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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21456
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ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1361276
----------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
488 Main Avenue
Norwalk, Connecticut 06851
(Address of principal executive offices, including zip code)
(203) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
---------------------- ----------------------------
Common Stock, $.01 par value 21,293,073 shares
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<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
Page Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet--
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statement of
Operations--Three and Six Months Ended
June 30, 2000 and 1999 4
Condensed Consolidated Statement of Cash
Flows-Six Months Ended June 30,
2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 19
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share and share amounts)
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 21,047 $ 37,386
Accounts receivable, net 2,781 2,304
Inventories, net 2,856 3,772
Prepayments and other current
assets 935 765
--------- --------
Total current assets 27,619 44,227
--------- --------
Equipment 4,331 4,802
Accumulated depreciation (2,343) (2,287)
--------- --------
Net equipment 1,988 2,515
--------- --------
Other non-current assets 2,752 2,774
Note receivable 4,550 --
--------- --------
Total assets $ 36,909 $ 49,516
========= ========
Liabilities and Stockholders'
Deficit
Current liabilities
Accounts payable and accrued
expenses $ 1,658 $ 2,557
Deferred revenue 360 505
Interest payable 4,153 --
-------- --------
Total current liabilities 6,171 3,062
-------- --------
Long-term debt
Senior Discount Notes,
13.25% 74,803 98,207
-------- --------
Common stock purchase warrants 5,100 5,100
-------- --------
Stockholders' deficit
Common stock (par value $0.01 per
share; 35,000,000 authorized,
21,293,073 shares issued and
outstanding in 2000 and 1999) 212 212
Additional paid-in capital 51,374 51,374
Accumulated deficit (100,751) (108,439)
-------- --------
Total stockholders' deficit (49,165) (56,853)
-------- --------
Total liabilities and stockholders'
deficit $ 36,909 $ 49,516
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues
Product sales $ 1,293 $ 671 $ 2,029 $ 1,308
Maintenance 270 239 558 400
--------- --------- --------- ---------
Total revenues 1,563 910 2,587 1,708
--------- --------- --------- ---------
Costs of goods sold
Product sales 1,267 1,135 2,131 2,429
Maintenance 95 180 198 345
--------- --------- --------- ---------
Total cost of goods sold 1,362 1,315 2,329 2,774
--------- --------- --------- ---------
Gross profit (loss) 201 (405) 258 (1,066)
--------- --------- --------- ---------
Operating expenses
Selling, general and
Administrative 1,557 2,593 3,521 5,582
Research and development 1,107 1,447 2,211 2,586
Depreciation and amorti-
zation 78 99 166 195
-------- --------- --------- ---------
Total operating expenses 2,742 4,139 5,898 8,363
-------- --------- --------- ---------
Loss from operations (2,541) (4,544) (5,640) (9,429)
-------- --------- --------- ---------
Other income (expenses)
Interest income 438 703 919 1,416
Interest expense (2,756) (4,689) (5,481) (9,282)
Gain/Loss on disposals 1 (4) (2) (12)
Loss on Equity investment (530) (1,067)
-------- --------- --------- ---------
Total other expenses, net (2,847) (3,990) (5,631) (7,878)
-------- --------- --------- ---------
Loss before extraordinary
item (5,388) (8,534) (11,271) (17,307)
Extraordinary item
Gain on extinguishment of
Debt -- -- 18,959 --
-------- --------- --------- ---------
Net income (loss) $ (5,388) $ (8,534) $ 7,688 $ (17,307)
======== ========= ========= =========
Earnings per share
Weighted average common
Shares outstanding 21,290 21,252 21,288 21,251
======== ========= ========= ========
Basic and diluted net (loss)
Per common share before
Extraordinary item $ (0.25) $ (0.40) $ (0.53) $ (0.81)
Basic and diluted net income
(loss) per common share $ (0.25) $ (0.40) $ .36 $ (0.81)
======== ========= ========= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
------ ------
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net income (loss) $ 7,688 ($17,307)
Other adjustments to reconcile
net income (loss) to net cash used in
operating activities (12,718) 11,240
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Cash used in operating activities (5,030) (6,067)
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Cash Flows Used in Investing Activities:
Capital expenditures (159) (987)
Disposal of fixed assets 2 15
Note Receivable (4,550) --
Investment in PSI (1,950) --
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Cash used in investing activities (6,657) (972)
------- -------
Cash Flows from Financing Activities:
Cash used for early debt retirement (4,652) --
------- -------
Net decrease in cash and cash
equivalents (16,339) (7,039)
------- -------
Cash and cash equivalents at beginning
of period 37,386 63,877
------- -------
Cash and cash equivalents at end of
period $21,047 $56,838
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
Note 1 -Basis of Consolidation:
Electronic Retailing Systems International, Inc. ("ERS" or
the "Company"), was incorporated in 1993 under the laws of
the State of Delaware as a holding company for the business
and assets of Electronic Retailing Systems International,
Inc., incorporated in 1990 under the laws of Connecticut, and
an affiliated partnership. The unaudited condensed
consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Note 2 -Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, the year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required
under generally accepted accounting principles.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all
adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the results
of the interim periods. Operating results for the three and
six month periods ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year
ending December 31, 2000. The accompanying unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 1999, included
in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
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. Actual results could differ from those estimates
and the difference could be material. The Company's future
results and inventory valuation could be adversely affected
by a number of factors, including (a) the timely availability
and acceptance of electronic shelf labeling systems, (b) the
impact of competitive products and pricing, and (c) the
Company's ability to obtain system components from suppliers.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
Earnings (loss) per common share is computed using the
weighted average number of common shares and common share
equivalents assumed to be outstanding during the period.
Common share equivalents consist of the Company's common
shares issuable upon exercise of stock options and stock
purchase warrants. The computation of earnings (loss) per
common share does not reflect common share equivalents that
are anti-dilutive.
The Company has sustained net losses and negative cash flows
from operations since its inception and management expects
these conditions to continue through the year ending December
31, 2000. Following the second quarter of 2000 and as
described under Note 7, in order to enhance long-term
liquidity the Company used $13.8 million in cash and issued
certain additional securities in exchange for all of its
outstanding 13-1/4% Senior Discount Notes due 2004. As a
result, management believes that existing resources will
enable the Company to fund operations into the second quarter
of 2001, after which there is uncertainty about the Company's
ability to continue to conduct its operations as a going
concern. Accordingly, the Company will need to raise
additional long-term financing to support operations and
service debt and eliminate such uncertainty. Management's
plans with respect to these issues include a proactive effort
to seek new financing, but there can be no assurance that
such financing would be available on terms reasonable to the
Company. In the event that the Company were unable to raise
any required additional financing, the Company's operations
would need to be scaled back or discontinued.
Note 3 -Inventories:
Inventories are stated at the lower of cost (determined on a
first in, first out basis) or market value. Inventories at
June 30, 2000 consist of $1,854,000 of materials and supplies
and $1,002,000 of finished goods. Inventories at December 31,
1999 consisted of $2,000,000 of materials and supplies and
$1,772,000 of finished goods. Inventories in excess of
expected requirements due to new product introductions or
product enhancements are expensed currently.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
Note 4 -Debt and Common Stock Purchase Warrants:
In August 1999, the Company repaid to the Connecticut
Development Authority (the "CDA"), in accordance with its
terms, an aggregate of $5,000,000 principal amount of
indebtedness. In August 1999, warrants to purchase 699,724
shares (as adjusted) of Common Stock, held by the CDA expired
without exercise. If the Company relocates outside of
Connecticut before 2004, the Company remains obligated to pay
a penalty to the CDA of $250,000.
In January 1997, the Company completed the sale, in a private
offering (the "Private Placement"), of 147,312 Units
("Units") consisting of $147,312,000 principal amount at
maturity of 13.25% Senior Discount Notes due February 1, 2004
(the "Senior Discount Notes") together with warrants to
purchase an aggregate of 2,538,258 shares of common stock,
$.01 par value ("Common Stock") at an exercise price of $5.23
per share, exercisable from the period commencing on the
first anniversary of closing through February 1, 2004.
The Units were sold to investors at a price aggregating $100
million, representing a yield to maturity on the Senior
Discount Notes of 13.25%. No cash interest accrued on the
Senior Discount Notes prior to February 1, 2000. The Senior
Discount Notes provided for interest to be payable thereafter
on February 1 and August 1 of each year commencing August 1,
2000. The Senior Discount Notes were to be non-callable prior
to February 1, 2001. Upon specified change in control events,
each holder had the right to require the Company to purchase
its Senior Discount Note at a specified price. The net
proceeds to the Company from the Private Placement
approximated $95 million.
The indenture under which the Senior Discount Notes were
issued placed limitations on operations and sales of assets
by the Company or its subsidiaries, required maintenance of
certain financial ratios in order for the Company to incur
additional indebtedness (subject to specified exceptions),
required the delivery by the Company's subsidiaries of
guaranties if specified debt was subsequently incurred by
such subsidiaries, and limited the Company's ability to pay
cash dividends or make other distributions to the holders of
its capital stock or to redeem such stock.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
With the consummation of the Private Placement in January
1997, the Company commenced recording interest on the
outstanding Senior Discount Notes 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 has been recorded as a result of the
amortization of the discount recorded on the Senior Discount
Notes (for value attributed to the warrants) and the
amortization of the costs of issuance.
During the fourth quarter of 1999, the Company repurchased:
(i) $45.25 million aggregate principal amount at maturity of
Senior Discount Notes in open market transactions from
holders not affiliated with the Company for an aggregate
purchase price of $7.01 million; and (ii) $1.095 million
aggregate principal amount at maturity of Senior Discount
Notes as the result of a tender offer by the Company for an
aggregate purchase price of $.170 million. The Company
incurred $818,000 in transaction fees related to these
purchases. During the first quarter of 2000, the Company
repurchased $24.549 million aggregate principal amount at
maturity of Senior Discount Notes in open market transactions
from holders who were not affiliated with the Company for an
aggregate purchase price of $4.65 million, and recognized an
extraordinary gain of $18.959 million ($0.89 per share). See
Note 7 for a description of the Company's acquisition of all
remaining Senior Discount Notes on July 6, 2000.
Long-term debt as of June 30, 2000 and December 31, 1999 was
comprised of 13.25% Senior Discount Notes totaling
$74,803,000 and $98,207,000, respectively.
Note 5 - Agreements with NewCheck Corporation
On February 11, 2000, in exchange for payments aggregating
$6.5 million, the Company acquired 262,802 shares of the
newly-created Series C Convertible Preferred Stock, $.0001
par value (the "NewCheck Senior Preferred Stock"), of
NewCheck Corporation ("NewCheck"), together with NewCheck's
8% Convertible Promissory Note (the "NewCheck Convertible
Note") in the aggregate principal amount of approximately
$4,550,000, convertible into an additional 613,205 shares of
NewCheck Senior Preferred Stock. NewCheck is engaged in the
development and commercialization of retailing productivity
solutions for use in supermarkets and other retail
environments similar to those addressed by the Company's
system. The shares of NewCheck Senior Preferred Stock
acquired by the Company at closing represented approximately
19% of NewCheck's outstanding voting securities. This
investment is being accounted for under the equity method of
accounting.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
The NewCheck Convertible Note accrues interest, payable at
maturity, at the per annum rate of 8%, matures on the fifth
anniversary of issue, is repayable (together with interest)
in shares of NewCheck Senior Preferred Stock at the election
of NewCheck. The NewCheck Convertible Note is convertible
after two years (and earlier in specified circumstances)
into shares of NewCheck Senior Preferred Stock.
The Company and NewCheck have also entered into a management
agreement under which, for an initial term of five years,
the Company will manage NewCheck's operations. In exchange
for the agreement, and in addition to continuing
reimbursements to the Company of the costs of performance,
at closing the Company was issued 1,110,000 ten-year
warrants, with an exercise price of $.001 per share,
exercisable after the first year to acquire shares of
NewCheck Common Stock equal to approximately 16% of
NewCheck's voting securities outstanding at closing (giving
effect to such warrants and to the conversion of the
NewCheck Convertible Note). The Company received additional
ten-year warrants that vest with respect to specified
percentages of the outstanding NewCheck Common Stock in the
event the equity value of NewCheck exceeds specified levels
during the three years after closing.
Note 6 -New Accounting Standards:
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS 137, which the
Company is required to adopt effective beginning January 1,
2001. The Company is currently evaluating the impact on its
financial statements of adopting the standard and will
comply as required; however, the impact is not expected to
be material on the Company's financial statements.
In December of 1999, the staff of the Securities and Exchange
Commission issued its Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in Financial Statements". SAB No.
101, as amended, provides guidance on the measurement and
timing of revenue recognition in financial statements of
public companies. Changes in accounting policies to apply
the guidance of SAB No. 101 must be adopted by recording the
cumulative effect of the change in the fiscal quarter ending
June 30, 2000. Management has not yet determined the effect
SAB No. 101 will have, if any, on its accounting policies or
the amount of the cumulative effect to be recorded from
adopting SAB No. 101.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
Note 7 - Subsequent Events
On July 6, 2000, the Company completed the exchange of
$76,418,000 principal amount at maturity of Senior Discount
Notes for an aggregate of $13,755,240, in cash, approximately
$5,000,000 principal amount of the Company's 10% Guaranteed
Secured Notes due August 1, 2001 (the "10% Notes"),
approximately $5,000,000 principal amount of the Company's 8%
Guaranteed Secured Notes due August 1, 2004 (the "8% Notes"),
and 39,985 shares of the Company's newly-created Series A-1
Convertible Preferred Stock, $1.00 par value ("Series A-1
Preferred Stock"), plus cash in lieu of fractional shares.
The notes submitted for exchange represented all of the
outstanding Senior Discount Notes.
The 10% Notes and 8% Notes (the "Notes") are guaranteed by
the Company's subsidiaries and are secured by the assets of
the Company and its subsidiaries. The Notes contain
covenants that, among other matters, restrict distributions
on the Company's Common Stock and limit the ability of the
Company and its subsidiaries to incur indebtedness for
borrowed money and create liens on their assets.
The Company's Series A-1 Preferred Stock does not entitle
the holders to dividends or, except in limited
circumstances, voting rights. The Series A-1 Preferred
Stock entitles the holders to a liquidation preference per
share of $100 and, subject to specified exceptions, is
subject to automatic conversion upon consummation of
specified equity transactions aggregating at least $20
million over any twelve-month period (including any cash
distributions or the Company's investment in NewCheck) into
the same securities offered in such transaction and at the
same price, payable by application of the liquidation
preference of the Series A-1 Preferred Stock.
Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
Overview
The market for electronic shelf labeling ("ESL") systems is in the
development stage, and the Company estimates that, as of June 30,
2000, approximately 210 stores in the United States were operating
such systems, out of a potential market in excess of 100,000
supermarkets and other stores. As a result, market acceptance of
and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at
and extent to which retailers choose to install ESL systems
throughout their stores. The initial acceptance and rate of
installation by retailers may be affected by numerous factors
beyond the Company's control, including the customer's assessment
of the benefits of and the need for ESL systems and the customer's
available capital resources, and there can be no assurance that
supermarket chains will choose to install ESL systems in a
significant number of stores.
Since its inception in 1990, the Company has been engaged
primarily in the development, design, market testing and, more
recently, sale of the ERS ShelfNet System. The Company
subcontracts to third parties the manufacture and assembly of the
components comprising the ERS ShelfNet System. In addition, the
Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued
development of the ERS ShelfNet System. The Company has never been
profitable and has incurred significant net operating losses and
negative cash flow from operations to date. Since inception and
through June 30, 2000, the Company has generated cumulative
revenues of $26.5 million, and has incurred a cumulative net loss
of approximately $180.7 million (prior to recording extraordinary
gains in 1999 and the first quarter of 2000 of $34.6 million and
18.5 million, respectively, in connection with the Company's
acquisition of its 13-1/4% Senior Discount Notes due 2004). The
Company expects losses and negative cash flow from operations to
continue in the current fiscal year, and the accumulated deficit
to increase, while the Company concentrates on the foregoing
activities 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 has also marketed its ERS
ShelfNet System on a fee based arrangement under its SayGo Plan.
The Company intends to continue, during its current fiscal year,
to develop additional strategies to accelerate market recognition
and acceptance of the system and its benefits, but there can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
system in the emerging market for ESLs.
<PAGE>
In February 2000, the Company acquired an interest in NewCheck
Corporation ("NewCheck"), of Jacksonville, Florida, which also
does business under the name of Productivity Solutions, Inc.
NewCheck is engaged in the development and commercialization of
retailing productivity solutions for use in supermarkets and other
retail environments similar to those addressed by the Company's
system. Under a management agreement extended to NewCheck, the
Company manages NewCheck's operations within the parameters of a
business plan authorized by NewCheck's board of directors.
As of June 30, 2000, the Company had outstanding $76.4 million
principal amount at maturity of its Senior Discount Notes,
following the acquisition by the Company during fourth quarter
1999 and first quarter 2000 of an aggregate of $70.9 million
principal amount at maturity of Senior Discount Notes. On July 6,
2000, and in order to enhance long-term liquidity, all outstanding
Senior Discount Notes were acquired by the Company in exchange for
$13.8 million in cash, $10 million principal amount of new
indebtedness and $4 million liquidation preference of newly-
created preferred stock.
The Company's ability to service its outstanding indebtedness 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 or that the anticipated
results of its strategy will be realized. As a result of the
factors set forth above, the Company will need to raise additional
long-term financing to support operations and service debt and
eliminate the uncertainty about the Company's ability to continue
to conduct its operations as a going concern. In the event the
Company is unable to raise any required additional financing, the
Company's operations would need to be scaled back or discontinued.
See "Liquidity and Capital Resources" below.
Statements contained in and preceding management's discussion and
analysis contain various forward-looking statements and
information that are based on information currently available to
management and management's beliefs and assumptions. When used in
this document, the words "anticipate", "designed to", "estimate",
"believes", "plans", and similar expressions are intended to
identify forward-looking statements, but are not the exclusive
means of identifying such statements. Such statements are subject
to risks and uncertainties, and the Company's actual results may
vary materially from those anticipated, estimated or projected due
to a number of factors, including, without limitation, the timely
availability and acceptance of new products, the rate of
development of the emerging market for ESL systems, the impact of
competitive products and pricing, the ability to obtain system
components from suppliers, the management of growth, and other
factors set forth in reports and other documents filed by the
Company with the Securities and Exchange Commission from time to
time.
<PAGE>
Results of Operations
Revenues. During the three month period ended June 30, 2000, the
Company's revenues were $1,563,000 compared to $910,000 in the
corresponding quarter in 1999. During the six month period ended
June 30, 2000, the Company's total revenues were $2,587,000
compared to $1,708,000 in the corresponding period in 1999. The
increase in revenues in 2000 compared to 1999 reflects the impact
of the Company's increased sales activity. In the second quarter
of 2000, the Company recorded sales of seven systems; in the
comparable period in 1999 sales of four systems were recorded.
In the three and six month periods ended June 30, 2000, revenues
were concentrated among four significant customers within the
supermarket industry comprising 90% and 93% of total revenues.
For the three and six month periods ended June 30, 1999, revenues
were concentrated among two significant customers comprising 88%
and 86% of total revenues.
Maintenance revenues for the three months ended June 30, 2000
increased to $270,000 from $239,000 in the corresponding 1999
period, and for the six months ended June 30, 2000 increased to
$558,000 from $400,000 in the corresponding 1999 period,
reflecting increased maintenance and billable service activity
from a larger customer base of installations.
Cost of Goods Sold. Cost of goods sold consists of the cost of
hardware components of the ERS ShelfNet System, system
installation costs, depreciation of tools and dies owned by the
Company and utilized in the manufacturing of hardware components,
amortization of capitalized product development costs, warranty
and maintenance costs, freight and inventory obsolescence. Under
the SayGo Plan, the Company depreciates the cost of hardware
components of its system over the shorter of their estimated
useful lives or five years.
Cost of goods sold increased to $1,362,000 for the three months
ended June 30, 2000 from $1,315,000 for the three months ended
June 30, 1999, and decreased to $2,329,000 for the six months
ended June 31, 2000 from $2,774,000 for the six months ended June
30, 1999. The gross profit increased in the second quarter of 2000
to 13% of total revenues, from a gross loss (cost of goods sold in
excess of revenues) of 45% in the comparable 1999 period and to
10% during the first half of 2000 compared to a gross loss of 62%
during the same period of the prior year. The increase in gross
profit percentage is the result of lower warranty maintenance
costs during the first half of 2000. Additionally, charges related
to inventory reserves decreased during the six months ended June
30, 2000 to $90,000 compared to $200,000 in the corresponding
period for 1999.
Warranty and maintenance expenses included in cost of goods sold
decreased to $95,000 in the three months ended June 30, 2000
compared to $180,000 for the 1999 quarter, and to $198,000 in the
six months ended June 30, 2000 compared to $345,000 for the same
<PAGE>
period in 1999. The Company anticipates that future warranty and
maintenance expenses per installation will decrease as a greater
percentage of the installed base consists of wireless
installations, and that the cost of goods sold as a percentage of
revenues will decrease as a result of higher manufacturing volumes
of its components and as the installation process is improved.
Selling, General and Administrative. Selling, general and
administrative costs consist of costs associated with selling and
administrative staff, overhead, market research and development,
and customer service personnel. Selling, general and
administrative costs decreased to $1,557,000 for the three months
ended June 30, 2000 compared to $2,593,000 for the quarter ended
June 30, 1999, and to $3,521,000 for the six month period ended
June 30, 2000, compared to $5,582,000 for the same period in 1999.
These decreases reflect a decrease in compensation related expense
from 1999 resulting from an overall decrease in employee
headcount, reimbursement of certain operating expenses under the
management agreement with NewCheck and other general cost
reductions.
Research and Development. Research and development expenses were
$1,107,000 for the three months ended June 30, 2000 compared to
$1,447,000 for the three months ended June 30, 1999, and
$2,211,000 for the six month period ended June 30, 2000 compared
to $2,586,000 for the same period in 1999. Such decreases reflect
a small reduction in hardware and software engineering activities.
Interest Income. Interest income decreased to $438,000 for the
three months ended June 30, 2000 compared to $703,000 for the
three months ended June 30, 1999, and to $919,000 for the six
month period ended June 30, 2000 compared to $1,416,000 for the
same period in 1999, due to the decreased cash and cash
equivalents available for investment.
Interest Expense. Interest expense decreased to $2,756,000 for
the three months ended June 30, 2000 compared to $4,689,000 June
30, 1999, and to $5,481,000 for the six month period ended June
30, 2000 compared to $9,282,000 for the same period in 1999.
Interest expense in 1999 included interest on amounts borrowed
from the Connecticut Development Authority ("CDA"), which matured
in August 1999, and, in both 1999 and the current year, non-cash
interest on the Senior Discount Notes, certain of which were
acquired during the fourth quarter of 1999 and first quarter of
the current year as described below. 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, $.01 par value ("Common Stock"), the
Company commenced recording interest on an amount equal to the
gross proceeds from the Private Placement plus prior recorded and
unpaid interest at the annual rate of 13.25%. Additional expense
has been recorded as a result of the amortization of the discount
recorded on the Senior Discount Notes (for value attributed to the
<PAGE>
1997 Warrants) and the amortization of costs of issuance. See
"Liquidity and Capital Resources" below for information concerning
the retirement of all outstanding Senior Discount Notes.
Loss on Equity Investment. During the quarter and six-months
ended June 30, 2000, the Company recorded losses of $530,000 and
$1,067,000 on account of its investment in NewCheck. Since closing
on February 11, 2000 on its investment in NewCheck, the Company
has accounted for its position on the equity method.
Income Taxes. The Company has incurred net losses since inception
which have generated net operating loss carryforwards for federal
income tax purposes of approximately $65.4 million which are
available to offset future taxable income and expire through the
year 2013. 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 unaudited
condensed consolidated financial statements. During the fourth
quarter of 1999 and the first quarter of the current year, the
Company's net operating loss carryforwards were reduced as a
consequence of the Company's recognition of extraordinary gain as
hereinafter described and after utilizing the Company's operating
loss to offset such gain for tax purposes.
Extraordinary Gain. In the first quarter of 2000, the Company
recognized an extraordinary gain of $18,959,000 as the result of
the acquisition of $24.549 million principal amount at maturity of
Senior Discount Notes for a cost of $4,652,000, net of fees. The
extraordinary gain is net of transaction fees of $247,000 and the
write off of $625,000 of debt issuance costs. These acquisitions
followed the acquisition of $45.25 million principal amount at
maturity of Senior Discount Notes during the fourth quarter of
1999, and were followed by the retirement of all remaining Senior
Discount Notes subsequent to the end of the second quarter of the
current year (see "Liquidity and Capital Resources" below).
Liquidity and Capital Resources
As of June 30, 2000, the Company had net working capital of
$21,448,000, reflecting cash and cash equivalents of $21,047,000,
compared to net working capital of $41,165,000, reflecting cash
and cash equivalents of $37,386,000 at December 31, 1999. The
decrease in net working capital and in cash and cash equivalents
resulted primarily from the funding of the Company's operations,
the acquisition by the Company of certain of its Senior Discount
Notes during the first quarter of 2000 and the Company's purchase
of securities of NewCheck. As described below, on July 6, 2000 the
Company used additional cash of $13,755,240, and issued additional
securities, to retire its outstanding Senior Discount Notes.
Net cash used in operations was $5,030,000 for the six months
ended June 30, 2000, compared to net cash of $6,067,000 used for
operating activities for the six months ended June 30, 1999,
resulting primarily from the net losses (prior to accounting for
<PAGE>
the 2000 extraordinary gain of $18,959,000) of $11,271,000 and
$17,307,000, respectively, for such period. In the first six
months of 2000, the net cash used in operations also reflected a
increase in accounts receivable (net of allowance for doubtful
accounts) of $477,000 a decrease in inventory (net of reserves) of
$826,000 and an increase in interest receivable of $141,000
(arising from convertible debt of NewCheck held), compared to a
decrease in accounts receivable (net of allowance for doubtful
accounts) of $178,000 and an decrease in inventory (net of
reserves) of $578,000 during the comparable period in 1999. In the
first six months of 2000, the net loss included $574,000 of non-
cash interest expense, compared to $8,496,000 of such expense in
the prior year. During the six months ended June 30, 2000, the
Company recorded a net profit of $7,688,000 after accounting for
$18,959,000 of gain recognized upon acquisition by the Company of
Senior Discount Notes.
Cash used in investing activities totaled $6,657,000 for the six
months ended June 30, 2000 compared to $972,000 of cash used in
investing activities for the six months ended June 30, 1999. The
increase in investing activities was primarily due to the
investment of $1,950,000 in NewCheck equity and $4,550,000 in
NewCheck convertible debt offset by a decrease in capital
expenditures. Investing activities included capital expenditures
of $159,000 and $987,000 for the six months ended June 30, 2000
and 1999, respectively.
In February 2000, in exchange for payments aggregating $6.5
million, the Company acquired shares of NewCheck's newly-created
Series C Convertible Preferred Stock, $.0001 par value (the
"NewCheck Senior Preferred Stock"), representing approximately 19%
of NewCheck's voting securities outstanding at closing, together
with NewCheck's 8% Convertible Promissory Note (the "NewCheck
Convertible Note") in the aggregate principal amount of $4.55
million, convertible into additional shares of NewCheck Senior
Preferred Stock. The NewCheck Senior Preferred Stock is entitled,
pursuant to its terms, to receive preferential dividends, payable
semi-annually in additional shares of NewCheck Senior Preferred
Stock, at the rate of 8% per annum on the liquidation preference
per share, which cumulate if not paid, is subject to certain
redemption rights exercisable by the holders and participates on
an "as converted" basis with NewCheck's common stock, $.0001 par
value ("NewCheck Common Stock"), and other participating series,
in the proceeds of certain events. Each share of NewCheck Senior
Preferred Stock is convertible into three shares of NewCheck
Common Stock at the election of the holder, is automatically
converted in specified circumstances, carries a number of votes
equal to the number of shares of NewCheck Common Stock issuable
upon conversion, and votes together with the NewCheck Common Stock
and other voting securities of NewCheck.
The NewCheck Convertible Note accrues interest, payable at
maturity, at the per annum rate of 8%, matures on the fifth
anniversary of issue, and is repayable (together with interest) in
shares of NewCheck Senior Preferred Stock at the election of
<PAGE>
NewCheck. The NewCheck Convertible Note is convertible after two
years (and earlier in specified circumstances) into shares of
NewCheck Senior Preferred Stock.
Under the management agreement dated February 11, 2000 extended by
the Company to NewCheck, the Company will manage NewCheck's
operations and, in addition to warrants issued to the Company with
respect to NewCheck Common Stock, the Company will be reimbursed
for the costs of its performance.
To the extent the Company continues to offer its system under the
SayGo Plan, in addition to pursuing maximum sales of the system,
the Company will require substantial funds for manufacturing and
carrying costs not initially covered by revenues calculated on the
basis of usage fees paid by customers. Under the SayGo Plan, the
Company will retain ownership of the system, 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 lines 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.
To date, the Company has not generated positive cash flow from
operations, and has historically funded its operations primarily
through loans from its stockholders, the sale of interests in an
affiliated partnership, the initial public offering of its Common
Stock consummated in May 1993, its arrangements with the CDA, the
sale of Series A Preferred Stock, $1.00 par value, to the
Company's principal stockholders and members of its Board of
Directors and their affiliates, an offshore public offering and
contemporaneous private placement of Common Stock in 1996 and the
Private Placement.
Cash used in financing activities was $4,652,000 to acquire
$24,549,000 principal amount at maturity of Senior Discount Notes
in the first three months of 2000. In the first three months of
1999, the Company did not generate or use any cash in financing
activities.
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 1997 Warrants are exercisable
through February 1, 2004 with respect to an aggregate of 2,538,258
shares of Common Stock, at a per share price of $5.23.
On July 6, 2000, the Company completed the exchange of $76,418,000
principal amount at maturity of its Senior Discount Notes for an
aggregate of $13,755,240, in cash, approximately $5,000,000
principal amount of the Company's 10% Guaranteed Secured Notes due
<PAGE>
August 1, 2001 (the "10% Notes"), approximately $5,000,000
principal amount of the Company's 8% Guaranteed Secured Notes due
August 1, 2004 (the "8% Notes") and 39,985 shares of the Company's
newly-created Series A-1 Convertible Preferred Stock, $1.00 par
value ("Series A-1 Preferred Stock"), plus cash in lieu of
fractional shares. The notes submitted for exchange represented
100% of the outstanding Senior Discount Notes.
The Company's 10% Notes will accrue interest payable at the rate
of 10% per annum, semi-annually, through issuance of additional
10% Notes. Upon consummation by the Company of specified equity
transactions (the "Equity Investment") aggregating at least $20
million over any twelve-month period (including any cash
distributions on the Company's investment in NewCheck), the 10%
Notes will be subject to mandatory prepayment. The Company's 8%
Notes will accrue interest payable at the rate of 8% per annum,
semi-annually, through issuance of additional 8% Notes. Upon
consummation by the Company of specified equity transactions
aggregating at least $40 million on a cumulative basis from
Closing, the 8% Notes will be subject to mandatory prepayment.
The 10% Notes and 8% Notes (the "Notes") will be subject to
prepayment at the election of the Company, in the case of the 10%
Notes without premium and in the case of the 8% Notes at premiums
ranging up to eight percent of the principal prepaid. Upon
specified change-in-control events, the Notes will be subject to
mandatory prepayment at specified premiums. The Notes are
guaranteed by the Company's subsidiaries and are secured by the
assets of the Company and its subsidiaries. The Notes contain
covenants that, among other matters, restrict distributions on the
Common Stock, and limit the ability of the Company and its
subsidiaries to incur indebtedness for borrowed money and create
liens on their assets.
The Series A-1 Preferred Stock does not entitle the holders to
dividends or, except in limited circumstances, voting rights. The
Series A-1 Preferred Stock entitles the holders to a liquidation
preference per share of $100 and, subject to specified exceptions,
is subject to automatic conversion upon consummation of the Equity
Investment, into the same securities offered in such transaction
and at the same price, payable by application of the liquidation
preference of the Series A-1 Preferred Stock.
The Company expects net losses and negative cash flows from
operations to continue through the current fiscal year. As a
result of the factors set forth above, the Company believes that
its existing resources will be sufficient to meet the Company's
currently anticipated operating and capital expenditure
requirements as it implements its business strategy into the
second quarter of 2001, after which there is uncertainty about the
Company's ability to continue to conduct its operations as a going
concern. The Company's ability to service its indebtedness and
meet its other obligations will depend, among other factors, on
the acceptance of the Company's system in its intended market and
the Company's success in implementing its business strategy and
<PAGE>
achieving large scale commercialization of the ERS ShelfNet
System.
In the event commercialization does not result in sufficient
liquidity to the Company, the Company will need to raise
additional long-term financing to support operations, service debt
and eliminate the uncertainty about the Company's ability to
continue as a going concern. The Company has no current
arrangement with respect to, or sources of, any additional
financing. Management's plans with respect to these issues include
a proactive effort to seek new financing, but there can be no
assurance that any such financing would be available on terms
reasonable to the Company. In the event the Company were unable to
raise any required additional financing, the Company's operations
would need to be scaled back or discontinued.
Market Risk
The Company is subject to market risks related to changes in
interest rates and, accordingly, the Company's objective is to
minimize any impact on its financial position from these risks.
The Company's cash and cash equivalents predominantly consist of
short-term, highly-liquid U.S. treasury bills and certificates of
deposit, in order to minimize interest rate risk. The Company
does not enter into transactions involving derivative financial
instruments for speculative trading purposes.
The Company utilizes sensitivity analysis, along with other
techniques, as a basis for measuring the impacts that market risk
exposure may have on the fair value of the Company's debt and
financial instruments. If market interest rates were to increase
immediately and uniformly by ten percent from levels at June 30,
2000, the decline in fair value of the portfolio would not be
material. The Company's long-term debt bears interest, for the
most part, at a fixed rate and, therefore, relative to its long-
term debt, an immediate ten percent change in the market interest
rates would not materially impact the Company's financial
statements.
These effects of hypothetical changes in interest rates, however,
ignore other effects the same movement may have arising from other
variables, and actual results could differ from the sensitivity
calculations of the Company. The Company regularly assesses
additional relevant variables, establishes policies and business
practices to protect against the adverse effects of using any
given financial instruments and does not anticipate any material
losses generated by these risks.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For information concerning this item, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk," which information is incorporated
herein by reference.
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Six Months Ended
June 30, 2000
Part II-Other Information
PART II. Other Information
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) As more fully described under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" of Part I of this
report (which information is incorporated by reference into this
item), on July 6, 2000 the Company completed the private exchange
of $76,418,000 principal amount at maturity of its Senior Discount
Notes due February 1, 2004 for an aggregate of: (i) $13,755,240,
in cash, calculated on the basis of $180 for each $1,000 principal
amount at maturity of Senior Discount Notes; (ii) approximately
$5,000,000 principal amount of the Company's 10% Guaranteed
Secured Notes due August 1, 2001, calculated on the basis of
$65.42961 for each $1,000 principal amount at maturity of Senior
Discount Notes; (iii) approximately $5,000,000 principal amount of
the Company's 8% Guaranteed Secured Notes due August 1, 2004,
calculated on the basis of $65.42961 for each $1,000 principal
amount at maturity of Senior Discount Notes; and (iv) 39,985
shares of the Company's newly-created Series A-1 Convertible
Preferred Stock, calculated on the basis of 0.5234368 shares for
each $1,000 principal amount of Senior Discount Notes, plus cash
in lieu of fractional shares. The Series A-1 Preferred Stock
entitles the holders to a liquidation preference per share of $100
and, subject to specified exceptions, is subject to automatic
conversion, upon consummation by the Company of specified equity
transactions aggregating at least $20 million over any twelve-
month period, into the same securities offered in such
transactions and at the same price, payable by application of the
liquidation preference of the Series A-1 Preferred Stock.
Registration under the Securities Act of 1933 of the 10% Notes, 8%
Notes and Series A-1 Preferred Stock issued in the foregoing
transaction was not required because such securities were issued
in a transaction not involving any public offering within the
meaning of Section 4(2) of said act.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed or incorporated by reference as
part of this Quarterly Report on Form 10-Q are
listed on the attached Index to Exhibits.
<PAGE>
(b) Current Reports on Form 8-K
During the quarter ended June 30, 2000, the
Company did not file any Current Reports on Form
8-K. The Company filed a Current Reports on Form
8-K dated July 6, 2000 reporting, under "Item 2.
Acquisition or Disposition of Assets" thereunder,
the acquisition by the Company of its outstanding
Senior Discount Notes. No financial statements
were included with such report.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
August 14, 2000 s/Bruce F. Failing, Jr.
------------------------- -------------------------------
Date Bruce F. Failing, Jr.
Vice Chairman and Chief
Executive Officer
August 14, 2000 s/Jerry McAuliffe
------------------------- -------------------------------
Date Jerry McAuliffe
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three Months Ended June 30, 2000
Index to Exhibits
Exhibit Number Document Description
-------------- --------------------
3(a) Certificate of Incorporation of the
Company.
10(a) Form of Letter of Transmittal executed
to the Company by holders of 13-1/4%
Senior Discount Notes due February 1,
2004 (incorporated by reference to
Exhibit 2(b) to the Current Report on
Form 8-K dated July 6, 2000).
10(b) Form of the Company's 10% Guaranteed
Secured Note due August 1, 2001
(incorporated by reference to Exhibit
2(c) to the Current Report on Form 8-K
dated July 6, 2000).
10(c) Form of the Company's 8% Guaranteed
Secured Note due August 1, 2004
(incorporated by reference to Exhibit
2(d) to the Current Report on Form 8-K
dated July 6, 2000).
10(d) Guaranty Agreement dated July 6, 2000
entered into by Electronic Retailing
Systems International, Inc., a
Connecticut corporation ("ERS-
Connecticut") (incorporated by reference
to Exhibit 2(e) to the Current Report on
Form 8-K).
10(e) Conditional Assignment and Security
Agreement dated July 6, 2000 among the
Company, ERS-Connecticut and United
States Trust Company of New York, as
collateral agent (incorporated by
reference to Exhibit 2(f) to the Current
Report on Form 8-K dated July 6, 2000).
11 Statement of Computation of Per Share
Earnings
27 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission for
information only and is not filed.
