,900
common shares (125) 31 (161) (255)
Net loss for year (9,412) (9,412)
--------- --------- --------- ---------- ---------
Balances at December 31, 1996 $ - $ 210 $ 50,655 $ (45,142) $ 5,723
Issuance of common stock
purchase warrants 510 510
Issuance of 139,929 common
shares with exercise of stock
options 1 163 164
Net loss for year (26,873) (26,873)
--------- --------- --------- ---------- ---------
Balances at December 31, 1997 $ - $ 211 $ 51,328 $ (72,015) $(20,476)
Issuance of 52,412 common
shares with exercise of stock
options 1 46 47
Net loss for year (34,313) (34,313)
--------- --------- --------- ---------- ---------
Balances at December 31, 1998 $ - $ 212 $ 51,374 $(106,328) $(54,742)
========= ========= ========= ========== =========
See accompanying notes to consolidated financial statements
</TABLE>
F-6
<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -Organization:
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 Company develops and supplies
electronic shelf labeling systems. Electronic shelf labeling
systems replace paper price tags on retail shelves with
liquid crystal display labels and transmit pricing and other
information to and from the aisle. The Company's system is
designed to address retailers' needs for improved pricing
accuracy and labor efficiencies by electronically linking a
store's shelves to its POS scanners and central computer. The
Company currently operates primarily in North America.
The Company has sustained net losses and negative cash flows
from operations since its inception and management expects
these conditions to continue into the year ending December
31, 1999. Management believes that existing resources will
enable the Company to fund operations through the year ending
December 31, 2000; thereafter, the Company may need to raise
additional long-term financing to support operations and
service debt. There can be no assurance that additional
financing would be available on terms reasonable to the
Company.
Note 2 -Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of
the Company and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
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
F-7<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ESL systems,
(b) the impact of competitive products and pricing, and (c)
the Company's ability to obtain system components from suppliers.
Cash Equivalents
Cash equivalents consist of short-term, highly-liquid U.S.
Treasury Bills and certificates of deposit with original
maturities of less than three months and are stated at cost,
which approximates market. Interest income is accrued as
earned.
Cash and cash equivalents at December 31, 1997 included
deposits of $2,969,000 held as interest bearing collateral for
irrevocable letters of credit of the same amount relating to
future inventory purchases in 1998.
Financial Instruments
Financial instruments include cash, cash equivalents, letters
of credit fully collateralized by cash and cash equivalents,
notes payable, long-term debt and common stock purchase
warrants. Financial instruments are carried at cost or accrued
carrying value which approximates fair market value.
Inventories
Inventories are stated at the lower of cost (determined on a
first in, first out basis) or market value. Inventories at
December 31, 1998 consist of approximately $2,167,000 of
materials and supplies and $4,445,000 of finished goods.
Inventories at December 31, 1997 consisted of approximately
$3,286,000 of materials and supplies and $3,987,000 of
finished goods.
Charges for excess, slow moving and obsolete inventory for the
years 1998, 1997 and 1996 were $3,099,000, $392,000, and
$843,000.
Furniture and Equipment
Furniture and equipment is stated at cost. Depreciation is
provided on the straight-line method over the estimated useful
lives of the respective assets, none of which exceeds five
years.
F-8<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furniture and equipment as of December 31, 1998 and 1997, was
comprised of the following (in (000s)):
1998 1997
---- ----
Furniture $1,350 $1,723
Equipment 3,763 3,332
------ ------
Furniture and equipment,
at cost 5,113 5,055
Accumulated depreciation (1,462) (1,753)
------ ------
Furniture and equipment, net $3,651 $3,302
====== ======
Fully depreciated furniture and equipment no longer in use of
$1,429 was written-off during 1998. In addition, during 1998
equipment with a cost of $243 was written off resulting in a loss
of $104.
Product Development Costs
The Company capitalizes product development costs, principally
wages and contractor fees, after establishing commercial and
technical viability. Product development costs are stated at the
lower of cost or net realizable value. These costs are amortized
using the straight-line method over the shorter of the estimated
useful life of the product or three years. The Company's policy is
to make regular evaluations of the remaining product development
costs for potential impairments of value through analysis of
operating results and related cash flows, trends and prospects as
well as competitive and economic factors. Amortization commences
when the product is available for general release to customers. As
of December 31, 1998 and 1997, unamortized capitalized costs of
$559,000 and $969,000, respectively, are included as other non-
current assets in the accompanying consolidated balance sheet.
Amortization expense totaled $783,000, $262,000 and $203,000 for
1998, 1997 and 1996, respectively.
F-9
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuance Costs
The Company has capitalized costs incurred in connection with
the issuance of debt. Such costs are principally investment
banking, legal, accounting, financial printing, and other
related fees and costs. These costs are amortized using the
effective interest method over the lives of the respective
debt arrangements. As of December 31, 1998 and 1997,
unamortized debt issuance costs of $4,475,000 and $5,038,000,
respectively, are included as other non-current assets in the
accompanying consolidated balance sheet. Amortization expense
totaled $563,000, $440,000 and $19,000 for 1998, 1997 and
1996, respectively.
Revenue Recognition
Revenue is recognized when the product is shipped or upon
completion of installation of a trial electronic shelf label
system, provided that no significant obligations remain and
collection of the resulting receivable is deemed probable.
Revenue from providing installation services to customers is
recognized upon the completion of an installation. Under the
SayGo plan, the Company recognizes revenues as monthly usage,
and other fees are billed to customers, and depreciates the
cost of hardware components of its systems over the start of
their estimated useful lives or five years. Maintenance
revenue for services provided under maintenance contracts is
recognized over the service contract period. Other revenue for
parts and services is recognized when provided.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which requires an asset and
liability approach to the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes relate to
timing differences between financial and income tax reporting
for stock option compensation, product development costs,
depreciation and other items.
F-10<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Based Compensation
The Company accounts for incentive plans and stock options
using the provisions of Accounting Principle Board Opinion No.
25, "Accounting for Stock Issued to Employees." Pro forma
information required by Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation," is included in
Note 10.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing the
net loss available to common stockholders by the weighted
average number of common shares outstanding for the period,
without consideration for common stock equivalents. Diluted
EPS is computed by dividing net loss for the period by the
weighted average number of common shares outstanding and
dilutive common stock equivalents.
Due to the Company's loss position, the Company has reported
only "basic" EPS. The presentation of "dilutive" EPS is not
required as common stock equivalents are anti-dilutive. The
number of securities at December 31, 1998, 1997, and 1996 that
could potentially dilute basic EPS in the future are
5,745,496, 5,969,004, and 1,528,492, respectively. Such
securities, which have been excluded from the calculation of
basic EPS as they are anti-dilutive, include employee and
director stock options, convertible debt, and common stock
purchase warrants.
Segment Information
The Company is in one business segment, the electronic shelf
labeling business, and follows the requirements of FAS 131,
"Disclosures about Segments of an enterprise and Related
Information;" however, the requirements do not have a material
impact on the financial statements.
Adoption of New Accounting Standard
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("FAS
130"), which is effective for fiscal years beginning after
December 15, 1997. FAS 130 establishes new rules for the
reporting and display of comprehensive income and its
components. Comprehensive income is defined as "the change in
equity of a business enterprise during a period
F-11<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from transactions and other events and circumstances from non-
owner sources." The adoption of this standard had no impact on
the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which the Company is required to adopt
effective beginning January 1, 2000. The Company is currently
evaluating the impact on its financial statements of adopting
the standard and will comply as required; however, the impact
is not expected to be material on the Company's financial
statements.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities". This SOP is
effective January 1, 1999 and generally requires that all
start-up costs, as defined, be expensed as incurred. The
Company is in the process of identifying any previously
capitalized costs which have to be expensed under this
guidance. Any required adjustment, which is not estimated to
be material, will be recorded as a cumulative effect
adjustment in the first quarter of 1999.
Reclassifications
Certain prior year amounts have been reclassified to conform
to current year presentation.
Note 3 -Related Party Transactions:
The Company has incurred certain common costs on behalf of
affiliates, which were reimbursed by the affiliates, in
connection with the sublease by the Company of a portion of
its prior headquarters facility to such affiliates. Such
common costs, including sublease payments, amounted to $0,
$55,000 and $63,000 in 1998, 1997 and 1996, respectively (see
Note 8). Unpaid amounts were included in receivables from
affiliates at December 31, 1997, and 1996.
The Company has received consulting services and paid a
current and a former member of its Board of Directors, through
an affiliate of the Company, fees of $192,000 and $125,000 in
1998 and 1997, respectively. The Company also has received
consulting services and paid a former member of its Board of
Directors fees of $34,000 in 1996.
F-12<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Preferred Stock:
In July 1995, the Company completed a private sale of 85,000
shares of its Series A Cumulative, Convertible Preferred
Stock, $1.00 par value ("Series A Preferred Stock"), for an
aggregate purchase price of $8.5 million. The purchase price
was delivered by surrender of $3 million of the Company's debt
held by the subscribers, which consisted of certain members of
the Company's Board of Directors and their affiliates, and
cash in the amount of $5.5 million. Subsequently in 1995, an
affiliate of the Company's Chairman of the Board, and one of
the subscribers, acquired 35,000 additional shares of Series
A Preferred Stock at a purchase price per share of $100.
In July 1996 in connection with the Company's offshore public
offering (see Note 5) and contemporaneous private placement,
holders of the Company's Series A Preferred Stock converted
their shares, in accordance with their terms, into an
aggregate of 3,138,900 shares of Common Stock, $.01 par value
("Common Stock"). In connection with the conversion, payments
aggregating $235,000 were made to the Series A Preferred Stock
holders.
Each share of Series A Preferred Stock entitled the holder to
a dividend of $7.50 per annum, payable quarterly, which would
cumulate if not paid. Dividends were payable by the Company,
at its election, either in cash or in the form of additional
shares of Series A Preferred Stock valued at $100 per share.
Dividends paid to holders of record of such stock in 1996 and
1995 were paid in the form of additional shares of Series A
Preferred Stock (aggregating 5,556 shares).
Each share of Series A Preferred Stock, valued at $100, was
convertible into shares of the Company's Common Stock at a
conversion price of $4.00 (subject to certain adjustments),
and was subject to redemption, at the option of the Company,
at a price of $100 under certain conditions. Holders of Series
A Preferred Stock voted together with holders of Common Stock,
each share carrying one vote, and were entitled to a
liquidation preference of $100 per share.
Note 5 - Common Stock Offering:
In July 1996, the Company completed the offshore public
offering of an aggregate of 4,963,500 shares of its Common
Stock, in accordance with Regulation S under the Securities
Act of 1933, and the contemporaneous private placement to
F-13<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subscribers, including certain members of the Company's Board
of Directors and their affiliates, of an aggregate of 911,657
shares of Common Stock. Net proceeds from these transactions
were approximately $12 million (exclusive of non-cash expenses
represented by the issuance of 218,957 shares of Common Stock
as commissions).
In January 1997, the Company's stockholders voted to approve
an increase in the number of authorized shares of Common Stock
from 25,000,000 to 35,000,000 shares.
Note 6 - Debt and Common Stock Purchase Warrants:
In August 1994, the Company completed a financing arrangement
with the Connecticut Development Authority ("CDA"), under
which the CDA loaned $5 million to the Company through
February 1996. Such indebtedness is repayable in August 1999,
accrues interest, payable monthly, at a rate of 7.4% per
annum, is subject to prepayment without premium at the option
of the Company, and is convertible into shares of the Common
Stock of the Company. This note has been classified as short
term on the Company's balance sheet at December 31, 1998. Such
indebtedness is collateralized by the Company's assets.
The Company also issued to the CDA warrants to purchase
600,000 shares of Common Stock. At issuance, the original
conversion price of the debt and exercise price of the
warrants was in excess of the then market price of the
Company's Common Stock and, accordingly, nominal value was
assigned to the warrants. The agreements entered into with the
CDA were amended effective upon consummation of the initial
sale of the Company's Series A Preferred Stock (see Note 4),
and as a result of additional provisions contained in the
CDA's warrants to provide as follows: (i) the conversion price
of the debt held by the CDA is $3.00 plus the average market
price of the Common Stock during the twelve months prior to
conversion, (ii) the exercise price of the CDA's warrants is
calculated as $2.58 plus the average market price of the
Common Stock during the twelve months prior to exercise, and
(iii) the number of shares subject to purchase upon exercise
of the CDA's warrants is 699,724.
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-
1/4% Senior Discount Notes due February 1,
F-14<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 (the "Notes") together with warrants to purchase an
aggregate of 2,538,258 shares of Common Stock, at an exercise
price of $5.23 per share, exercisable from the period
commencing on the first anniversary of closing through
February 1, 2004.
The Units were sold to investors at a price aggregating $100
million, representing a yield to maturity on the Notes of 13-
1/4%. 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
Private Placement approximated $95 million.
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 interest 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.
Long-term debt as of December 31, 1998 and 1997 was comprised
of the following (in 000s):
F-15<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
7.4% CDA Note due August 12, 1999 $ - $ 4,993
13.25% Senior Discount Notes
due February 1, 2004 (in-
cluding interest accrued
of $15,441 and $12,798) 124,057 108,109
-------- -------
Total long-term debt $124,057 $113,102
======== =======
</TABLE>
The Company engaged Patricof & Co. in connection with certain
corporate finance services and, in addition to fees paid,
issued three-year warrants in the second quarter of 1997
exercisable with respect to 250,000 shares of Common Stock at
a price of $5.24 per share. The estimated fair value of
warrants issued to Patricof & Co. approximated $510,000, and
has been recorded as an increase to Additional Paid-in
Capital.
Note 7 - Customer Information:
All of the Company's sales are to customers in the retail food
market industry. Significant customer sales for the years
ended December 31, 1998, 1997 and 1996 were as follows:
Customer 1998 1997 1996
---- ---- ----
The Stop & Shop Supermarket Company 59% 41% 46%
Big Y Foods, Inc. -- -- 20%
Shaw's Supermarkets, Inc. 29% 22% 13%
H.E. Butt Grocery Co. -- 11% --
Accounts receivable at December 31, 1998 and 1997 are
unsecured and concentrated among major supermarket chains in
the United States. If the customers within this concentration
failed to pay according to the terms of their agreements these
receivables would be reduced to nominal value.
F-16
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 Commitments and Contingencies:
The Company leases its facilities under operating lease
agreements. During 1998, 1997 and 1996 rental expense amounted
to approximately $946,000, $424,000 and $278,000,
respectively.
Future minimum lease payments on a calendar year basis under
non-cancelable leases, as of December 31, 1998, are as
follows:
Total
Commitments
----------
1999 768,000
2000 788,000
2001 816,000
2002 777,000
2003 and thereafter 2,989,000
----------
$6,138,000
==========
The Company is involved in certain litigation incidental to
the conduct of its business and affairs. Management does not
believe that the outcome of any such litigation will have a
material adverse effect on the financial condition or results
of operations of the Company.
Note 9 - Research and Development:
Research and development activities were a major component of
the Company's expenditures and efforts during 1998, 1997 and
1996. The Company's research and development expenses
(including the allocation of applicable salaries) during 1998,
1997 and 1996 were $3,928,000, $3,409,000 and $1,614,000,
respectively.
Note 10 - Stock Option and Defined Contribution Plan:
The Company has an employee stock option plan whereby options
to purchase shares of Common Stock may be granted to key
employees of the Company. The stockholders have approved
successive increases in the number of shares of Common Stock
available for issuance under the plan, which currently
authorizes the grant of options covering 3,500,000 shares.
Options granted under the plan typically become exercisable
over a period of four years and have a term of 10 years.
F-17
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of all option activity pursuant to the employee
stock option plan is as follows:
<TABLE>
<CAPTION>
Price Range Options
----------- -------
<S> <C> <C>
Options outstanding December 31, 1995 $ .01-$6.00 917,729
---------
Options granted $1.88-$2.25 380,784
Options exercised $ .01 (65,860)
Options canceled $2.25-$6.00 (354,161)
---------
Options outstanding December 31, 1996 $ .01-$5.875 878,492
---------
Options granted $4.88-$6.19 1,117,117
Options exercised $ .01-$5.00 (139,929)
Options canceled $ .01-$6.13 (120,552)
---------
Options outstanding December 31, 1997 $ .01-$6.19 1,735,128
---------
Options granted $2.25-$4.00 918,099
Options exercised $ .01-$2.25 (52,412)
Options canceled $ .01-$6.13 (1,181,853)
----------
Options outstanding December 31, 1998 $ .01-$6.19 1,418,962
==========
</TABLE>
Options exercisable at:
December 31, 1998 280,165
December 31, 1997 271,450
December 31, 1996 145,042
The following table summarizes information about employee
stock options outstanding and exercisable at December 31, 1998:
F-18<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .01 251,862 3 years $ .01 106,359 $ .01
$2.25-$4.00 1,070,881 9 $3.16 117,274 $2.28
$4.88-$6.13 96,219 8 $5.14 56,532 $5.12
--------- -------
1,418,962 280,165
========== =======
</TABLE>
Additionally, the Company has a director stock option plan
under which options covering 750,000 shares of Common Stock
may be granted to directors of the Company. During 1998,
47,500 options were granted to directors of the Company to
purchase an equal number of common shares pursuant to this
plan at option prices of $2.75 and $4.00. As of December 31,
1998 options covering an aggregate of 100,000 shares of Common
Stock were outstanding under the plan.
In June 1998, the Company's Board of Directors approved a plan
to issue new options with a lower exercise price and a
different vesting period upon surrender by the employee of
existing options. Employee options with exercise prices
ranging from $4.875 to $6.1875 to purchase 508,863 shares of
common stock were exchanged for 508,863 shares at the price of
$3.50, which was the fair market value at the time of
exchange. The tables above have been adjusted to reflect these
reduced exercise prices, and the extension of the option's
life.
The Company applies APB Opinion 25 and related interpretations
in accounting for its employee and director stock option
plans. The consolidated statement of operations for the year
ended December 31, 1996 includes noncash stock option
compensation expense of $44,000 representing compensation
earned for employee service through the periods then ended
related to option grants. Had compensation expense for the
Company's employee stock option plan been determined based on
the fair value at the grant dates of awards under the plan,
consistent with FAS 123, the Company's net loss and basic loss
per common share would have been the pro forma amounts
indicated below:
F-19
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported ($34,313,000) ($26,873,000) ($9,412,000)
Pro forma ($35,781,000) ($28,052,000) ($9,412,000)
Basic loss per common share:
As reported ($1.62) ($1.27) ($0.60)
Pro forma ($1.64) ($1.33) ($0.60)
</TABLE>
The fair value of each stock option grant was estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used in 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 112% 114% 53%
Risk-free interest rate 5% 6% 7%
Expected life 6 years 6 years 5 years
</TABLE>
The weighted average fair value of stock options granted
during the years ended December 31, 1998, 1997 and 1996 was
$2.89, $4.82 and $1.31, respectively.
The Company has a defined contribution profit sharing and
savings plan which qualifies under Section 401(k) of the
Internal Revenue Code for employees meeting certain service
requirements. Participants may contribute up to 15% of their
gross wages, not to exceed in any given year a limitation set
by Internal Revenue Service regulations (such limitation was
$10,000 in 1998). The plan provides for discretionary matching
contributions, as determined by the Board of Directors, to be
made by the Company. There was $34,000 contributed to the
plan, by the Company, as of December 31, 1998. There were no
discretionary amounts contributed to the plan as of December
31, 1997.
F-20<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Income Taxes:
The Company has incurred net losses since inception which have
generated net operating loss carryforwards of $73.7 million
for federal income tax purposes. These carryforwards are
available to offset future taxable income and begin to expire
in the year 2008. These losses are subject to limitation on
future years utilization should certain ownership changes
occur.
The net operating loss carryforwards and temporary differences
between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes result in a
noncurrent deferred tax benefit at December 31, 1998 and 1997
of $44.5 million and $32.5 million, respectively. In
consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize this deferred tax
benefit in the future, the Company has recorded a valuation
allowance of an equal amount on such dates to fully offset the
deferred tax benefit amount.
Significant components of the noncurrent deferred tax asset at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $30,662,000 $29,127,000
Deferred interest expense 10,113,000 --
Stock option compensation 2,726,000 2,642,000
Other 977,000 762,000
---------- -----------
Total deferred tax benefit 44,478,000 32,531,000
Valuation allowance (44,478,000) (32,531,000)
----------- -----------
Net noncurrent deferred tax asset $ -- $ --
=========== ===========
</TABLE>
In 1998, 1997 and 1996 a statutory Federal income tax rate of 34%
and a state income tax rate of 7.6%, net of the Federal tax
benefit, were applicable to the Company. Due to the Company's
taxable losses the effective tax rate was nil in each year.
F-21<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision calculated for financial reporting
purposes differs from income taxes determined by applying the
statutory Federal income tax rate to the financial statement net
loss for the years ended December 31, 1998, 1997 and 1996 as a
result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax benefit at Federal statutory
rate $11,156,000 $9,083,000 $3,200,000
State income tax benefit, net of
Federal tax charge 2,494,000 2,031,000 714,000
Net loss not providing current
year tax benefit (12,641,000) (11,063,000)(3,608,000)
Non-deductible interest (987,000) -- --
Other ( 22,000) (51,000) (306,000)
---------- ---------- --------
Provision for income taxes $ - $ - $ -
=========== ========== ==========
</TABLE>
Note 12 - Proposed ERS/Telepanel Combination:
In October 1997, the Company and Telepanel Systems Inc.
("Telepanel") executed an agreement providing for the
combination of the Company and Telepanel, as a result of
which ERS would have become the sole beneficial owner of
the outstanding Telepanel Common Shares. In February
1998, as an interim arrangement pursuant to the
combination agreement, the Company and Telepanel entered
into a joint distribution agreement providing for the
creation of a joint venture (the "Joint Venture") that
would hold specified distribution rights. Pursuant to
such arrangements, in February 1998 the Company advanced
the amount of $2,000,000 to the Joint Venture, which
accrued interest payable monthly, at the prime rate plus
2.5% per annum, was guaranteed by Telepanel and its
subsidiaries, and was collateralized by all of the assets
of Telepanel and its subsidiaries (such collateral
subordinated in right to specified bank indebtedness but
prior in right to any other interest).
F-22<PAGE>
<PAGE>
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1998, the Company announced that the condition to
closing contained in the combination agreement requiring
confirmation that the transaction would qualify for pooling-of-
interests accounting treatment failed to be satisfied, and the
Company's Board of Directors determined that it did not intend
to waive the condition to combine regarding qualification for
pooling-of-interests accounting treatment. In April 1998, the Company
and Telepanel executed a formal agreement to terminate their combination
agreement and executed reciprocal releases thereunder. In addition,
the parties agreed: (i) to terminate their joint distribution agreement;
(ii) that the Company would withdraw its demand for acceleration of
payment of the outstanding working capital advances to the Joint Venture
(as a result of the failure of the Joint Venture to pay interest
when due); and (iii) that such balances would be due in October
1998, subject to earlier repayment from equity or debt offerings
of Telepanel. The outstanding advances to the Joint Venture were
repaid in full in October 1998.
F-23
<PAGE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
Exhibit Number Document Description
- -------------- --------------------
<S> <C>
3.1 - Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1
of the Registration Statement on Form S-4
No. 333-21893).
3 - By-laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Annual
Report on Form 10-K for the year ended
December 31, 1997).
10.1 - Form of Reorganization Agreement dated March
12, 1993 among the Company, the Principal
Subsidiary, Norton Garfinkle, The G/N
Garfinkle Trust, Bruce F. Failing, Jr.,
The Failing Trust, Elizabeth Z. Failing,
Robert D. Power and John Stevens
(Incorporated by reference to Exhibit
10.1 to the Registration Statement on
Form S-1 No. 33-59486).
10.2 - Form of Registration Rights Agreement dated
March 12, 1993 among the Company, Norton
Garfinkle, The G/N Garfinkle Trust, Bruce
F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and
John Stevens (Incorporated by reference
to Exhibit 10.2 to the Registration
Statement on Form S-1 No. 33-59486).
10.3 - Form of Restated Stockholders' Agreement dated
March 12, 1993 among Norton Garfinkle,
The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and
Elizabeth Z. Failing (Incorporated by
reference to Exhibit 10.3 to the
Registration Statement on Form S-1 No.
33-59486), together with Amendment No. 1
to Restated Stockholders Agreement dated
October 29, 1997 (Incorporated by
reference to Exhibit 10.4 to the Annual
Report on Form 10-K for the year ended
December 31, 1997) and Amendment No. 2 to
Restated Stockholders Agreement dated
E-1<PAGE>
April 25, 1998 (Incorporated by reference
to Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the period ended March
31, 1998).
10.4 - Form of Reorganization Agreement dated March
12, 1993 among the Company, the
Partnership, the Principal Subsidiary,
and the limited partners of the
Partnership (Incorporated by reference to
Exhibit 10.4 to the Registration
Statement on Form S-1 No. 33-59486).
10.5 - Form of Registration Rights Agreement dated
March 12, 1993 among the Company and the
limited partners of the Partnership
(Incorporated by reference to Exhibit
10.5 to the Registration Statement on
Form S-1 No. 33-59486).
10.6 - Registration Rights Agreement dated as of July
24, 1995 among the Company, Donald E.
Zilkha, Bruce F. Failing, Jr., Hanseatic
Corporation and Garfinkle Limited
Partnership II (Incorporated by reference
to Exhibit 5(d) of the Current report on
Form 8-K dated July 24, 1995).
10.7 - Technical Services Agreement dated October 1,
1985 between Telepanel, Inc. and Amacrine
International, Inc. (Incorporated by
reference to Exhibit 10.10 to the
Registration Statement on Form S-1 No.
33-59486).
10.8 - License Agreement dated January 27, 1993
between the Company and Telepanel Systems
Inc. (Incorporated by reference to
Exhibit 10.11 to the Registration
Statement on Form S-1 No. 33-59486).
10.9 - Note and Warrant Purchase Agreement dated as
of August 12, 1994 among the Company, the
Principal Subsidiary, and the Connecticut
Development Authority (Incorporated by
reference to Exhibit 10(a) to the
Quarterly Report on Form 10-Q for the
period ended June 30, 1994), together
with 7.4% Convertible Note dated August
12, 1994 executed by
E-2<PAGE>
the Company and the Principal Subsidiary
to the Connecticut Development Authority
(Incorporated by reference to Exhibit
10(b) to the Quarterly Report on Form 10-
Q for the period ended June 30, 1994),
and Stock Subscription Warrant dated
August 12, 1994 issued by the Company to
the Connecticut Development Authority
(Incorporated by reference to Exhibit
10(c) to the Quarterly Report on Form 10-
Q for the period ended June 30, 1994),
and Conditional Assignment and Security
Agreement dated August 12, 1994 among the
Company, the Principal Subsidiary and the
Connecticut Development Authority
(Incorporated by reference to Exhibit
10(d) to the Quarterly Report on Form
10-Q for the period ended June 30, 1994).
10.10 - Placing Agreement dated July 5, 1996
between the Company and Henderson
Crosthwaite Institutional Brokers Limited
(Incorporated by reference to Exhibit 5
to the Company's Current Report on Form
8-K dated July 11, 1996), together with
Agreement with respect to U.S. Securities
Laws dated July 2, 1996 between the
Company and Henderson Crosthwaite
Institutional Brokers Limited
(Incorporated by reference to Exhibit
5(d) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.11 - Forms of Subscription Agreement accepted
July 5, 1996 by the Company (Incorporated
by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K
dated July 11, 1996, together with
Registration Rights Agreement dated July
11, 1996 between the Company and the
subscribers parties thereto (Incorporated
by reference to Exhibit 5(g) to the
Company's Current Report on Form 8-K
dated July 11, 1996).
E-3<PAGE>
10.12 - Warrant Agreement dated as of January 24, 1997
between the Company and American Stock
Transfer & Trust Company (Incorporated by
reference to Exhibit 10.20 to the
Registration Statement on Form S-4 No. 333-
21893).
10.13 - Indenture dated as of January 24, 1997 between
the Company and United States Trust Company
of New York (Incorporated by reference to
Exhibit 4.1 to the Registration Statement
on Form S-4 No. 333-21893).
10.14 - Registration Rights Agreement dated January
20, 1997 between the Company and Credit
Suisse First Boston Corporation and UBS
Securities LLC (Incorporated by reference
to Exhibit 4.3 to the Registration
Statement on Form S-4 No. 333-21893).
10.15 - Lease Agreement dated May 30, 1997 between 488
Main Avenue Associates, LLC and the
Company, together with Amendment No. 1
thereto (Incorporated by reference to
Exhibit 10.17 to the Annual Report on
Form 10-K for the year ended December 31,
1997).
10.16 - Lease Agreement dated October 1, 1997 between
Kurian Limited Partnership and the Company
(Incorporated by reference to Exhibit 10.18 to
the Annual Report on Form 10-K for the year
ended December 31, 1997).
10.17 - Combination Agreement dated October 29, 1997
between the Company and Telepanel Systems Inc.
(Incorporated by reference to Exhibit 5(a) of
the Current Report on Form 8-K dated October
29, 1997), together with Joint Distribution
Agreement dated February 3, 1998 between the
Company and Telepanel Systems Inc.
(Incorporated by reference to Exhibit 10.20 to
the Annual Report on Form 10-K
E-4<PAGE>
for the year ended December 31, 1997) and
Termination Agreement dated April 22, 1998
among the Company, Telepanel Systems Inc. and
Telepanel/ERS Joint Venture Inc. (Incorporated
by reference to Exhibit 5(a) to the Current
Report on Form 8-K dated April 22, 1998).
10.18 - Form of the Company's 1993 Employee Stock Option
Plan (Incorporated by reference to Exhibit
10.21 of the Annual Report on Form 10-K for
the year ended December 31, 1997).
10.19 - Form of the Company's 1993 Director Stock Option
Plan (Incorporated by reference to Exhibit
10.22 of the Annual Report on Form 10-K for
the year ended December 31, 1997).
10.20 - Release and Settlement Agreement dated March 2,
1998 between the Company and William W. Erdman
10.21 - Release and Settlement Agreement dated May 18,
1998 between the Company and Michael L.
Luetkemeyer.
11.1 - Statement of Computation of Per Share Earnings.
12.1 - Statement of Computation of Ratio of Earnings
to Fixed Charges.
21 - Subsidiaries of the Company.
23.1 - Consent of PricewaterhouseCoopers LLP.
24 - Power of Attorney (See "Power of Attorney" in
this Annual Report on Form 10-K).
27 - Financial Data Schedule.
</TABLE>
E-5
Exhibit 10.20
RELEASE AND SETTLEMENT AGREEMENT
--------------------------------
This RELEASE AND SETTLEMENT AGREEMENT (hereinafter
"Agreement") is made by and between ELECTRONIC RETAILING SYSTEMS,
INC. (hereinafter "THE COMPANY" and WILLIAM W. ERDMAN. Wherever
used in this Agreement, the term "THE COMPANY" shall include all
officers, directors, shareholders, employees, agents,
representatives, successors and assigns of ELECTRONIC RETAILING
SYSTEMS, INC, in their individual and/or official capacities.
WHEREAS, WILLIAM W. ERDMAN is employed by THE COMPANY; and
WHEREAS, THE COMPANY and WILLIAM W. ERDMAN agree that it is in
the best interests of both parties that WILLIAM W. ERDMAN terminate
his employment with THE COMPANY.
NOW, THEREFORE, in the interest of fully and finally resolving
all matters and disputes arising out of or in any way connected to
the employment of WILLIAM W. ERDMAN by THE COMPANY, and in
consideration of the mutual promises and covenants contained
herein, THE COMPANY and WILLIAM W. ERDMAN, acting of their own free
will, hereby agree as follows:
1. WILLIAM W. ERDMAN's employment with THE COMPANY has
terminated effective January 28, 1998 and he is no longer deemed an
employee of THE COMPANY for any purpose after such date.
2. (a) THE COMPANY will pay WILLIAM W. ERDMAN severance
for the period beginning on January 29, 1998 and continuing through
July 28, 1998. In addition, THE COMPANY will pay WILLIAM W. ERDMAN
severance for the period beginning on July 29, 1998 and continuing
through the earlier of (i) October 28, 1998 or (ii) subject to the
last sentence of this subparagraph (a), such date as WILLIAM W.
ERDMAN commences other full-time employment (hereinafter the
"severance period"). Subject to the last sentence of this
subparagraph (a), such severance payments shall be based on WILLIAM
W. ERDMAN's gross biweekly salary of Nine Thousand Six Hundred
Fifteen and 40/100 Dollars ($9,615.40), less all applicable
deductions required by law and/or described in this Agreement.
Such severance shall be paid to WILLIAM W. ERDMAN in bi-weekly
installments, such installments to coincide with the <PAGE>
<PAGE>
regular payroll dates of THE COMPANY. Notwithstanding the
foregoing, in the event WILLIAM W. ERDMAN commences other full-time
employment (including self-employment) between July 29, 1998 and
October 28, 1998 at a salary lower than the equivalent of a gross
biweekly salary of Nine Thousand Six Hundred Fifteen and 40/100
Dollars ($9,615.40), and provides THE COMPANY with satisfactory
evidence thereof on request, THE COMPANY will pay him severance
equal to the difference in such salary rates until the expiration
of the severance period.
(b) THE COMPANY will deduct the following from each
payment made to WILLIAM W. ERDMAN under the terms of subsection
2(a): a) WILLIAM W. ERDMAN'S FICA and Medicare contributions, if
any, as required by law; b) Federal and State income taxes; c)
health and dental insurance premium contributions, as described in
Section 3 below; d) any other deductions required by law or
authorized in writing by WILLIAM W. ERDMAN.
3. (a) Until December 31, 1998, or such earlier date as
WILLIAM W. ERDMAN becomes eligible for coverage under the
comparable long term disability and/or life insurance plans of
another employer, THE COMPANY will continue in effect the long term
disability and life insurance coverage that was in effect for
WILLIAM W. ERDMAN immediately prior to January 28, 1998.
(b) Until December 31, 1998, or such earlier date as
WILLIAM W. ERDMAN becomes eligible for coverage under the
comparable group medical and/or dental plan of another employer,
THE COMPANY will also continue in effect medical and dental
insurance coverage for WILLIAM W. ERDMAN and his eligible
dependents, provided that WILLIAM W. ERDMAN shall be required to
continue to pay such premium contributions as may be in effect for
THE COMPANY employees. Such premium contributions shall be
deducted from the severance checks described in Section 2(a) of
this Agreement until the expiration of the severance period, and
thereafter shall be remitted by WILLIAM W. ERDMAN directly to THE
COMPANY on the first day of each subsequent month. As of January
1, 1999, WILLIAM W. ERDMAN shall be entitled to continue in effect
medical insurance coverage for himself and his eligible dependents,
at his own expense, in accordance with applicable federal and state
law.<PAGE>
<PAGE>
4. Subject to WILLIAM W. ERDMAN's execution of an
applicable stock option agreement otherwise embodying the terms for
stock options vesting over time as described in his offer letter
dated March 7, 1997 (the "Offer Letter") except as modified herein,
until December 31, 1998, WILLIAM W. ERDMAN will be entitled to
exercise all options under such stock option agreement vested
through January 28, 1998. After December 31, 1998, all rights to
purchase stock under such stock option agreement shall cease.
Except as described above, all other stock options and any and all
other rights to acquire any stock of THE COMPANY which were earned
or acquired by WILLIAM W. ERDMAN in the course of his employment
with THE COMPANY are hereby extinguished, and WILLIAM W. ERDMAN
consents to the cancellation of all such stock options, the waiver
of all future rights to any stock options and/or stock of THE
COMPANY earned or acquired by WILLIAM W. ERDMAN in the course of
his employment with THE COMPANY, and further consents to release
THE COMPANY from any and all further obligations under any other
stock options, thereby rendering any such rights and options null
and void and of no further force and effect.
5. With the exception of the payments described in
Section 2 of this Agreement and the insurance benefits described in
Section 3 of this Agreement, WILLIAM W. ERDMAN expressly
acknowledges that he is not entitled to any payments, benefits or
compensation, in any form for any reason, from THE COMPANY,
including but not limited to any severance payments or benefits set
forth in the Offer Letter, which is expressly rescinded and
superseded by this Agreement.
6. WILLIAM W. ERDMAN acknowledges that he would not be
entitled to all of the payments described in Section 2 of this
Agreement or the insurance benefits provided by THE COMPANY during
the severance period, as described in Section 3 of this Agreement,
if he did not enter into this Agreement. THE COMPANY acknowledges
that WILLIAM W. ERDMAN would not otherwise release the potential
claims hereinafter set forth but for his receipt of such severance
payments and insurance benefits.
7. WILLIAM W. ERDMAN shall return to THE COMPANY any and
all records, papers, data, credit cards, keys and security cards
belonging to THE COMPANY in his possession upon execution of this
Agreement.<PAGE>
<PAGE>
8. (a) WILLIAM W. ERDMAN recognizes and agrees that in
the course of his employment with THE COMPANY, he has been exposed
to confidential information concerning THE COMPANY, including, but
not limited to, existing and contemplated products, trade secrets,
formulas, patents, models, compilations, business and financial
methods or practices, plans, pricing, marketing, merchandising and
selling techniques and information, customer lists, supplier lists
and confidential information relating to policies and/or business
strategies (hereinafter referred to as "Confidential Information").
WILLIAM W. ERDMAN agrees that all such Confidential Information is
and shall forever remain the sole property of THE COMPANY. WILLIAM
W. ERDMAN shall keep all such Confidential Information strictly
confidential, and he shall not disclose to any third party in any
manner, either directly or indirectly, any of such Confidential
Information at any time, for any purpose. Further, WILLIAM W.
ERDMAN shall not use in any manner, either directly or indirectly,
any of such Confidential Information for his own benefit or for the
benefit of any third party, or for any other purpose, at any time.
(b) WILLIAM W. ERDMAN agrees that during the term of
his employment with THE COMPANY or its affiliates and for a one-
year period following the termination of his employment, without
the prior written consent of THE COMPANY, WILLIAM W. ERDMAN may not
directly or indirectly, engage, assist or participate in, whether
as a director, officer, employee, agent, manager, consultant,
partner, owner or independent contractor or other participant, any
business, firm, corporation, partnership, enterprise or
organization that conducts a business which involves either (x) the
development, manufacturing, marketing or servicing of systems sold
to the retailing industry for purposes of displaying and changing
retail point of purchase prices and/or displaying other information
targeted at the consumer or store employee via electronic and non-
electronic means or (y) the development, engineering,
manufacturing, marketing or servicing of systems sold to the
retailing industry for purposes of improving pricing accuracy,
product location accuracy, inventory management and item movement;
and which is within any geographic area where THE COMPANY or any of
its affiliates engages in business; provided, however, that WILLIAM
W. ERDMAN may invest in stocks, bonds or other securities of any
similar business (but without otherwise participating in such
similar business) if (i) such stocks, bonds, or other securities
are listed on any national <PAGE>
<PAGE>
securities exchange or are registered under Section 12(g) of the
Securities Exchange Act of 1934, and (ii) his investment does not
exceed, in the case of any class of the capital stock of any one
issuer, 5% of the issued and outstanding shares, or in the case of
bonds or other securities, 5% of the aggregate principal amount
thereof issued and outstanding.
(c) WILLIAM W. ERDMAN understands and agrees that
violation by him of any portion of this Section 8 will cause THE
COMPANY to suffer immediate, substantial and irreparable injury,
and will be a sufficient basis to award injunctive relief and
monetary damages to THE COMPANY, without affecting the remainder of
this Agreement.
9. For and in consideration of the payments described in
this Agreement, WILLIAM W. ERDMAN for himself, and for his
respective heirs, executors, administrators, successors and
assigns, knowingly releases and forever discharges THE COMPANY from
any and all claims, demands, obligations, damages, liabilities and
causes of action (including, but not limited to, claims and causes
of action for wrongful discharge, tort, defamation, breach of
contract and breach of the duty of good faith and fair dealing, and
causes of action and claims or causes of action under Title VII of
the Civil Rights Act of 1964, 42 U.S.C. Section 2000e et. seq., the
Civil Rights Act of 1991, 42 U.S.C. Section 1981, et. seq., the
Connecticut Discriminatory Practices Act, Conn. Gen. Stat. Section
46a-58, et. seq., the Americans with Disabilities Act, 42 U.S.C.
Section 12101 et. seq., the Age Discrimination in Employment Act,
29 U.S.C. Section 621 et. seq., the Connecticut Whistle Blowers'
Act, Conn. Gen. Stat. Section 31-51m, the provisions of the
Connecticut General Statutes concerning the payment of wages (Conn.
Gen. Stat. Section 31-58 et. seq. and Conn. Gen. Stat. Section 31-
70 et. seq.), the Fair Labor Standards Act, 29 U.S.C. Section 201
et. seq., and all other federal, state and local laws, ordinances
or regulations), in law or in equity, which WILLIAM W. ERDMAN now
has or ever had against THE COMPANY, for any losses, injuries or
damages (including back pay, front pay, liquidated, compensatory or
punitive damages, attorneys' fees and litigation costs), resulting
from and/or arising out of or in any way connected with WILLIAM W.
ERDMAN's employment by THE COMPANY and/or his separation from such
employment.<PAGE>
<PAGE>
10. THE COMPANY and WILLIAM W. ERDMAN expressly
acknowledge and agree that the consideration provided herein is
solely for the purpose of amicably resolving any dispute arising
out of WILLIAM W. ERDMAN's employment by THE COMPANY and his
separation from such employment. WILLIAM W. ERDMAN and THE COMPANY
further understand and agree that this Agreement does not
constitute an admission by THE COMPANY that THE COMPANY is in any
way liable to WILLIAM W. ERDMAN or that THE COMPANY harmed or
damaged WILLIAM W. ERDMAN or violated any rights he may have or in
any respect treated his unfairly or unlawfully.
11. Should WILLIAM W. ERDMAN commence or prosecute any
action or proceeding contrary to the provisions of this Agreement,
he agrees to indemnify THE COMPANY for all costs, including court
costs and reasonable attorneys' fees, incurred by THE COMPANY in
the defense of such action or in establishing or maintaining the
application or validity of this Agreement or the provisions
thereof.
12. Except as otherwise provided specifically in this
Agreement, in the event any party to this Agreement claims that the
other party has failed to comply with the terms of the Agreement,
the remedy for the party claiming the breach shall be an
appropriate legal action to require the other party to comply with
the Agreement and to obtain damages resulting from the breach,
including all costs incurred by the non-breaching party, including
court costs and reasonable attorney's fees in prosecuting any such
legal action.
13. THE COMPANY and WILLIAM W. ERDMAN expressly
acknowledge and agree that they will not make any claim or demand
and each of them hereby waives any rights any of them may now have
or may hereafter have claim to have, based upon any alleged oral
alteration, amendment, modification or any other alleged change in
this Agreement; that the validity, effect and operation of this
Agreement shall be determined by the laws of the State of
Connecticut; and that there is no written or oral understanding or
agreement between them that is not recited herein.
14. WILLIAM W. ERDMAN affirmatively states that he has
had a full and fair opportunity to consult with an attorney
regarding the provisions of this Agreement, that he understands
that he is entitled to have a period of twenty-one (21) days to
consult with an attorney and consider this Agreement, and that if
he signs the Agreement prior to the expiration of such twenty-one
(21) days, he does so voluntarily and of his own free will.
15. All parties acknowledge that for a period of up to
seven (7) days following execution of this Agreement, WILLIAM W.
ERDMAN shall have the right to revoke his assent to this Agreement,
in which case the provisions of the Agreement shall become null and
void.
<PAGE>
16. THE COMPANY and WILLIAM W. ERDMAN affirmatively
state that they have a full understanding of the contents of the
Agreement and the effects thereof; and that they have executed the
same voluntarily and of their own free will, without any coercion.
17. THE COMPANY and WILLIAM W. ERDMAN agree that neither
they nor their respective immediate family members, attorneys,
auditors, agents, members, officers, assigns, employees, heirs,
successors or representatives, will publish, publicize or
disseminate, or cause to be published, publicized or disseminated,
in any manner, information relating to the contents of this
Agreement or the discussions or events that led up to it, to any
third party, including, but not limited to, the news and
communications media or agents thereof, excepting such disclosure
that THE COMPANY and WILLIAM W. ERDMAN may make to their respective
attorneys, auditors or tax planners, or any disclosure WILLIAM W.
ERDMAN makes to members of his immediate family or any disclosure
by WILLIAM W. ERDMAN or THE COMPANY in compliance with any state or
federal law or any disclosure made by WILLIAM W. ERDMAN for the
purpose of enforcing the terms of this Agreement, should THE
COMPANY fail to comply with the terms of this Agreement. Further,
THE COMPANY may also disclose information relating to the terms or
contents of this Agreement to officers, employees, agents, members
or representatives of THE COMPANY on a need-to-know basis for
purposes of carrying out or effecting compliance with the parties'
obligations under this Agreement.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the aforementioned parties, intending to
be legally bound hereby, have executed this Agreement.
/s/ William W. Erdman
---------------------
William W. Erdman
STATE OF NEW YORK )
: ss: Date: 3/2/98
COUNTY OF WESTCHESTER)
Personally appeared WILLIAM W. ERDMAN, Signer of the foregoing
Instrument, and acknowledged the same to be his free act and deed
before me.
/s/ David Feureisen
--------------------
Notary Public
ELECTRONIC RETAILING SYSTEMS,
INC.
By: /s/ Virginina E. Menz
----------------------
STATE OF CONNECTICUT)
: ss: Date: 2/28/98
COUNTY OF )
Personally appeared , Signer of the
foregoing Instrument, and acknowledged the same to be his/her free
act and deed on behalf of ELECTRONIC RETAILING SYSTEMS, INC.
/s/ Lori Hinds
--------------------
Notary Public/
Commissioner of the
Superior Court
Exhibit 10.21
RELEASE AND SETTLEMENT AGREEMENT
--------------------------------
This RELEASE AND SETTLEMENT AGREEMENT (hereinafter
"Agreement") is made by and between ELECTRONIC RETAILING SYSTEMS,
INC. (hereinafter "THE COMPANY" and MICHAEL L. LUETKEMEYER
(hereinafter "EMPLOYEE"). Wherever used in this Agreement, the
term "THE COMPANY" shall include all officers, directors,
shareholders, employees, agents, representatives, successors and
assigns of ELECTRONIC RETAILING SYSTEMS, INC., in their individual
and/or official capacities.
WHEREAS, EMPLOYEE is employed by THE COMPANY in the position
of Chief Financial Officer; and
WHEREAS, THE COMPANY and EMPLOYEE agree that it is in the
best interests of both parties that EMPLOYEE terminate his
employment with THE COMPANY.
NOW, THEREFORE, in the interest of fully and finally
resolving all matters and disputes arising out of or in any way
connected to the employment of EMPLOYEE by THE COMPANY, and in
consideration of the mutual promises and covenants contained
herein, THE COMPANY and EMPLOYEE, acting of their own free will,
hereby agree as follows:
1. EMPLOYEE's employment with THE COMPANY is terminated
effective May 8, 1998 and EMPLOYEE is no longer deemed an employee
of THE COMPANY for any purpose after such date.
2. (a) THE COMPANY will pay EMPLOYEE severance for the period
beginning on May 8, 1998 and continuing through November 7, 1998
(the "Initial Severance Period"). In addition, if EMPLOYEE has not
obtained other full-time employment (including self-employment) as
of November 7, 1998, THE COMPANY will pay EMPLOYEE severance for
the period beginning on November 8, 1998 and continuing through
the earlier of (i) February 8, 1999 or (ii) such date as EMPLOYEE
commences other full-time employment (including self-employment)
(hereinafter the "Extended Severance Period"). Such severance
payments shall be based on EMPLOYEE's gross biweekly salary of
Seven Thousand Six Hundred Ninety-Two and 31/100 Dollars
($7,692.31), less all applicable deductions<PAGE>
<PAGE>
required by law and/or described in this Agreement. Such severance
shall be paid to EMPLOYEE in bi-weekly installments, such
installments to coincide with the regular payroll dates of THE
COMPANY commencing with the first payroll date following
expiration of the seven-day revocation period described in Section
19, below.
(b) THE COMPANY will deduct the following from each payment
made to EMPLOYEE under the terms of subsection 2(a): a) EMPLOYEE's
FICA and Medicare contributions, if any, as required by law; b)
Federal and State income taxes; c) health and dental insurance
premium contributions, as described in Section 3 below; d) any
other deductions required by law or authorized in writing by
EMPLOYEE.
3. (a) During the Initial Severance Period and the Extended
Severance Period, if any, or such earlier date as EMPLOYEE becomes
eligible for coverage under the comparable long term disability
and/or life insurance plans of another employer, THE COMPANY will
continue in effect the long term disability and life insurance
coverage that was in effect for EMPLOYEE immediately prior to May
8, 1998.
(b) During the Initial Severance Period and the Extended
Severance Period, if any, or such earlier date as EMPLOYEE becomes
eligible for coverage under the comparable group medical and/or
dental plan of another employer, THE COMPANY will also continue in
effect medical and dental insurance coverage for EMPLOYEE and his
eligible dependents, provided that EMPLOYEE shall be required to
continue to pay such premium contributions as may be in effect for
THE COMPANY's active employees. Such premium contributions shall
be deducted from the severance checks described in Section 2(a) of
this Agreement until the expiration of the Initial Severance
Period or the Extended Severance Period, as the case may be, and
thereafter shall be remitted by EMPLOYEE directly to THE COMPANY
on the first day of czech subsequent month.
4. EMPLOYEE shall be entitled to keep the lap top computer
and cellular phone provided to him by THE COMPANY, subject to
EMPLOYEE's assumption of and full compliance with all of the
lessee's obligations under the cellular phone lease agreement
previously entered into by him.<PAGE>
<PAGE>
5. THE COMPANY shall assume direct responsibility for paying
any lease cancellation fees payable to the landlord of EMPLOYEE's
Connecticut apartment, up to a maximum payment of One Thousand
Nine Hundred Forty Dollars ($1,940).
6. THE COMPANY shall pay the costs of moving EMPLOYEE's
family and personal and household effects to Florida, provided
such move occurs on or before November 8, 1998. THE COMPANY shall
have the right, at its option, to make the arrangements (including
with respect to the negotiation of fees) for such move on
EMPLOYEE's behalf, or to approve in advance any such arrangements
made by EMPLOYEE. In no event shall THE COMPANY be responsible for
paying storage expenses for EMPLOYEE's household and personal
effects prior to EMPLOYEE's move to Florida for longer than four
(4) months.
7. THE COMPANY shall pay all verified and documented closing
costs on EMPLOYEE's purchase of a home in Florida, to the extent
actually paid by EMPLOYEE on or before November 8, 1998, up to a
maximum of Twenty-Two Thousand Dollars ($22,000). Any such costs
advanced by THE COMPANY to EMPLOYEE, to the extent not actually
paid by EMPLOYEE as closing costs and documented as such to THE
COMPANY's satisfaction, shall be repaid by EMPLOYEE to THE COMPANY
or deducted by THE COMPANY from any severance payments otherwise
payable to EMPLOYEE hereunder.
8. EMPLOYEE shall surrender the Incentive Stock Option
Agreement for 49,998 shares, and the nonqualified Stock Option
Agreement for 150,002 shares, of the common stock, $.01 par value
(the "Stock"), of the Company, granted to the EMPLOYEE as of
August 18, 1997 (collectively, the "Stock Options"), and shall
execute a replacement stock option Agreement (the "Replacement
Stock Option") embodying the terms of the Stock Options modified
such that (i) the EMPLOYEE will be entitled to exercise options
for an aggregate of 62,500 shares of Stock under the Replacement
Stock Option until December 31, 1998 based upon his involuntary
termination without cause as of May 8, 1997, and (ii) the
Replacement Stock Options shall not qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as
amended. As of December 31, 1998, all rights to purchase stock
under such Replacement Stock Option agreement shall cease. Except
as described above, all other stock options and any and all other
rights to acquire any stock of THE COMPANY which were earned or <PAGE>
<PAGE>
acquired by EMPLOYEE in the course of his employment with THE
COMPANY are hereby extinguished, and EMPLOYEE consents to the
cancellation of all such stock options, the waiver of all future
rights to acquire stock options and or stock of THE COMPANY earned
or acquired by EMPLOYEE in the course of his employment with THE
COMPANY, and further consents to release THE COMPANY from any and
all further obligations under any other stock options, thereby
rendering any such rights and options null and void and of no
further force and effect.
9. With the exception of the payments and benefits described
above, EMPLOYEE expressly acknowledges that he is not entitled to
any payments, benefits or compensation, in any form for any
reason, from THE COMPANY, including but not limited to any
severance payments or benefits set forth in his offer letter dated
June 24, 1997 (the "Offer Letter"), which Offer Letter is
expressly rescinded and superseded by this Agreement.
10. EMPLOYEE acknowledges that he would not be entitled to
all of the payments and benefits described in Sections 2 through
8 of this Agreement if he did not enter into this Agreement. THE
COMPANY acknowledges that EMPLOYEE would not otherwise release the
potential claims hereinafter set forth but for his receipt of such
severance payments and insurance benefits.
11. With the exception of his lap top computer and cellular
phone, EMPLOYEE shall return to THE COMPANY all property belonging
to THE COMPANY, including but not limited to any and all records,
papers, data, credit cards, keys and security cards belonging to
THE COMPANY in his possession upon execution of this Agreement.
12. (a) EMPLOYEE recognizes and agrees that in the course of
his employment with THE COMPANY, he has been exposed to
confidential information concerning THE COMPANY, including, but
not limited to, existing and contemplated products, trade secrets,
formulas, patents, models, compilations, business and financial
methods or practices, plans, pricing, marketing, merchandising and
selling techniques and information, customer lists, supplier lists
and confidential information relating to policies and/or business
strategies (hereinafter referred to as "Confidential
Information"). EMPLOYEE agrees that all such Confidential
Information is and shall forever remain the sole property of THE
COMPANY. EMPLOYEE shall keep all such Confidential Information <PAGE>
<PAGE>
strictly confidential, and he shall not disclose to any third
party in any manner, either directly or indirectly, any of such
Confidential Information at any time, for any purpose. Further,
EMPLOYEE shall not use in any manner, either directly or
indirectly, any of such Confidential Information for his own
benefit or for the benefit of any third party, or for any other
purpose, at any time.
(b) EMPLOYEE agrees that during the term of his employment
with THE COMPANY or its affiliates and for a one-year period
following the termination of his employment, without the prior
written consent of THE COMPANY, EMPLOYEE may not directly or
indirectly, engage, assist or participate in, whether as a
director, officer, employee, agent, manager, consultant, partner,
owner or independent contractor or other participant, any
business, firm, corporation, partnership, enterprise or
organization that conducts a business which involves either (x)
the development, manufacturing, marketing or servicing of systems
sold to the retailing industry for purposes of displaying and
changing retail point of purchase prices and/or displaying other
information targeted at the consumer or store employee via
electronic and non-electronic means or (y) the development,
engineering, manufacturing, marketing or servicing of systems sold
to the retailing industry for purposes of improving pricing
accuracy, product location accuracy, inventory management and item
movement; and which is within any geographic area where THE
COMPANY or any of its affiliates engages in business; provided,
however, that EMPLOYEE may invest in stocks, bonds or other
securities of any similar business (but without otherwise
participating in such similar business) if (i) such stocks, bonds,
or other securities are listed on any national securities exchange
or are registered under Section 12(g) of the Securities Exchange
Act of l934, and (ii) his investment does not exceed, in the case
of any class of the capital stock of any one issuer, 5% of the
issued and outstanding shares, or in the case of bonds or other
securities, 5% of the aggregate principal amount thereof issued
and outstanding.
(c) EMPLOYEE agrees that during the term of his employment
with THE COMPANY or its affiliates and for a one-year period
following the termination of his employment, without the prior
written consent of THE COMPANY, EMPLOYEE may not interfere with
the relationship of THE COMPANY or any affiliate with, or endeavor
<PAGE>
<PAGE>
to entice away from THE COMPANY or any affiliate, any person,
firm, corporation or other business organization who or which at
any time during EMPLOYEE's employment with THE COMPANY was an
employee or supplier of, or maintained a business relationship
with, THE COMPANY or any affiliate.
(d) EMPLOYEE understands and agrees that violation by him of
any portion of this Section 12 will cause THE COMPANY to suffer
immediate, substantial and irreparable injury, and will be a
sufficient basis to award injunctive relief and monetary damages
to THE COMPANY, without affecting the remainder of this Agreement.
13. For and in consideration of the payments described in
this Agreement, EMPLOYEE for himself, and for his respective
heirs, executors, administrators, successors and assigns,
knowingly releases and forever discharges THE COMPANY and its
affiliates from any and all claims, demands, obligations, damages,
liabilities and causes of action (including, but not limited to,
claims and causes of action for wrongful discharge, tort,
defamation, breach of contract and breach of the duty of good
faith and fair dealing, and causes of action and claims or causes
of action under Title VII of the Civil Rights Act of 1964, 42
U.S.C. Section 2000e et. seq., the Civil Rights Act of 1991, 42
U.S.C. Section 1981, et. seq., the Connecticut Discriminatory
Practices Act, Conn. Gen. Stat. Section 46a-58 et. seq., the
Americans with Disabilities Act, 42 U.S.C. Section 12101 et. seq.,
the Age Discrimination in Employment Act, 29 U.S.C. Section 621
et. seq., the Connecticut Whistle Blowers' Act, Conn. Gen Stat.
Section 31-51m, the provisions of the Connecticut General Statutes
concerning the payment of wages (Conn. Gen. Stat. Section 31-58
et. seq. and Conn. Gen. Stat. Section 31-70 et seq.), the Fair
Labor Standards Act, 29 U.S.C. Seciton 201 et seq., all
Massachusetts laws governing the foregoing subject matters, and
all other federal, state and local laws, ordinances or
regulations), in law or in equity, which EMPLOYEE now has or ever
had against THE COMPANY, for any losses, injuries or damages
(including back pay, front pay, liquidated, compensatory or
punitive damages, attorneys' fees and litigation costs), resulting
from and/or arising out of or in any way connected with EMPLOYEE's
employment by THE COMPANY and/or his separation from such
employment.
<PAGE>
<PAGE>
14. THE COMPANY and EMPLOYEE expressly acknowledge and agree
that the consideration provided herein is solely for the purpose
of amicably resolving any dispute arising out of EMPLOYEE's
employment by THE COMPANY and his separation from such employment.
EMPLOYEE and THE COMPANY further understand and agree that this
Agreement does not constitute an admission by THE COMPANY that THE
COMPANY is in any way liable to EMPLOYEE or that THE COMPANY
harmed or damaged EMPLOYEE or violated any rights he may have or
in any respect treated him unfairly or unlawfully.
15. Should EMPLOYEE commence or prosecute any action or
proceeding contrary to the provisions of this Agreement, he agrees
to indemnify THE COMPANY for all costs, including court costs and
reasonable attorneys' fees, incurred by THE COMPANY in the defense
of such action or in establishing or maintaining the application
or validity of this Agreement or provisions thereof.
16. Except as otherwise provided specifically in this
Agreement, in the event any party to this Agreement claims that
the other party has failed to comply with the terms of this
Agreement, the remedy for the party claiming the breach shall be
an appropriate legal action to require the other party to comply
with the Agreement and to obtain damages resulting from the
breach, including all costs incurred by the non-breaching party,
including court costs and reasonable attorney's fees in
prosecuting any such legal action.
17. THE COMPANY and EMPLOYEE expressly acknowledge and agree
that they will not make any claim or demand and each of them
hereby waives any rights any of them may now have or may hereafter
have or claim to have, based upon any alleged oral alteration,
amendment, modification or any other alleged change in this
Agreement; that the validity, effect and operation of this
Agreement shall be determined by the laws of the State of
Connecticut; and that there is no written or oral understanding or
agreement between them that is not recited herein.
18. EMPLOYEE affirmatively states that he has had a full and
fair opportunity to consult with an attorney regarding the
provisions of this Agreement, that he understands that he is
entitled to have a period of twenty-one (21) days to consult with
an attorney and consider this Agreement, and that if he signs the <PAGE>
<PAGE>
Agreement prior to the expiration of such twenty-one (21) days, he
does so voluntarily and of his own free will.
19. All parties acknowledge that for a period of up to seven
(7) days following execution of this Agreement, EMPLOYEE shall
have the right to revoke his assent to this Agreement, in which
case the provisions of the Agreement shall become null and void.
20. THE COMPANY and EMPLOYEE affirmatively state that they
have a full understanding of the contents of the Agreement and the
effects thereof; and that they have executed the same voluntarily
and of their own free will without any coercion.
21. THE COMPANY and EMPLOYEE agree that neither they nor
their respective immediate family members, attorneys, auditors,
agents, members, officers, assigns, employees, heirs, successors
or representatives, will publish, publicize or disseminate, or
cause to be published, publicized or disseminated, in any manner,
information relating to the contents of this Agreement or the
discussions or events that led up to it, to any third party,
including, but not limited to, the news and communications media
or agents thereof, excepting such disclosure that THE COMPANY and
EMPLOYEE may make to their respective attorneys, auditors or tax
planners, or any disclosure EMPLOYEE makes to members of his
immediate family or any disclosure by EMPLOYEE or THE COMPANY in
compliance with any state or federal law or any disclosure made by
EMPLOYEE for the purpose of enforcing the terms of this Agreement,
should THE COMPANY fail to comply with the terms of this
Agreement. Further, THE COMPANY may also disclose information
relating to the terms or contents of this Agreement to officers,
employees, agents, members or representatives of THE COMPANY on a
need-to-know basis for purposes of carrying out or effecting
compliance with the parties' obligations under this Agreement.
IN WITNESS WHEREOF, the aforementioned parties, intending to
be legally bound hereby, have executed this Agreement.
/s/ Michael L. Luetkemeyer
---------------------------
Michael L. Luetkemeyer<PAGE>
<PAGE>
STATE OF FLORIDA)
:ss: Date: 5/18/98
COUNTY OF PALM BEACH)
Personally appeared EMPLOYEE, Signer of the foregoing
Instrument, and acknowledged the same to be his free act and deed
before me.
/s/ Annmarie Dombrowski
------------------------
Notary Public
ELECTRONIC RETAILING SYSTEMS,
INC.
By: /s/ Patricia A. Carroll
--------------------------
STATE OF CONNECTICUT)
: ss: Date:
COUNTY OF )
Personally appeared __________________, Signer of the
foregoing Instrument, and acknowledged the same to be his/her free
act and deed on behalf of ELECTRONIC RETAILING SYSTEMS, INC.
/s/ Lori Hinds
--------------------------
Notary Public/Commissioner
of the Superior Court
Exhibit 11.1
Electronic Retailing Systems International, Inc.
Computation of Net Loss Per Common Share
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Net Loss ($11,972,000) ($34,313,000)
============= =============
Weighted average common shares
outstanding 21,248,404 21,232,621
============= =============
Basic loss per common share ($0.56) ($1.62)
============= =============
Calculation of weighted average
shares outstanding
Shares issued and outstanding at
December 31, 1997 21,187,035 21,187,035
Issuance of shares pursuant to
stock option plan 61,369 45,586
------------ ------------
Weighted average common shares
outstanding 21,248,404 21,232,621
============ ============
</TABLE>
Exhibit 12.1
<TABLE>
Electronic Retailing Systems International, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Amounts in thousands of dollars)
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Pre-tax from continuing operations $(34,313) $(26,873) $(9,412)
Fixed Charges:
- -------------
Interest expense & amortization 16,886 14,024 382
Rentals:
Buildings 33% 315 141 93
Office and other leased equipment 33% 8 13 11
--------- -------- -------
Total fixed charges 17,209 14,178 486
-------- -------- -------
Earnings before income taxes, minority
interest and fixed charges (17,104) (12,695) (8,926)
-------- -------- -------
Ratio of earnings to fixed charges (0.99) (0.90) (18.37)
======== ========= ======
Deficiency of earnings to fixed charges $ 34,313 $ 26,873 $ 9,412
======== ======== =======
</TABLE>
<TABLE>
Exhibit 21
<CAPTION>
Place of % of Voting
Name Incorporation Securities Owned
- ----- ------------- ----------------
<S> <C> <C>
Electronic Retailing
Systems International, Connecticut 100%
International, Inc.
</TABLE>
Other subsidiaries of the Company are not named in the table above.
Such unnamed subsidiaries considered in the aggregate as a single
subsidiary would not be considered a significant subsidiary.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-66764, 33-82482 and
33-82484) of Electronic Retailing Systems International, Inc. of
our report dated March 29, 1999, appearing on page F-2 of this Form
10-K.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
March 29, 1999
<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 TWELVE MONTHS
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 63,877
<SECURITIES> 0
<RECEIVABLES> 1,612
<ALLOWANCES> (352)
<INVENTORY> 6,612
<CURRENT-ASSETS> 72,908
<PP&E> 5,113
<DEPRECIATION> (1,462)
<TOTAL-ASSETS> 81,626
<CURRENT-LIABILITIES> 7,211
<BONDS> 124,057
0
0
<COMMON> 212
<OTHER-SE> (54,742)
<TOTAL-LIABILITY-AND-EQUITY> 81,626
<SALES> 2,900
<TOTAL-REVENUES> 3,764
<CGS> 8,095
<TOTAL-COSTS> 16,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,886
<INCOME-PRETAX> (34,313)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,313)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> 0
</TABLE>
