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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
488 Main Avenue
Norwalk, Connecticut 06851
(Address of principal executive offices, including zip code)
(203) 849-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2000
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Common Stock, $.01 par value 21,252,637 shares
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<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q
Contents
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet--
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statement of
Operations--Three Months Ended
March 31, 2000 and 1999 5
Condensed Consolidated Statement of Cash
Flows--Three Months Ended March 31,
2000 and 1999 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
INDEX TO EXHIBITS 24
<PAGE>
<TABLE>
Electronic Retailing Systems International, Inc.
Condensed Consolidated Balance Sheet
(in thousands except per share and share amounts)
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 23,870 $ 37,386
Accounts receivable 1,721 2,304
Inventories 3,703 3,772
Prepayments and other current
assets 318 765
--------- --------
Total current assets 29,612 44,227
--------- --------
Equipment 4,639 4,802
Accumulated depreciation (2,431) (2,287)
--------- --------
Net equipment 2,208 2,515
--------- --------
Other non-current assets 3,418 2,774
Note receivable 4,550 --
--------- --------
Total assets $ 39,788 $ 49,516
========= ========
Liabilities and Stockholders'
Deficit
Current liabilities
Accounts payable and accrued
expenses $ 1,736 $ 2,557
Deferred revenue 392 505
Interest payable 1,664 --
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Total current liabilities 3,792 3,062
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Long-term debt
Senior Discount Notes, 13.25% 74,673 98,207
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Common stock purchase warrants 5,100 5,100
-------- --------
Stockholders' deficit
Common stock (par value $0.01 per
share; 35,000,000 authorized,
21,249,447 shares issued and
outstanding in 2000 and 1999) 212 212
Additional paid-in capital 51,374 51,374
Accumulated deficit (95,363) (108,439)
-------- --------
Total stockholders' deficit (43,777) (56,853)
-------- --------
Total liabilities and stockholders'
deficit $ 39,788 $ 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
March 31,
-------------------------
2000 1999
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<S> <C> <C>
Revenues
Product sales $ 736 $ 637
Maintenance 288 161
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Total revenues 1,024 798
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Costs of goods sold
Product sales 864 1,294
Maintenance 103 165
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Total cost of goods sold 967 1,459
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Gross profit ( loss) 57 (661)
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Operating expenses
Selling, general and administrative 1,964 2,989
Research and development 1,104 1,138
Depreciation and amortization 88 96
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Total operating expenses 3,156 4,223
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Loss from operations (3,099) (4,884)
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Other income (expenses)
Interest income 481 713
Interest expense (2,725) (4,593)
Equity investment (537) --
Loss on disposals (3) (8)
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Total other expenses, net (2,784) (3,888)
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Loss before extraordinary gain $ (5,883) $ (8,772)
on extinguishment of debt
Extraordinary item
Gain on extinguishment of debt 18,959 --
Net income (loss) $13,076 $ (8,772)
======= ========
Earnings (loss) per share:
Weighted average common shares
outstanding (for basic and
diluted) 21,286 21,249
======== ========
Loss per share before extra-
ordinary item $ (0.28) $ (0.41)
Extraordinary item $ 0.89 $ --
Basic and diluted earnings
(loss) per share $ 0.61 (0.41)
======== =========
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>
Three Months Ended
March 31,
------------------------
2000 1999
------ ------
<S> <C> <C>
Cash Flows Used in Operating Activities:
Net income (loss) $13,076 ($8,772)
Other adjustments to reconcile
net income (loss) to net cash used in
operating activities (15,884) 6,649
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Cash used in operating activities (2,808) (2,123)
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Cash Flows Used in Investing Activities:
Capital expenditures (96) (609)
Disposal of fixed assets 3 12
Note Receivable (4,550) --
Investment in PSI (1,413) --
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Cash used in investing activities (6,056) (597)
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Cash Flows from Financing Activities:
Cash used for early debt retirement (4,652) --
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Net decrease in cash and cash
equivalents (13,516) (2,720)
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Cash and cash equivalents at beginning
of period 37,386 63,877
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Cash and cash equivalents at end of
period $23,870 $61,157
======= =======
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 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.
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. Management believes that existing resources will
enable the Company to fund operations into the second quarter
of 2001; 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. 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 2 -Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, the year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required
under generally accepted accounting principles.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all
adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the results
of the interim periods. Operating results for the three
month period ended March 31, 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.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(Unaudited)
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions covering a broad spectrum
of the Company's financial activities, and while the Company
believes these estimates to be prudent, there exists a
possibility that unexpected events might affect these
estimates. 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.
Earnings (loss) per common share is computed using the
weighted average number of common shares and common share
equivalents assumed to be outstanding during the period.
Common share equivalents consist of the Company's common
shares issuable upon exercise of stock options and stock
purchase warrants. The computation of earnings (loss) per
common share does not reflect common share equivalents that
are anti-dilutive.
Note 3 -Inventories:
Inventories are stated at the lower of cost (determined on a
first in, first out basis) or market value. Inventories at
March 31, 2000 consist of $1,953,000 of materials and
supplies and $1,750,000 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.
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.
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(Unaudited)
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, 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. Interest
will be payable thereafter on the outstanding Senior Discount
Notes on February 1 and August 1 of each year commencing
August 1, 2000. The Senior Discount 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 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 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 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 is being 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 engaged
Jefferies & Co. and BNY Capital Markets, Inc. to advise it in
connection with the development or consideration of proposals
relating to the Senior Discount Notes. 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
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(Unaudited)
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. The Company continues to be engaged in the
development and consideration of proposals with respect to
the Senior Discount Notes intended to enhance the Company's
long-term liquidity, but there can be no assurance that any
such proposal will be implemented.
Long-term debt as of March 31, 2000 and December 31, 1999 was
comprised of 13.25% Senior Discount Notes totaling
$74,673,000 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 "Senior Preferred Stock"), of NewCheck
Corporation ("NewCheck"), together with NewCheck's 8%
Convertible Promissory Note (the "Convertible Note") in the
aggregate principal amount of approximately $4,550,000,
convertible into an additional 613,205 shares of 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
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.
The 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 Senior Preferred Stock at the election of
NewCheck. The Convertible Note is convertible after two
years (and earlier in specified circumstances) into shares
of 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,
<PAGE>
Electronic Retailing Systems International, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(Unaudited)
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
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 Standard:
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>
Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
Overview
The market for electronic shelf labeling ("ESL") systems is in the
development stage, and the Company estimates that, as of March 31,
2000, approximately 200 stores in the United States were operating
such systems, out of a potential market in excess of 100,000
supermarkets and other stores. As a result, market acceptance of
and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at
and extent to which retailers choose to install ESL systems
throughout their stores. The initial acceptance and rate of
installation by retailers may be affected by numerous factors
beyond the Company's control, including the customer's assessment
of the benefits of and the need for ESL systems and the customer's
available capital resources, and there can be no assurance that
supermarket chains will choose to install ESL systems in a
significant number of stores.
Since its inception in 1990, the Company has been engaged
primarily in the development, design, market testing and, more
recently, sale of the ERS ShelfNet System. The Company
subcontracts to third parties the manufacture and assembly of the
components comprising the ERS ShelfNet System. In addition, the
Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued
development of the ERS ShelfNet System. The Company has never been
profitable and has incurred significant net operating losses and
negative cash flow from operations to date. Since inception and
through March 31, 2000, the Company has generated cumulative
revenues of $23.9 million, and has incurred a cumulative net loss
of approximately $169.5 million (prior to recording extraordinary
gains in 1999 and 2000 of $34.6 million and 19.0 million,
respectively, in connection with the Company's acquisition of
Senior Discount Notes). 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 unless it has
established a sufficient revenue generating customer base.
The Company historically has marketed the ERS ShelfNet System for
sale at prices generally in excess of $100,000 per store. The
purchase of an ESL system from the Company has therefore
represented a significant capital expenditure for capital-
constrained retailers. The Company 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.
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.
<PAGE>
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.
In order to pursue its business strategy, the Company has incurred
substantial indebtedness. As of March 31, 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. 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, will be required to be dedicated to the
Company's interest expense obligations and may not be available to
the Company for its operations, working capital, capital
expenditures or other purposes, (ii) the Company's ability to
obtain financing that may be needed may be limited, (iii) the
Company's flexibility to adjust to changing market conditions and
ability to withstand competitive pressures as compared to less
highly-leveraged competitors could be limited (including by reason
of the covenants contained in the Company's debt instruments), and
(iv) the Company may be more vulnerable to downturns in general
economic conditions or in its business or be unable to undertake
capital expenditures that are important for its growth strategy,
any of which could have a material adverse effect on the Company
and its ability to make payments of principal of, and interest on,
its indebtedness.
Commencing August 1, 2000, cash interest on the Company's Senior
Discount Notes (the "Senior Discount Notes") will be payable semi-
annually at the rate of 13-1/4% per annum. The full accreted
principal amount at maturity of the Senior Discount Notes will
become due on February 1, 2004. The Company's ability to meet its
continuing debt service and other obligations will depend largely
on the extent to which the Company can implement successfully its
business strategy of achieving large-scale commercialization of
the ERS ShelfNet System, and there can be no assurance that the
Company will be able to implement fully its strategy, that the
anticipated results of its strategy will be realized, or that the
Company will be able to generate sufficient cash flow or otherwise
obtain funds in the future to cover interest and principal
payments associated with the Senior Discount Notes and any other
debt of the Company. See "Liquidity and Capital Resources" below.
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
<PAGE>
vary materially from those anticipated, estimated or projected due
to a number of factors, including, without limitation, the timely
availability and acceptance of new products, the rate of
development of the emerging market for ESL systems, the impact of
competitive products and pricing, the ability to obtain system
components from suppliers, the management of growth, and other
factors set forth in reports and other documents filed by the
Company with the Securities and Exchange Commission from time to
time.
Results of Operations
Revenues. During the three month period ended March 31, 2000, the
Company's total revenues were $1,024,000 compared to $798,000 in
the corresponding quarter in 1999. The increase in revenues in
2000 compared to 1999 reflects the impact of the Company's
increased sales activity. In the first quarter of 2000, the
Company recorded sales of four systems; in the comparable period
in 1999 sales of two systems were recorded and five systems were
placed under the Company's SayGo Plan under which the Company
recognizes revenues as monthly usage and other fees are billed to
customers.
In the three month period ended March 31, 2000, revenues were
concentrated among four significant customers within the
supermarket industry comprising 90% of total revenues. For the
three month period ended March 31, 1999, revenues were
concentrated among two significant customers comprising 88% of
total revenues.
Maintenance revenues for the three months ended March 31, 2000
increased to $288,000 from $161,000 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 decreased to $967,000 for the three months
ended March 31, 2000, from $1,459,000 for the three months ended
March 31, 1999. The gross profit increased in the first quarter of
2000 to 6% of total revenues, from a gross loss (cost of goods
sold in excess of revenues) of 83% in the comparable 1999 period.
The increase in gross profit percentage is the result of lower
warranty maintenance costs during the first quarter of 2000.
Additionally, inventory reserves decreased during the three months
ended March 31, 2000 from the comparable period in 1999.
Warranty and maintenance expenses included in cost of goods sold
decreased to $103,000 in the three months ended March 31, 2000
compared to $165,000 for the same period in 1999. The Company
<PAGE>
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 $1,964,000 for the three month
period ended March 31, 2000, compared to $2,989,000 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
$1,104,000 for the three month period ended March 31, 2000
compared to $1,138,000 for the same period in 1999. Such
decreases reflect a small reduction in hardware and software
engineering activities.
Interest Income. Interest income decreased to $481,000 for the
three month period ended March 31, 2000, compared to $713,000 for
the same period in 1999, due to the decreased cash and cash
equivalents available for investment.
Interest Expense. Interest expense decreased to $2,725,000 for
the three month period ended March 31, 2000, compared to
$4,593,000 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, the Company
commenced recording interest on an amount equal to the gross
proceeds from the Private Placement plus prior recorded and unpaid
interest at the annual rate of 13.25%. Additional expense is
being recorded as a result of the amortization of the discount
recorded on the Senior Discount Notes (for value attributed to the
1997 Warrants) and the amortization of costs of issuance.
Income Taxes. The Company has incurred net losses since inception
which have generated net operating loss carryforwards for federal
income tax purposes of approximately $63.6 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
<PAGE>
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.
Liquidity and Capital Resources
As of March 31, 2000, the Company had net working capital of
$25,820,000, reflecting cash and cash equivalents of $23,870,000,
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.
Net cash used in operations was $2,808,000 for the three months
ended March 31, 2000, compared to net cash of $2,123,000 used for
operating activities for the three months ended March 31, 1999,
resulting primarily from the net losses (prior to accounting for
the 2000 extraordinary gain of $18,959,000) of $5,883,000 and
$8,772,000, respectively, for such period. In the first three
months of 2000, the net cash used in operations also reflected a
decrease in accounts receivable (net of allowance for doubtful
accounts) of $583,000 a decrease in inventory (net of reserves) of
$69,000 and an increase in interest receivable of $50,000 (arising
from convertible debt of NewCheck held), compared to a decrease in
accounts receivable (net of allowance for doubtful accounts) of
$638,000 and an decrease in inventory (net of reserves) of
$607,000 during the comparable period in 1999. In the first three
months of 2000, the net loss included $799,586 of non-cash
interest expense, compared to $4,203,000 of such expense in the
prior year. During the three months ended March 31, 2000, the
Company recorded a net profit of $13,076,000 after accounting for
$18,959,000 of gain recognized upon acquisition by the Company of
Senior Discount Notes.
Cash used in investing activities totaled $6,056,000 for the three
months ended March 31, 2000 (consisting of an investment of
$1,413,000 in NewCheck equity and $4,550,000 in NewCheck
convertible debt), compared to $597,000 of cash used in investing
activities for the three months ended March 31, 1999. Investing
activities included capital expenditures of $96,000 and $609,000
for the three months ended March 31, 2000 and 1999, respectively.
<PAGE>
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
"Senior Preferred Stock"), representing approximately 19% of
NewCheck's voting securities outstanding at closing, together with
NewCheck's 8% Convertible Promissory Note (the "Convertible Note")
in the aggregate principal amount of $4.55 million, convertible
into additional shares of Senior Preferred Stock. NewCheck's
Senior Preferred Stock is entitled, pursuant to its terms, to
receive preferential dividends, payable semi-annually in
additional shares of Senior Preferred Stock, at the rate of 8% per
annum on the liquidation preference per share, which cumulate if
not paid. The Senior Preferred Stock is redeemable, at a price
equal to the greater of the original issue price or fair market
value, upon specified dates, if so elected by the requisite vote
of the Senior Preferred Stock. In the event of the liquidation or
sale of, or specified business combinations involving, NewCheck,
or in the event of other specified transactions or liquidity
events, the Senior Preferred Stock will, prior to other series of
preferred stock, receive an amount equal to its liquidation
preference (calculated initially as capital invested), and then
participate on an "as converted" basis with NewCheck's common
stock, $.0001 par value ("NewCheck Common Stock"), and other
participating series, in remaining amounts available for
distribution.
Each share of Senior Preferred Stock is convertible into three
shares of NewCheck Common Stock at the election of the holder, and
is automatically converted in specified circumstances. Each share
of Senior Preferred Stock 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 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 Senior Preferred Stock at
the election of NewCheck. The Convertible Note is convertible
after two years (and earlier in specified circumstances) into
shares of 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.
<PAGE>
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 Senior Discount Notes mature on
February 1, 2004, with accrual of cash interest at the rate of
13.25% per annum commencing February 1, 2000, such interest
payable thereafter on February 1 and August 1 of each year
commencing August 1, 2000. The Senior Discount Notes may be
called, at the Company's option, in whole or in part, at any time
after February 1, 2001, and, upon specified change in control
events, each holder has the right to require the Company to
purchase its Senior Discount Notes at specified prices.
The indenture under which the Senior Discount Notes were issued
places limitations on operations and sales of assets by the
Company or its subsidiaries, requires maintenance of certain
financial ratios in order for the Company to incur additional
indebtedness (subject to specified exceptions), requires the
delivery by the Company's subsidiaries of guaranties if specified
debt is subsequently incurred by such subsidiaries, and limits the
Company's ability to pay cash dividends or make other
distributions to the holders of its capital stock or to redeem
such stock. The 1997 Warrants are exercisable through February 1,
2004 with respect to an aggregate of 2,538,258 shares of Common
Stock, at a per share price of $5.23.
In August 1999, the Company repaid to the CDA, in accordance with
its terms, an aggregate of $5,000,000 principal amount of
indebtedness, which prior to repayment was convertible to shares
of Common Stock at an adjusted conversion price calculated at
$3.00 plus the average price of the Common Stock during the twelve
months prior to conversion. In August 1999, warrants to purchase
699,724 shares (as adjusted) of Common Stock, held by the CDA and
<PAGE>
exercisable at an adjusted price calculated at $2.58 plus the
average market price of the Common Stock during the twelve months
prior to exercise, expired without exercise. If the Company
relocates outside of Connecticut before 2004, the Company remains
obligated to pay a penalty to the CDA of $250,000.
The Company expects net losses and negative cash flows from
operations to continue through the current fiscal year. The
Company has been utilizing and will continue to utilize the net
proceeds from the Private Placement in connection with its
liquidity requirements, 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 outstanding Senior Discount
Notes commences, and fund operations into the second quarter of
2001. As more fully described above, the Company's ability to meet
its continuing debt service and other obligations will depend,
among other factors, on the acceptance of the Company's system in
its intended market and the Company's success in implementing its
business strategy and achieving large scale commercialization of
the ERS ShelfNet System.
In the event commercialization does not result in sufficient
liquidity to the Company, the Company may need to raise additional
long-term financing to support 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. 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. During the fourth quarter of
1999, the Company engaged Jefferies & Co. and BNY Capital Markets,
Inc. to advise it in connection with the development or
consideration of proposals relating to the Senior Discount Notes.
The Company continues to be engaged in the development and
consideration of proposals with respect to the Senior Discount
Notes intended to enhance the Company's long-term liquidity, but
there can be no assurance that any such proposal will be
implemented.
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, prior to December 31,
1999 the Company reviewed the ERS ShelfNet System and its internal
computer programs and systems to ensure year 2000 compliance and
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
<PAGE>
(iv) suppliers. The Company's project team provided consulting
services where needed in the areas of project planning and
estimating, testing and technical issues, and ran remedial
projects where needed.
The Company has addressed any internal year 2000 issues through
upgrades or modifications to its systems. The project team found
the new generation software of the ERS ShelfNet System to be year
2000 compliant in all material respects, and also determined that
the new generation software may be utilized to upgrade non-
compliant prior generation software. Given the terms of the
Company's arrangements with customers of its prior generation
software, and the Company's upgrade of or other measures taken
regarding such software, the Company does not anticipate any
material financial exposure resulting from its prior generation
software. The Company has not identified any other material
difficulty presented by its major customers or suppliers and has
not experienced any material business interruption in connection
with year 2000 difficulties.
Market Risk
The Company is subject to market risks related to changes in
interest rates and, accordingly, the Company's objective is to
minimize any impact on its financial position from these risks.
The Company's cash and cash equivalents predominantly consist of
short-term, highly-liquid U.S. treasury bills and certificates of
deposit, in order to minimize interest rate risk. The Company
does not enter into transactions involving derivative financial
instruments for speculative trading purposes.
The Company utilizes sensitivity analysis, along with other
techniques, as a basis for measuring the impacts that market risk
exposure may have on the fair value of the Company's debt and
financial instruments. If market interest rates were to increase
immediately and uniformly by ten percent from levels at March 31,
2000, the decline in fair value of the portfolio would not be
material. The Company's long-term term debt bears interest, for
the most part, at a fixed rate and, therefore, relative to its
long-term debt, an immediate ten percent change in the market
interest rates would not materially impact the Company's financial
statements.
These effects of hypothetical changes in interest rates, however,
ignore other effects the same movement may have arising from other
variables, and actual results could differ from the sensitivity
calculations of the Company. The Company regularly assesses
additional relevant variables, establishes policies and business
practices to protect against the adverse effects of using any
given financial instruments and does not anticipate any material
losses generated by these risks.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For information concerning this item, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk," which information is incorporated
herein by reference.
<PAGE>
Electronic Retailing Systems International, Inc.
Form 10-Q for the Three Months ended
March 31, 2000
Part II-Other Information
PART II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed or incorporated by reference as
part of this Quarterly Report on Form 10-Q are
listed on the attached Index to Exhibits.
(b) Current Reports on Form 8-K
During the quarter ended March 31, 2000, the
Company filed a Current Report on Form 8-K dated
February 11, 2000 reporting, under "Item 2.
Acquisition or Disposition of Assets" thereunder,
the acquisition by the Company of its interest in
NewCheck. 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.
May 15, 2000 s/Bruce F. Failing, Jr.
______________________ _____________________________
Date Bruce F. Failing, Jr.
Vice Chairman and Chief
Executive Officer
May 15, 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 March 31, 2000
Index to Exhibits
Exhibit Number Document Description
-------------- --------------------
27 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission for
information only and is not filed.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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0
0
<COMMON> 212
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