<PAGE>
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
General For Registration of Securities
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
IN STORE MEDIA SYSTEMS, INC.
NEVADA 84-1249735
(State or jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
15423 EAST BATAVIA DRIVE, AURORA, COLORADO 80011
303-364-6550
(Address and telephone number of principal executive offices)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE N/A
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK
(Title of class)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS
GENERAL
In Store Media Systems, Inc., a Nevada corporation (the "Company" or
"ISMSI"), has its corporate offices at 15423 East Batavia Drive, Aurora,
Colorado 80011. The Company is a development stage enterprise that is
developing, and plans to manufacture and distribute, its patented, in-store,
closed-loop couponing system. The Company's primary activities to date have
consisted of developing its technology, securing patent protection, formulating
its business strategy, raising initial capital and developing necessary
relationships with third parties, such as the Unisys Corporation, supermarkets,
product goods manufacturers and others.
In December 1992, In Store Media Systems, Inc., a Colorado corporation
and a predecessor to the Company (the "Predecessor") was organized to develop a
computerized, point-of-sale, marketing platform, the Coupon Exchange Center, a
proprietary invention. The Company believes that its Coupon Exchange Centers
offer numerous advantages over existing methods of delivering promotions for
consumer products. In the course of developing this product, the Company has
also developed an in-lane, electronic coupon clearing system for supermarkets.
On the basis of market research by the Company and published industry
information, the Company believes there is an immediate need for electronic
coupon clearing at virtually every checkout lane in every supermarket in the
United States. There is not a similar system in the market today, nor is the
Company aware of any such system scheduled for introduction.
In October 1998, the Predecessor merged with and into Crescent Gold
Corporation, a Nevada corporation. Crescent Gold Corporation, which was the
surviving corporation in the merger, had no operations or assets at the time of
the merger. However, its common stock was publicly traded on the Over the
Counter Bulletin Board at the time of the merger. After the merger, Crescent
Gold Corporation changed its name to "In Store Media Systems, Inc." and changed
its OTC Bulletin Board symbol to "ISMS." In the merger, the shareholders of the
Predecessor exchanged all of their issued and outstanding common shares for
approximately 44.0 million shares of Crescent Gold Corporation Common Stock.
Immediately following the exchange, the shareholders of the Predecessor owned
approximately 88% of the total outstanding shares of the Company.
COUPON INDUSTRY INFORMATION
The coupon industry is part of the over $280 billion spent annually in
the United States to advertise and promote goods and services, and it is an
influential force in the over $400 billion retail food industry. The coupon is
the only cash instrument in America not electronically cleared. Today, it takes
60 to 90 days to get coupon performance data to the brand managers, and such
data is incomplete. The Company intends to replace the present methods of
clearing and marketing coupons with systems that give manufacturers and
retailers real-time access to their market data.
Industry Statistics
-------------------
o Manufacturers distributed 278 billion coupons in 1998
o There were 4.7 billion coupons redeemed in 1998
o Coupons are used by 83% of United States population (88% women
and 76% of men use coupons)
o 1998 expenditures by manufacturers for couponing:
<TABLE>
<CAPTION>
<S> <C> <C>
Face Values Redeemed $3.6 billion (59%)
Distribution Costs $2.0 billion (32%)
Handling Fees $0.4 billion (6%)
Processing Fees & Other Costs $0.2 billion (3%)
------------ ------
Total Costs $6.2 billion (100%)
============ ======
</TABLE>
(SOURCES: NCH NUWORLD 1998 CONSUMER BEHAVIOR STUDY AND CMS 1998 COUPON USAGE
TRENDS)
-1-
<PAGE>
Market for In-Store Couponing
-----------------------------
While the overall coupon industry is growing slowly, the in-store
distribution segment of the industry has enjoyed and sustained a 20%-plus
long-term growth rate over the last ten years. In-store coupons are one of the
best ways to encourage new product trials, induce brand switching and protect
market share. Industry sources estimate that the annual revenues from this
segment is $700 to $800 million (SOURCE: PROMO MAGAZINE, OCTOBER 1999). Because
the in-store coupon can be more easily targeted to a specific consumer, it
should continue to enjoy long-term growth as the manufacturers' database
marketing programs become more sophisticated and retailer loyalty programs
become more entrenched.
PRODUCTS AND SERVICES
The ultimate application of the Company's proprietary technology is the
distribution of in-store coupons through such Coupon Exchange Centers. However,
the Company will first introduce its proprietary in-lane, electronic coupon
clearing system. The electronic coupon clearing system provides instant
verification that the products were purchased for the coupons redeemed. After
retail stores accept and use the coupon clearing system, the Company will
install its Coupon Exchange Center. Each Coupon Exchange Center includes the
distribution of targeted coupons and touch-screen consumer surveys that can
dramatically increase the revenue potential with many business-to-business and
business-to-consumer Internet possibilities. Descriptions of the Company's
pending products and services are provided below.
The Coupon Exchange Centers will deliver to packaged goods
manufacturers, supermarkets and other retailers' real-time data on transactions
and coupon performance. The Coupon Exchange Center permits targeted promotions,
instant feedback and quick response to marketplace changes. The Company believes
that these characteristics are merchandising trends driving the future
competitive environment.
The Coupon Exchange Center will give the brand manager and the retailer
direct interaction with a targeted shopper. Through custom Internet
applications, brand managers will be able to deliver to shoppers, as they walk
into the supermarket, custom tailored offers and to receive back immediate data
on their effectiveness.
In$taClearing(TM)
-----------------
The Company's first product introduction will be its in-lane coupon
redemption system ("In$taClearing(TM)"). In$taClearing can "clear" virtually all
the coupons currently being distributed. This clearing ability is designed to
meet the immediate need in the industry for a stand-alone, electronic coupon
clearing system. In$taClearing will operate separately from or in conjunction
with the Coupon Exchange Centers.
To the Company's knowledge, In$taClearing is the first in-lane,
electronic coupon clearing system in America, and offers to retail stores and
manufacturers the following advantages:
o The In$taClearing coupon redemption program provides
manufacturers, who are spending over $6 billion per year in the
distribution and redemption of coupons, accurate accountability
and verification of the coupon redemption process.
o The current clearing process takes a long time, is labor
intensive, and is costing manufacturers over $800 million per
year in misredemption, shipping and fraud, all of which will be
reduced or eliminated with the In$taClearing program (Source:
Joint Industry Coupon Committee, 1998).
-2-
<PAGE>
o The Company has developed technology in accordance with the
coupon industry's published guidelines for electronic clearing.
In addition, the Company designed the system to fulfill the
manufacturers' objectives of increasing efficiency and reducing
fraud.
o In$taClearing program monitors the checkout transaction, matches
the coupons redeemed to the products purchased, instructs the
supermarket's POS system to provide the discount to the consumer
and then reports the applicable data collected to the data center
within minutes.
Coupon Exchange Centers(TM)
---------------------------
The Company's second product introduction will be the Coupon Exchange
Centers. The Coupon Exchange Centers deliver "In$taCa$h(TM)" coupons directly to
the consumer in exchange for unwanted or expired manufacturers' coupons obtained
from newspapers or other sources. Upon purchase of the applicable product, the
consumer may redeem the In$taCa$h(TM) coupons for cash, in the form of a bearer
check for the aggregate value of all In$taCa$h coupons redeemed, which is
issued by the Coupon Exchange Center's coupon scanner/checkwriter(TM) system, at
the checkstand.
The In$taCa$h coupon program will offer a unique combination of the
following:
o In$taCa$h coupons are distributed from the Company's kiosk to
shoppers from a location near the entrance of the store.
o In$taCa$h coupons are specifically targeted to the individualized
needs and purchase intentions of each shopper. Such needs are
determined from transaction histories observed by the Coupon
Exchange Center and from responses to surveys circulated by the
Company.
o In$taCa$h coupons rewards the shopper with a bearer check upon
redemption at check out.
o In$taCa$h coupons provide brand managers immediate feedback on
the coupons distributed and redeemed.
Data Driven Marketing, Inc.
---------------------------
The Company has established one wholly owned subsidiary, Data Driven
Marketing, Inc. ("DDMI"). DDMI's mission is to take the accumulating transaction
data and combine it with additional demographic household data, which is
directly and indirectly collected by the Company. This data, which will be
continually supplemented with transaction data from the Coupon Exchange Centers,
will provide DDMI a unique product to the manufacturers - household specific
data on consumers' purchasing history and intentions. In addition, the Company
is establishing an Internet website, 1stnationalcouponbank.com, which will
provide customized access to redemption data for payment and verification, and
customized data withdrawal and analysis.
The Company believes that DDMI and its coupon information website will,
upon introduction, offer the following benefits to users.
o Because of its two in-store services (In$taCa$h coupons dispensed
from Coupon Exchange Centers and In$taClearing in-lane electronic
coupon clearing), the Company has an excellent opportunity to
collect information about consumers' buying habits and future
purchase intentions.
o This research information is valuable to packaged goods
manufacturers because of the speed and level of detail that would
be available.
o The Company intends to provide manufacturers with data about
consumer brand preferences that can be applied immediately
through the Company's in-store coupon program.
-3-
<PAGE>
PRODUCT LAUNCH AND DISTRIBUTION
Existing Prototypes
-------------------
The Company has completed two working prototypes of the Coupon Exchange
Center. At various times of the past five years, it has demonstrated these
prototypes at the National Grocers Association Show, the Food Marketing
Institute show, the Promo "EXPO" show and the Florida Grocers Association show.
Currently, the Company has prototypes of the Coupon Exchange Center and
its in-lane coupon clearing system at Unisys' offices. The Coupon Exchange
Center includes the technology for the In$taClearing coupon clearing system. The
Company recently installed a model supermarket at its offices, which it will use
to demonstrate prototypes of the Coupon Exchange Center and the in-lane,
electronic clearing systems. The model supermarket at the Company is complete
with a wide range of grocery items and a point-of-sale checkout system.
The Company expects the initial product launch of the in-store coupon
clearing system to commence the first quarter of 2000. The Company also expects
to introduce its first commercial application of the Coupon Exchange Center in
the fourth quarter of 2000. The Company intends to adopt a staged distribution
strategy, which begins with a basic rollout program and can be expanded to meet
available commercial opportunities. The Company believes that over 10,000
supermarkets in the United States have a sufficient coupon transaction volume to
need electronic coupon clearing. The Company will employ a geographic rollout
program that is structured to commence with smaller markets and then move into
the largest retail markets (e.g., New York, Los Angeles and Chicago). By
commencing with smaller markets, the Company expects to minimize the initial
costs of labor, execution and training. In addition, the Company will have the
opportunity to refine its products and services based upon the results of
smaller market programs, allowing the Company to offer tested and proven
products into the larger markets.
The Company has developed a service network program called the POD
system ("Planned Operations Development"), through which the Company will build
a network of local offices across the country. The POD system is a hub and spoke
support system to provide incremental expansion and coordinate with the Unisys
service centers. The POD office will be a small, warehouse-type facility with a
trained staff and the local management, which among other things can be a local
contact for the store managers of participating retailers. Each POD will be
responsible for installing and maintaining up to approximately 25 retail stores.
To facilitate the rollout after the anticipated successful product
introduction of the electronic clearing technology, the Company has secured two
$200 million commitment letters from Dougherty Funding, LLC, an investment
banking firm located in Minneapolis, Minnesota. The first $200 million committed
will be initially available to finance the equipment (to outfit 75 stores that
have an average of 10 checkout lanes per store, the equipment and installation
cost is approximately $2.7 million). The second $200 million committed will be
used as a revolving line of credit to finance the accounts receivables with the
manufacturers after the Company reimburses the retailer. Under the engagement
letter, Dougherty Funding will have no obligation to provide such funding until
such time as the Company demonstrated an operational system in a store
environment and completes the production and installation of the subsidiary
components that comprise the system. See Item 2. Financial Statements at
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -Liquidity and Capital Resources."
In the past, the Company has experienced substantial product
introduction delays, resulting primarily from inadequate financial resources.
The Company anticipates that further delays could be occasioned by delays in
receiving the necessary additional capital to finance payment of Unisys and the
Company's internal development efforts.
-4-
<PAGE>
MANUFACTURING SUPPORT FROM UNISYS CORPORATION
Since inception, the Company's primary activities have been the
development of the technology underlying the Coupon Exchange Center system. The
Company has developed the concept, created renderings, prototypes and
specifications for the Coupon Exchange Center and the clearing system. However,
the Company determined that it would require a manufacturing arrangement with a
company having proven capacity and credibility to demonstrate to supermarkets
and manufacturers that it has the ability to deliver a high quality product. The
Company therefore established a development and manufacturing relationship with
the Unisys Corporation. The Company does not intend to manufacture the Coupon
Exchange Centers. The Company anticipates that Unisys Corporation will
manufacture the Coupon Exchange Centers pursuant to numerous existing
memorandums of understanding.
Beginning in January 1997, the Company entered into five development
agreements with the Payment Systems Division of the Unisys Corporation
("Unisys") in which Unisys will provide at cost most of the hardware, software
and depot level maintenance for the Company's Coupon Exchange Center system.
Unisys has agreed to manufacture the Coupon Exchange Centers for a price to be
determined by volume. In addition the Company will pay Unisys a royalty on each
In$taCa$h coupon redeemed that was dispensed by the Coupon Exchange Center,
subject to an annual minimum.
Through December 31, 1998, the Company has paid Unisys $693,716 and has
recorded a payable of $740,688 at December 31, 1998. In 1999, the Company paid
Unisys an additional $250,000. Currently, the Company owes Unisys $490,000. The
Company estimates that it will owe Unisys an estimated $1.1 million upon
delivery of the products and engineering deliverables specified in the
development agreements. Continuation of Unisys Corporation's services depends
upon such payment. Any delay would materially affect the Company's ability to
complete product development and introduction of the Coupon Exchange Center.
SALES AND MARKETING
The Company intends to establish an internal retail marketing force and
a manufacturers marketing force. The retail marketing force will market the
Coupon Exchange Centers and the coupon clearing system to retail stores. The
manufacturer sales force will focus primarily upon obtaining product
manufacturers to offer coupons for their products in the Coupon Exchange
Centers.
Retail Sales and Marketing Force
--------------------------------
The Company's first marketing efforts will be to introduce the coupon
clearing system into retail stores. Once the commercial introduction of the
clearing system has commenced, the retail marketing efforts will be focused on
two objectives. The first will be to continue to expand the coupon clearing
system by installing it in stores that do not currently use it. The second is to
encourage currently installed retailers to use the Company's Coupon Exchange
Center. The Company believes it has identified supermarkets that will install
the Company's products and services. However, the Company does not have any
binding agreements with such companies.
Manufacturer Sales Force
------------------------
The primary focus of the Company's marketing effort is to attract
national consumer packaged goods manufacturers to include product coupons in the
Coupon Exchange Center. The sales force will focus on larger manufacturers, and
will work with them on a consultative basis to develop and implement customized,
targeted marketing programs that fit each brand's strategies and objectives. The
Company has had initial discussions with some the nation's most prominent
packaged goods manufacturers and believes that such manufacturers will include
product coupons in the Coupon Exchange Centers. However, the Company has
received no binding commitments from such manufacturers.
-5-
<PAGE>
PLAN OF OPERATIONS
The Company intends to complete the development of its products,
beginning with the in-lane clearing system. Upon completion of the coupon
clearing system, the Company will test the system at selected retailers. Such
test sites have not been established. However, the Company is in discussions
with potential candidates. After initial testing, and assuming such tests prove
to be successful, the Company will commence the coupon clearing system
commercial introduction. Contingent upon sufficient funding, the Company
believes that it can achieve the following results in the next twelve months:
(a) A demonstration of the Company's entire coupon clearing and
distribution system at its mock supermarket showroom.
(b) Completion of the development of the in-lane clearing system and
its successful field trials.
(c) Commercial introduction of the Company's coupon clearing system.
(d) Completion of the development of the Coupon Exchange Center and
the start of its field trials.
The completion of development will require additional research and
development in the following areas: data center development, continuation of
mechanical, electrical, computer hardware and software engineering development
and ergonomic development.
The completion of the development of the Company's products is
contingent upon securing additional financing. However, until the additional
financing has been accomplished, the Company continues to refine the development
of its products through continuing communications with retailers and
manufacturers and through the creation with in-house personnel of prototypes for
testing and trials.
To continue its development, the Company needs to continue to pay its
operating expenses, including payroll, rent, leases, utilities and other
overhead expenses such as insurance, telephone, postage, office supplies and
other periodic expenses including network maintenance, office equipment and
professional services.
In its current financial condition, the Company has no plan to expand
its plant and equipment, and does not foresee any anticipated material changes
in number of employees in the various departments such as research and
development, production, sales or administration until product introduction
commences.
BUSINESS RISKS
Need for Additional Capital
---------------------------
The Company will require additional funds to continue development of
the systems and implement its plan of operation for the next 12-months. The
Company has only general arrangements for such additional capital. There can be
no assurance that the financing will be available when needed to execute the
plan on terms that are acceptable to the Company. The inability to obtain
additional capital would restrict the Company's ability to grow and could reduce
the Company's ability to continue as a going concern. As of September 30, 1999,
the Company had available cash of approximately $720,000. Such amount is
insufficient to implement the plan intended by the Company. The Company is
therefore dependent upon additional financing to continue operations.
-6-
<PAGE>
Dependence upon Relationships with Manufacturers, Supermarkets and
Others
------------------------------------------------------------------
The Company's future success will depend in large part upon its ability
to establish and maintain relationships with packaged goods manufacturers,
supermarkets and retailers. Packaged goods manufacturer will need to agree to
promote and advertise their products using the Coupon Exchange Centers and agree
to clear their coupons through the Company's electronic coupon clearing system.
The supermarkets and other retailers will need to agree to allow the Company to
place the Coupon Exchange Centers and the electronic clearing systems in their
stores. The Company believes it has identified a number of product manufacturers
that will advertise with and use the Company's products and services. The
Company believes it has identified supermarkets that will install the Company's
products and services. However, the Company does not have any binding agreements
with such companies. Therefore, there can be no assurance that the supermarkets
and manufacturers currently identified by the Company will enter into
contractual relationships.
Dependence upon Coupon Usage
----------------------------
The Company's success will depend in part upon the acceptance and usage
by consumers. Any decrease in the demand for, or usage of coupons may materially
affect the Company's business. Since demand for the Company's products and
services by consumer product manufacturers, retailers and consumers is
substantially interrelated, any lack of demand by any one of these would effect
the Company's overall market acceptance.
Dependence upon Expansion of Operations
---------------------------------------
To a significant extent, the Company's future success will be dependent
upon its ability to engage in a successful expansion program. It will be
dependent, in part, upon its ability to secure participating retailers in its
chosen markets, attract customers for its coupon distribution and data products,
maintain adequate financial controls and reporting systems, manage its growth,
and obtain additional capital upon favorable terms. There can be no assurance
that the Company will be able to successfully implement its planned expansion,
finance its growth or manage the resulting larger operation.
PATENTS, TRADEMARKS AND TRADENAMES
Company holds a United States patent containing 37 allowed claims on
various aspects of its Coupon Exchange Centers and is currently in the process
of applying for three additional patents. In addition, the Company regards
certain computer software and applications as proprietary and attempts to
protect them through use of copyright and trademark laws and non-disclosure
agreements.
Although the Company believes that such proprietary rights offer a
competitive advantage to the Company, it is possible that such rights may be
invalid or that the Company has infringed or may infringe on existing or future
patents or proprietary rights. In addition, certain aspects of the Company's
products and services may not be adequately protected from infringement or
copying by competitors. Further, there can be no assurance that the Company's
patent would be upheld if challenged or that competitors might not develop
similar or superior processes or services beyond the scope of the Company's
proprietary rights.
The Company has received protection for the following trademarks:
In$taClearing, In$taCa$h, ShareSwitch and ShareTrax. In addition, the Company
has filed for protection for others. Therefore, the Company may not receive
protection with respect to some of its proprietary marks. The Company also
intends to prepare and file for federal trademark protection on other
proprietary marks. However, there can be no guarantee that such protection will
be available.
The Company believes that proprietary rights are very important in the
coupon clearing and marketing industry, and that such rights are a fundamental
basis for competition in the industry. The Company will continue to take action
to protect the new technology it develops and intends to defend vigorously
against infringement of its proprietary rights.
-7-
<PAGE>
COMPETITION
In-Store Couponing Competitors
------------------------------
The Coupon Industry is highly competitive, and the Company will
encounter significant competition in connection with the operation of its
business. These competitive conditions may adversely affect the Company's
revenues, profitability and ability to meet its business objectives. In the
in-store marketing industry, many formats including television, radio,
newspapers and other coupons, compete for the advertising and promotion dollars
spent by packaged goods manufacturers to help sell their products. A number of
competitors have introduced and are successfully operating competing coupon
systems, including checkout coupons, on-the-shelf coupon dispensers,
computer-screen equipped shopping carts and others. The Company will be
competing with many established companies having much greater financial
resources, experience, and market share than the Company.
The Company's primary competitors are Catalina Marketing Corp.,
Actmedia, now a part of News America Marketing, Inc., a division of News Corp.,
and InteroAct. Catalina Marketing has installed its couponing system in
approximately 11,500 stores in the United States. Actmedia has an installed base
of approximately 15,000 food stores in the United States. (In addition to
in-store couponing, Actmedia also provided sampling and direct mail services.)
InteroAct, a private company, was founded in 1994 and currently offers its
products in approximately 1,250 stores.
The Company believes that the primary methods of competition are in
system effectiveness and the ability to target market and confirm market
results. While the Company believes that its products and services offer
numerous advantages over existing systems, there can be no assurance that it can
effectively compete against other companies. The Company's competitors have
significantly greater financial resources, established management, and a
significant market presence, including name recognition. While the Company
anticipates it system will operate in stores with competitive systems, to the
extent that a competitor has installed another system in its retail locations,
it may be more difficult for the Company to replace or add the Coupon Exchange
Center and/or the electronic coupon clearing system. Further, the retailer may
be contractually bound to maintain the existing system for several years.
Coupon Redemption Competitors
-----------------------------
In the coupon clearing industry, several companies have
well-established manual alternatives. Although no competitive electronic
clearing system is on the market today, competitors have expressed a desire to
develop a similar system, and there is no assurance that they could not succeed.
The coupon redemption industry has two segments. One segment is the
retail clearinghouses and the other segment is the manufacturers' agents. The
retail clearinghouses help the retailer collect, count and process the coupons
redeemed by the consumers. The manufacturers' agents help the manufacturers
enforce their redemption policies and reimburse the retailers the face value of
the coupons and dispense the coupon handling fee ($0.08 per coupon is the
standard in the industry). Often the retail clearinghouse and the manufacturers'
agents are divisions of the same company. The three leading companies in the
industry are NCH NuWorld Marketing Limited, Inmar, Inc. and International Data.
NCH NuWorld is the oldest and largest manufacturer agent clearinghouse
servicing over 250 manufacturers. Inmar, Inc. is the parent company for Carolina
Coupon Clearing, Carolina Manufacturers Service, and Carolina Reclamation
Service. Inmar, Inc. was the second entrant into the industry, and within five
years became the largest combined manufacturers' agent and retail clearinghouse.
International Data, Inc. is a merger of Indiana Data and North American Data
Processors and Consumer Response Corporation resulting in the largest retail
clearinghouse.
-8-
<PAGE>
RESEARCH AND DEVELOPMENT ACTIVITIES
Of the $2,974,129 spent from inception to date by the Company on
research and development, $1,923,363, or 65%, was spent in 1997 and 1998. In
1996 and prior, the Company spent $1,050,766 on research and development. In
1997, it spent $1,728,466 and in 1998, it spent $194,897. Such research and
development expenses related predominantly to developing the technology included
in the Coupon Exchange System and the coupon clearing system. The Company
anticipates that research and development expenses will continue to be its most
significant expenditures until product introduction.
COST OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company is unaware of any pending or proposed environmental laws,
rules or regulations, the effect of which would be adverse to its contemplated
operations.
EMPLOYEES
The Company currently has 14 full-time employees. The Company considers
its relations with its employees to be excellent. None of the employees are
represented by a labor union, and the Company has not experienced any work
stoppage. The Company anticipates that it will be required to add a significant
number of new employees when Coupon Exchange Centers and In$taClearing systems
are installed. The Company has identified numerous management personnel with
experience and qualified backgrounds - some obtained while working for
competitors - who have indicated they will accept employment with ISMSI. The
Company does not have employment agreements with such persons and the Company
may not be able to retain their services when desired or on terms acceptable to
the Company.
AVAILABLE INFORMATION
After the effectiveness of this Registration Statement, the Company
will file with the Securities and Exchange Commission periodic reports under the
Securities Exchange Act of 1934. The public may read and copy any materials
filed by the Company at the SEC's Pubic Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549 or by calling 1-800-EC-0330. The SEC also maintains an
Internet site (http://www.sec.gov) that contains reports, proxy and information
statement, and other information regarding the Company. The Company's website is
located at http://www.ismsi.net
-9-
<PAGE>
ITEM 2. FINANCIAL INFORMATION
STATEMENT OF OPERATIONS
The following table sets forth certain historical financial data for In
Store Media Systems, Inc., a Nevada corporation, for the fiscal years ended
December 31, 1998, 1997 and 1996, which have been derived from the financial
statements of In Store Media Systems, Inc. and its predecessor, and the related
notes thereto, which statements were audited by Causey, Demgen & Moore, Inc.
independent auditors. Historical financial data may not be indicative of the
Company's future performance. This information should be read in conjunction
with the more detailed financial data and information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included elsewhere
herein. The Company's unaudited financial statements for the nine months ended
September 30, 1999, and for the fiscal years ended December 31, 1994 and 1995
are derived from the unaudited financial statements of the Company, which, in
the Company's opinion, reflect all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the Company's financial
condition and its results of operation. The results of operation for the nine
months ended September 30, 1999, are not necessarily indicative of the results
of operation for the full fiscal year.
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
(UNAUDITED)
<CAPTION>
Statements of Operations Unaudited
Data --------------------------
1994 1995 1996 1997 1998
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 5,700 $ 13 $ 927,927 $ 1,728,466 $ 194,897
General and administrative 294,444 297,083 695,252 840,688 866,858
Depreciation and amortization 5,818 6,638 31,672 51,438 61,777
------------ ------------- ------------- ------------- -------------
Operating Loss (305,962) (303,734) (1,654,851) (2,620,592) (1,123,532)
Other income (expense):
Interest income -0- -0- 19,039 4,791 28,147
Litigation settlement -0- -0- -0- (156,250) -0-
Debt conversion costs -0- -0- -0- (257,894) (20,000)
Interest expense (3,138) (1,341) (840,661) (1,551,362) (775,591)
------------ ------------- ------------- ------------- -------------
Total other income (expense) (3,138) (1,341) (821,622) (1,960,715) (767,444)
Net Loss $ (309,100) $ (305,075) $ (2,476,473) $ (4,581,307) $ (1,890,976)
Basic and diluted net loss
per common share $ (.01) $ (.01) $ (.06) $ (.11) $ (.04)
Weighted average common shares 38,400,000 40,900,000 41,300,000 40,800,000 49,000,000
outstanding
Balance Sheet Data:
Cash and cash equivalents $ 39,448 $ 47,595 $ 704,740 $ 1,726 $ 316,444
Working capital (deficit) $ 13,733 $ 54,271 $ (2,044,309) $ (4,937,870) $ (3,080,153)
Total Assets $ 658,278 $ 930,264 $ 2,441,274 $ 1,375,016 $ 1,299,568
Long-term liabilities $ 41,121 $ 64,759 $ 32,626 $ 196,569 $ 249,770
Shareholders Equity (deficit) $ 120,567 $ 173,010 $ (1,200,288) $ (4,267,082) $ (3,227,921)
</TABLE>
Selected Financial Data - continued
Unaudited Unaudited
Nine Months Nine Months Cumulative
Statements of Operations Ending Ending Amounts
Data September 30 September 30 From
1998 1999 Inception
------------- ------------- -------------
Costs and expenses:
Research and development $ 192,425 $ 267,324 $ 3,241,453
General and administrative 540,986 849,640 4,086,002
Depreciation and amortization 38,880 54,423 212,586
------------- ------------- -------------
Operating Loss (772,291) (1,171,387) (7,540,041)
Other income (expense):
Interest income 22,047 23,454 75,431
Litigation settlement -0- -0- (156,250)
Debt conversion costs -0- (107,250) (385,144)
Interest expense (626,081) (195,624) (3,367,717)
------------- ------------- -------------
Total other income (expense) (604,034) (279,420) (3,367,717)
Net Loss $ (1,376,325) $ (1,450,807) $(11,373,721)
Basic and diluted net loss
per common share $ (.03) $ (.03) $ (.27)
Weighted average common shares 48,000,000 51,000,000 41,750,000
outstanding
Balance Sheet Data:
Cash and cash equivalents $ 723,255
Working capital (deficit) $ (2,259,967)
Total Assets $ 1,350,572
Long-term liabilities $ 247,880
Shareholders Equity (deficit) $ (2,043,047)
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a development stage company engaged in the development
of its patented system for selecting, distributing and electronically clearing
coupons. The Company has generated no revenue from operations and has
continually incurred losses of approximately $11,373,721 since inception through
September 30, 1999. The Company expects to incur additional losses through the
end of the 1999 fiscal year.
At September 30, 1999, the Company had negative stockholders' equity of
$2,043,047, which reflects $9,330,674 of paid in capital less accumulated
deficit of $11,373,721. The excess of the accumulated deficit amount over paid
in capital primarily reflects the amount of funds generated through the sale of
short-term convertible notes and debentures by the Company and its predecessor
in private transactions in 1996, 1997, 1998 and 1999. At September 30, 1999, the
Company had a working capital deficit of $2,259,967. which is equal to the
amount of $885,772 in current assets less $3,145,739 in current liabilities on
such date.
The Company plans to continue on-going development of its coupon
distribution and clearing system, to the extent permitted by available
financing. The Company will require additional funds to continue its planned
development efforts and implement its plan of operation over the next 12 months.
The Company is unable to provide any assurance that such additional funds will
be available on commercially viable terms or at all. The Company may be forced
to discontinue or curtail its operations and on-going development efforts if
sufficient funds do not become available to the Company in a timely manner.
RESULTS OF OPERATION
The Company's operational costs have historically increased or
decreased primarily due to the expansion or contraction of the Company's ongoing
research and development efforts. The Company has incurred operating expenses of
$7,540,041 since the inception of the Company's predecessor in 1992 through
September 30, 1999. These expenses include $3,241,453 in research and
development expenses and $4,086,002 in general and administrative expenses.
Subject to the availability of additional funds, the Company expects its
operational expenses and costs to increase as it expands its efforts to complete
the development of its systems, products and services, and expects to commence
manufacturing and installation of its equipment. The Company also expects
operational costs to increase as it expands its marketing and promotional
efforts in connection with the introduction of its products and services.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
For the nine-month period ended September 30, 1999, the Company
sustained net losses of $1,450,807, as compared to net losses of $1,376,325 for
the nine-month period ended September 30, 1998. The increase in net losses was
primarily due to the below-described increase in operating costs and expenses
and the reduction in interest expense.
-11-
<PAGE>
The Company's operating costs and expenses for the nine months ended
September 30, 1999 increased by approximately 51.7% to $1,171,387, as compared
to operating costs and expenses of $772,291 for the nine months ended September
30, 1998. Operating expenses consist of research and development expenses,
general and administrative expenses and depreciation and amortization costs and
expenses. The increase in operating costs and expenses for the period ended
September 30, 1999 was primarily due to an increase in costs and expenses
associated with research and development, which increased by approximately 38.9%
to $267,324 for the nine months ended September 30, 1999, as compared to
research and development expenses of $192,425 for the nine months ended
September 30, 1998. The increase in research and development expenses was due to
the additional expenses incurred in connection with the installation of in-house
storefront models that the Company will use to demonstrate and test the
Company's system and prototypes. The increase also was due to an increase in
general and administrative expenses and a slight increase in depreciation and
amortization costs. General and administrative expenses increased by
approximately $308,654 or 57.1% to $849,640 for the nine months ended September
30, 1999, as compared to general and administrative expenses of $540,986 for the
corresponding period during the preceding fiscal year. The increase in general
and administrative expenses was primarily due to the recruitment of additional
engineering and marketing personnel in connection with the Company's development
activities. Depreciation and amortization costs increased approximately by 40.0%
to $54,423, as compared to depreciation and amortization costs of $38,880 for
the corresponding nine-month period ended during the preceding fiscal year. The
increase in depreciation and amortization costs was primarily due to the
increased costs associated with the amortization and depreciation of computing
systems and equipment purchased in connection with the Company's product
development activities.
The Company's net non-operating expenses (including non-operating
interest income, litigation settlement expenses and interest expense) decreased
by approximately 53.7% to $279,420 for the nine-month period ended September 30,
1999, as compared to non-operating expenses of $604,034 for the corresponding
nine-month period during the preceding fiscal year. The decrease was primarily
due to a 68.8% decrease in interest expense, which represented all of the
non-operating expenses for the nine months ended September 30, 1998 and
approximately 70.0% of the non-operating expenses for the nine months ended
September 30, 1999. The decrease in interest expense was primarily due to the
conversion of certain interest-bearing notes and the associated interest accrued
thereon into shares of the Company's common stock. Such decrease was offset by
$107,250 in debt conversion expenses for the nine months ended September 30,
1999. The Company incurred no debt conversion expenses in 1998. Company's
interest income increased slightly to $23,454 for the nine months ended
September 30, 1999, as compared to interest income of $22,047 for the nine
months ended September 30, 1998. The increase in interest income was due to an
increase in the Company's cash balances deposited in interest bearing money
market accounts.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1997.
For the fiscal year ended December 31, 1998, the Company sustained net
operating losses of $1,890,976, as compared to net losses of $4,581,307 for the
fiscal year ended December 31, 1997. The decrease in operating losses was
primarily due to the below-described reduction in research and development
expenses and interest expense.
The Company's operating expenses for fiscal 1998 decreased by
approximately 57.1% to $1,123,532, as compared to operating expenses of
$2,620,592 for the 1997 fiscal year. Operating expenses consist of research and
development expenses, general and administrative expenses and depreciation and
amortization costs and expenses. The decrease in operating expenses in 1998 was
entirely due to a decrease in costs and expenses associated with research and
development, which decreased by approximately 88.7% to $194,897 for the 1998
fiscal year, as compared to research and development expenses of $1,728,466 for
the 1997 fiscal year. The reduction in research and development expenses was due
to a reduction in the amount of capital available for research and development.
The offsetting increase was due to a slight increase in general and
administrative expenses and an increase in depreciation and amortization costs.
General and administrative expenses increased by approximately $26,170 or 3.1%
to $866,858 for the 1998 fiscal year, as compared to general and administrative
expenses of $840,688 for the preceding fiscal year. The increase in general and
administrative expenses was primarily due to the addition of Mr. Tom Gorman as
Chief Financial Officer to the management team. Depreciation and amortization
costs increased by 20.1% to $61,777, as compared to depreciation and
amortization costs of $51,438 for the 1997 fiscal year. The increase in
depreciation and amortization costs was primarily due to the purchase of
additional computer equipment and production machinery.
-12-
<PAGE>
The Company's net non-operating expenses (including non-operating
interest income, litigation settlement expenses and interest expense) decreased
by approximately 60.9% to $767,444 for the fiscal year ended December 31, 1998,
as compared to non-operating expenses of $1,960,715 for the 1997 fiscal year.
The decrease was primarily due to a 50.0% decrease in interest expense, which
represented all of the non-operating expenses for 1998 and approximately 79.1%
of the non-operating expenses for the 1997 fiscal year. The decrease in interest
expenses was primarily due to the conversion of principal and accrued interest
payable on certain notes previously issued by the Company's predecessor into
shares of the Company's common stock. In addition, the Company had $20,000 of
litigation settlement related expenses in 1998, as compared to litigation
settlement expenses of $156,250 in 1997. The litigation settlement expenses
incurred in 1997 were related to the legal expenses and other expenses in the
successful outcome of a shareholder derivative lawsuit against Healthstar, Inc.,
Peter Indovina, et al, and the Company's lawsuit against Continum Technology
Corporation. The Company's interest income increased to $28,147 in the 1998
fiscal year, as compared to interest income of $4,791 in 1997. The increase in
interest income was primarily due to an increase of the Company's account
balances in its money market accounts.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1996.
For the fiscal year ended December 31, 1997, the Company's net
operating losses increased approximately by 85.0% to $4,581,307, as compared to
operating losses of $2,476,473 for the fiscal year ended December 31, 1996. The
increase in operating losses was primarily due to the below-described increase
in research and development expenses.
The Company's operating expenses increased by approximately 58.4% to
$2,620,592 for the 1997 fiscal year, as compared to operating expenses of
$1,654,851 in 1996. The increase was primarily due to an increase in research
and development expenses, which comprised approximately 56.1% of total operating
expenses in 1996 and approximately 66.0% of the Company's operating expenses in
1997. Research and development expenses increased by approximately 86.3% to
$1,728,466 for the 1997 fiscal year, as compared to research and development
expenses of $927,927 for the 1996 fiscal year. The increase in research and
development expenses was primarily due to the Company's expanded research and
development activities in connection with its obligations under the Unisys
Agreements. General and administrative expenses increased by approximately 21.0%
to $840,688 for 1997, as compared to general and administrative expenses of
$695,252 in 1996. The increase in general and administrative expenses was
primarily due to additional full-time employees that either assisted in the
management of the relationship with Unisys or assisted in the Company's product
development. Depreciation and amortization costs also increased by approximately
62.4% to $51,438 for 1997, as compared to depreciation and amortization costs
incurred in the 1996 fiscal year.
The Company's net non-operating expenses increased by approximately
138.6% to $1,960,715 for the fiscal year ended December 31, 1997, as compared to
non-operating expenses of $821,622 for the 1996 fiscal year. The increase was
primarily due to a 84.5% increase in interest expense, which comprised virtually
all of the non-operating expenses for the 1996 fiscal year. The increase in
interest expense was primarily due to the increase in amounts borrowed to
finance the increased cost of research and development during the 1997 fiscal
year. In addition, the Company incurred no litigation settlement expenses in
1996. See the comparison of the results of operation for the 1998 and 1997
fiscal years for a description of the litigation settlement expenses incurred in
1997. The Company's interest income decreased by approximately 74.8% in 1997, as
compared to the interest income generated in 1996. The increase in interest
income was primarily due to an increase of the Company's account balances in its
money market accounts.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's principal requirements for capital have
been to finance the cost of research and development of its coupon selection,
dispensing and clearing systems and related technologies, and to pay for
expenses associated with securing patent protection, formulating its business
strategy and developing strategic relationships with third parties, such as
Unisys Corporation, retailers and product manufacturers. The Company has
historically financed its operations through loans and investments by directors
and officers, and the sale of equity and debt securities in private transactions
in reliance upon exemptions from the registration and qualification requirements
under federal and state securities laws. See Item 10. Recent Sales of
Unregistered Securities. At September 30, 1999, the Company had $3,145,739 in
current liabilities, of which $3,195,408 (including $412,968 of interest accrued
thereon) was in the form of convertible, short-term debentures issued by the
Company and its predecessor in private transactions during the 1998, 1997 and
1996 fiscal years. The Company is in default of its obligations under the notes
issued to investors by the Company and its predecessor from time to time
beginning in 1996 through 1999. A principal portion of the notes was converted
into shares of the Company's common stock during the 1998 and 1999 fiscal years.
At September 30, 1999, notes in the aggregate principal amount of $2,081,690
remained outstanding, as compared to notes in the aggregate principal amount of
$2,840,836 that were outstanding on December 31, 1998. The remaining portion of
the Company's current liabilities are comprised of continuing payment
obligations of approximately $490,000 (at September 30, 1999) to Unisys
Corporation. The Company relies on the availability of additional capital to
satisfy all such obligations.
The Company will require additional capital to continue and complete
development of its systems, to market its products and services and to implement
its business strategies, as more fully described and contemplated in this
Registration Statement. The Company has limited access to additional sources of
equity and debt financing and it can provide no assurance that additional funds
will be available on commercially acceptable terms or in a timely manner to
enable the Company to continue its operations as expected.
The Company has engaged the services of Dougherty Funding, LLC, a
Minneapolis, Minnesota investment banker, as the Company's exclusive debt
placement agent, to provide equipment financing and a line of credit in an
aggregate amount of up to $200.0 million to finance the costs and expenses
associated with the manufacture, installation and rollout of the In$taClearing
system equipment. Dougherty Funding also has indicated and interest to provide
additional debt financing of up to $200.0 million, which would be available for
the Company to finance the accounts receivable with the manufacturers after the
Company reimburses the retailer. The Company expects that these funds will be
sufficient to finance the Company's operational costs and expenses following the
completion of its development efforts. Under the engagement letter, Dougherty
Funding has no obligation to provide such funding until such time as the Company
shall have produced an operational equipment demonstration and completed the
production and installation of the subsidiary components that make up the
system. As consideration for its services, Dougherty Funding will receive a fee
equal to 2.0% of all amounts borrowed by the Company through lenders introduced
or identified to the Company by Dougherty Funding. If a financing arrangement
fails to close due to the failure of the Company, the Company will be obligated
to pay to Dougherty a break-up fee of $100,000.
The Company's cash position has improved substantially since the end of
fiscal 1997. At September 30, 1999, the Company had available cash of $723,255,
as compared to available cash of $316,444 at December 31, 1998. The additional
cash was generated through the sale of equity securities during the latter part
of 1998 and in 1999. At the current spending rate of approximately $150,000 per
month, the Company expects that such funds will be insufficient to continue
operations beyond the first quarter of 2000.
Additionally, the Company's debt obligations have decreased since the
end of the last completed fiscal year and the end of the 1997 fiscal year, as
additional holders of notes issued in 1996, 1997 and 1998 have converted the
Company's payment obligations under such notes into shares of the Company's
common stock. At September 30, 1999, the total principal amount payable on all
such previously issued notes decreased by approximately 26.7% to $2,081,690, as
compared to $2,840,836 payable on notes at December 31, 1998. The Company's
short-term obligations also continued to decrease in 1998 and 1999 primarily due
to a decrease in accounts payable and the elimination of certain obligations
owed to Healthstar, Inc. and the Continuum Technology Corp., which related to
the Company's settlement of its lawsuits.
-14-
<PAGE>
The Company currently has an agreement to acquire the assets of the
Partnership for Shares Marketing, Inc. for $500,000 in cash and 1,500,000 shares
of common stock, contingent upon the availability of funding. See item 7.
Certain relationships and related transactions. Upon consummation of this
transaction, the Company will acquire a national database containing information
on approximately 73 million households, which the Company expects to contribute
to its wholly-owned subsidiary, Data Driven Marketing, Inc. Other than in
connection with the above-described transaction, the Company has no future
commitments for capital expenditures.
YEAR 2000 COMPLIANCE; YEAR 2000 READINESS DISCLOSURE
To the fullest extent permitted by law, the following discussion is a
"Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information
and Readiness Disclosure Act 105 P.L. 271. Such Act does not protect the Company
from violations arising under the Federal Securities laws.
BACKGROUND
Many of the world's computer systems and programs currently record
years in a two-digit format. Such computer systems or programs that have
date-sensitive software or hardware may recognize a date using "00" as the year
1900 rather than the year 2000, and therefore, may be unable to recognize,
interpret or use dates in and beyond the year 1999 correctly. Because the
activities of many businesses are affected by dates or are date-related, the
inability of these systems or programs to use such date information correctly
could result in system failures or disruptions and lead to disruptions of
business operations in the United States and internationally (the "Year 2000
Problem"). In the case of the Company, such disruptions may include, among other
things, an inability to process transactions, send or process invoices, or
engage in similar routine business activities.
Issues relating to the Year 2000 Problem arise in a number of different
contexts in which the Company and its operating subsidiary use or access
computer programming. In its operations, the Company uses both third-party and
internally developed software programs and relies on customary
telecommunications services, as well as building and property logistical
services, including, without limitation, embedded computer-controlled systems.
The Company generally will also rely heavily upon suppliers, as well as data
processing, transmission and other services provided by third-party service
providers, including, without limitation, product distribution and delivery, and
information services.
The Company will rely upon independent internal local access network
(LAN) computer systems. In addition, the Company leases office space from third
parties and may conduct business through multiple locations in major cities.
Although the Company will, for the most part, conduct business independently, it
will substantially use similar third-party software and have common
relationships and dependencies with third party service providers.
ASSESSING THE IMPACT OF THE YEAR 2000 PROBLEM ON THE COMPANY'S
OPERATIONS
The Company has reviewed its computer systems and programs, including
information technology ("IT") and non-IT systems, and has determined that they
are in compliance with the requirements of the Year 2000. The Year 2000 problem,
however, is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year to 00. The Company
relies on a variety of third party vendors and service providers in the daily
operation of its web sites. The Company relies on third party data providers in
connection with its marketing efforts, as well as its internal IT staff. The
Company also will rely on third party service providers for shipping and
handling of products. All such third party providers depend on computing systems
and software, and are susceptible to Year 2000 related problems. Also many of
the data feeds that third party service and data providers use to deliver data
and information to the Company are generated through various data compilation
sources that are also reliant on computer technology and software. If a
significant number of these computers fail to function correctly, the Company
may not be able to correctly process or deliver orders, process transactions or
continue the development of its products. Although the Company could incur
substantial costs in connection with the failure of third-party computing
systems and software, such costs are not sufficiently certain to estimate at
this time.
-15-
<PAGE>
To date, the Company has incurred over $10,000 in expenses to purchase
Year 2000 compliant servers and software. All three servers have been upgraded
to the latest software, Microsoft Windows NT 4.0 servicepak 5, which is Year
2000 compliant. The Company estimates that it will not incur any material
additional expenses in staffing and related general and administrative expenses
to make existing hardware and software Year 2000 compliant. As of the date of
this Registration Statement, the Company does not expect to incur additional
expenses for Year 2000 remediation. The Company anticipates that the most likely
worst case scenario relating to the Year 2000 problem is that its servers could
malfunction and become inoperative. As a result, the Company may be required to
shut down its network until such time as the necessary repairs and corrections
are made. While the Company expects that it will be able to complete all such
necessary corrections and repairs in approximately one week, it is unable to
provide any assurance or guarantee that it can reestablish server operations
during this time frame. The Company does not expect any such disruptions in
server operations to have a material impact on its operations, as it is
currently engaged primarily in research and development activities.
Consequently, such disruptions are expected to affect the Company's operations
to the extent that the inability to access the network would limit the ability
of office personnel to share files electronically.
CONTINGENCY PLANNING
The Company has not developed any plan to address contingencies arising
from the inability of third-party service providers to become Year 2000
compliant in a timely manner. Consequently, no assurance can be given that the
potential failure of third-party systems will not increase the Company's
operating costs or create uncertainties that may have an adverse effect on the
Company's operating results or financial condition.
The Company does not at this time have any plans to develop a
comprehensive contingency plan with respect to the possible failure of computing
systems or interruptions relating to the rollover of the two-digit year to 00.
The Company has limited its contingency planning to identifying alternative
third party providers that would be available if the Company's current providers
are unable to perform in a timely manner. The Company is not actively pursuing
such alternatives, but expects that alternative providers would be available to
provide replacement products and services if the need should ever arise.
-16-
<PAGE>
ITEM 3. PROPERTY
DESCRIPTION OF PROPERTY
The Company's principal executive offices and manufacturing facility
are located at 15423 East Batavia Drive, Aurora, Colorado. The Company is
leasing these premises (consisting of approximately 6,260 square feet) from
Freund Investments on a month-to-month basis at a rate of approximately $3,130
per month. The Company is currently in the process of renegotiating the lease
terms with the landlord, Freund Investments. The property is sufficient to meet
the needs of the Company at this time.
-17-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as otherwise indicated, the following table sets forth certain
information regarding the beneficial ownership of the Company's capital stock as
of November 30, 1999, by (i) each of the Company's directors and officers, (ii)
each person or entity who beneficially owned more than five percent of the
Company's capital stock, and (iii) all directors and officers of the Company as
a group. Unless otherwise indicated, the address of each named beneficial owner
is the same as that of the Company's principal offices at 15423 East Batavia
Drive, Aurora, Colorado 80011.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME AND ADDRESS OF COMMON STOCK OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED (1)
- ------------------- ------------------ ----------------------
<S> <C> <C>
Ronald F. Anderegg 4,886,921 9.0%
1600 South Beacon Boulevard
Grand Haven MI 49417
Charles A. Schulze 20,614,198 (2) 37.9%
6756 South Holland Way
Littleton, CO 80128
Donald P. Uhl 3,705,000 6.8%
Charles Chavez 1,045,875 (4) 1.9%
Frank Pirri 525,000 1.0%
Larry Mortimer 50,000 *
Thomas Y. Gorman 137,500 (3) *
All Officers and Directors as a Group
(7 persons) 26,077,573 (2)(3) 47.8%
- -----------------
</TABLE>
* Less than 1.0%
(1) Beneficial ownership is determined in accordance with the applicable
rules under the 1934 Act. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable, or become exercisable within 60 days
from the date hereof, are deemed outstanding. However, such shares are
not deemed outstanding for purposes of computing the percentage
ownership of any other person. Percentage ownership is based on
54,427,425 shares of Common Stock outstanding.
(2) Includes shares issued and sold to American International Investments,
Inc. ("AII"), the entire outstanding capital stock of which is owned by
the children of Mr. Everett E. Schulze, Jr., the Company's Chairman and
CEO. Mr. Charles A. Schulze is the President of AII, by virtue of which
he has investment and voting control with respect to the stock. Mr.
Charles Schulze disclaims beneficial ownership of these shares other
than through his derivative ownership interest in AII.
(3) Includes options to purchase 100,000 shares of the Company's Common
Stock at an exercise price per share of $1.00, which are immediately
exercisable.
(4) Includes 670,500 shares owned by members of Mr. Chavez's family, with
respect to which Mr. Chavez disclaims beneficial ownership.
-18-
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following discussion includes biographical information regarding
the Company's officer, directors and significant employees.
MANAGEMENT
EVERETT E. SCHULZE, JR., age 48, is the founder of the Company's
predecessor. Since inception of the Company's predecessor in 1992, Mr. Schulze
has, on a full-time basis been the Chairman and CEO of the Company and its
predecessor. Mr. Schulze is the inventor of the Company's technology. He has
over 20 years experience with point-of-sale coupons (through
consumer-interactive beverage container recycling centers). He holds 14 United
States patents. Mr. Schulze has over 18 years experience as principal and CEO of
manufacturing facilities which produced original design, close tolerance
equipment for the food, oil & gas and aerospace industries. Before organizing
the Company's predecessor, Mr. Schulze was President and CEO of Es-Tech
International, Inc. ("Es-Tech"), which developed, manufactured and installed the
Enviromint CanPactor, an aluminum can recycling center. Mr. Schulze invented the
Enviromint CanPactor, established the assembly facilities and commenced
installation outside various supermarkets. Mr. Schulze sold his interest in
Es-Tech in 1993 to devote full time to In Store Media. Mr. Everett Schulze is
the father of Mr. Charles A. Schulze, an employee and director of the Company.
DONALD P. UHL, age 65, is the co-founder of the Company's predecessor.
Since inception of the Company's predecessor, he has, on a full-time basis been
the Executive Vice President and a director of the Company and its predecessor.
Following 20 years of service as an officer in the U.S. Air Force, Mr. Uhl has
gained an extensive background in early stage development of young companies.
Before joining the Company, Mr. Uhl served as an officer, director or consultant
to companies in the electronic testing equipment, computer disc, and coupon
business. He helped those companies to develop their business plans, marketing
strategies and to raise necessary capital from both private and public sources.
>From February 1992 to October 1992, Mr. Everett Schulze (as President of
Es-Tech) engaged Mr. Uhl to facilitate the marketing and production of the
CanPactor. Before working on the CanPactor project, since 1990, Mr. Uhl served
as Vice President of Corporate Development for Premier Technologies, Inc., a
start-up company engaged in the production of electronic cable-test equipment.
>From 1988 to 1990, Mr. Uhl was the President of Capital Funding Advisors, Inc.,
a consulting firm specializing in developing funding proposals for small
emerging companies. Before that time, Mr. Uhl was founder, Chairman and
President of Western Energy Development Company, Inc., a public corporation,
which grew from $3 million to $26 million in assets during Mr. Uhl's tenure from
1980 to 1988. Mr. Uhl also was chairman of the Pikes Peak Area Council of
Governments from 1980 to 1982, and served on the Governor 's Front Range Policy
Committee in from 1980 to 1981. He was also the Mayor of Monument, Colorado,
from 1978 to 1982.
FRANK J. PIRRI, age 58, has been a director of the Company since 1995.
He has over 37 years of experience in the management of consumer motivational
programs. From 1993 to the present, Mr. Pirri has served as Vice Chairman of
Incentive Marketing Services at S&H Citadel, Inc., a full service marketing
services firm with annual revenue of approximately $130.0 million. At S&H
Citadel, Mr. Pirri was the co-leader of a merger team responsible for directing
the consolidation of certain divisions, which resulted in total savings of $10.0
million. He was also the head of strategic planning activities and the manager
of a vertical integration program. Since last year, Mr. Pirri has also served as
the Senior Vice President of Mypoints.com, which is a development-stage company
engaged in providing direct marketing services through the Internet. For two
years before his engagement with Mypoints.com, Mr. Pirri was the Executive Vice
President of MotivationNet, a development-stage internet loyalty and rewards
company. Intellipost, Inc. acquired MotivationNet to create MyPoints.com. For
two years before his employment at MotivationNet, Mr. Pirri was a consultant and
the President of Life Facts, Inc., a provider of medical information services.
Mr. Pirri also has served in various executive capacities at the Sperry &
Hutchinson Company, where he has been the president and vice president of
divisions that developed consumer motivational and loyalty programs for
retailers and consumer packaged goods manufacturers. Mr. Pirri received an MBA
degree from the Kellogg Graduate School of Management at Northwestern University
and a B.B.A. degree in marketing from Pace University.
-19-
<PAGE>
JOEL MONSKY, age 56, has been a director of the Company since 1995. Mr.
Monsky has 38 years of experience in management and the sales and development of
consumer databases with National Birth Record Company and Demographics Systems,
Inc. In 1997, Mr. Monsky, founded and became the President of The Partnership
for Shared Marketing, which is a data marketing company whose clients included
several of the top packaged goods manufacturers, advertising agencies, and
supermarket chains. The Company has entered into an agreement to purchase
certain assets of Partnership for Shared Marketing. See Item 7. Certain
Relationships and Related Transactions. For ten years prior, Mr. Monsky was the
Vice President of Marketing of Datapulse, Inc., which is a data marketing
company. The Partnership for Shared Marketing is an acquisition target of the
Company. These assets will be incorporated into the Company's wholly owned
subsidiary called Data Driven Marketing, Inc. In 1991, Mr. Monsky co-founded and
served as the Executive Vice President of Datapulse, Inc., the developer of a
new survey technology. From 1991 to present, Datapulse, Inc. has surveyed over
9.5 million individual consumers in generating marketing data for major Fortune
500 companies. From its inception to the present, Mr. Monsky has generated
approximately $10,000,000 in sales for Datapulse, including sales of specific
Omnibus Telephone Survey questions and database sales.
CHARLES CHAVEZ, age 53, has been a director of the Company since 1995
and was appointed as Vice President of Operations in 1997. For the last 22
years, Mr. Chavez has been the owner and operator of Prestige Painting, Inc., a
commercial remodeling business. Mr. Chavez has a wide range of business
experience. He has particular expertise in project estimation and planning and
will be in charge of system installations and POD setups for the Company.
CHARLES A. SCHULZE, age 28, is the son of Mr. Everett Schulze and has
been a director of the Company and its Director of Purchasing since 1998. As
part of his responsibilities, Mr. Schulze supervises the Company's prototype
production facility. Before the Company's merger in October of 1998, Mr. Charles
Schulze served in the above-described capacities for the Company's predecessor
since its inception. Before that time and since 1993, Mr. Schulze was employed
as in-house information manager for the Company's predecessor. Mr. Schulze is
the President and a principal shareholder of American International Investments,
Inc., the Company's principal shareholder.
LAWRENCE P. MORTIMER, age 51, was appointed as the Company's Senior VP
of Marketing as of August 1, 1999. Before joining the Company, since January of
1999, Mr. Mortimer was an independent consultant to Morris International, a
sports and marketing company, and Fuel Rewards, Inc., a retail rewards and
loyalty program company. Before that time and from August of 1997, Mr. Mortimer
served as Senior Vice President for News America Marketing ("NAM"). NAM, a
division of News Corp. (NYSE: NWS), the industry leader in publishing and
distributing of "free standing inserts," which are the coupon supplements that
NAM includes in approximately 60 million newspapers each week. Before his
involvement with NAM, he served as Vice President of Sales of Actmedia since
1989. During his tenure, annual sales increased from $16 million in 1989 to $120
million in 1998. Actmedia, a division of Heritage Media, was acquired by News
Corp. in August of 1997, when News Corp. paid $1.3 billion for Heritage Media
and its subsidiaries. Actmedia pioneered the instant coupon machines that
distribute coupons at point of sale, which are the small coupon dispensers
attached to grocery store shelves at major supermarkets. Mr. Mortimer received a
Bachelor of Arts degree from Point Park College and has completed several
professional workshops and seminars, including the Gannett Management Seminar in
1998.
THOMAS Y. GORMAN, age 42, has been the Company's Chief Financial
Officer since June 1, 1998. Before joining In Store Media and since January of
1994, Mr. Gorman was the director of business development for PAC Enterprises,
Inc. Mr. Gorman participated in the debt and equity financing for projects in
South America, Eastern Europe, Africa, and Asia that had a total combined value
of over $245 million, and managed the prospective deals for PAC in Eastern
Europe and Russia. He has 20 years experience in financial and marketing
management as a director, president and vice president of several companies
including Roman Labs, Inc., a medical equipment manufacturer and U-Choose-It,
Inc., a television production company. Mr. Gorman is also currently a member of
the board of directors of Arete Industries, Inc. of Boulder, Colorado (OTCBB:
"AREE"). Mr. Gorman joined Arete's board as an outside director in September
1998 to work with its management on its turnaround. Arete is currently divesting
itself of its printing business and changing its focus to internet sporting
goods sales. Mr. Gorman has an MBA from the University of Colorado, a B.A. in
economics from DePauw University (Greencastle, Indiana).
-20-
<PAGE>
SIGNIFICANT EMPLOYEES
MIKE PARSONS, age 38, was appointed as the Company's Project Director
in June of 1999. For the six years before joining the Company, Mr. Parsons was
President of PAC International, Inc., an affiliate of PAC Enterprises, and an
international systems engineering company serving the beverage-can industry.
While serving as President, Mr. Parsons completed twenty projects in ten
countries. During his six years at PAC, the number of major projects increased
from an average of 0.8 per year to 3.3 per year. Mr. Parsons has also worked for
Eastman Kodak as the Development and Design Engineer for Kodak's imaging product
systems. Mr. Parsons is presently a member of the Professional Engineers of
Colorado, and has been awarded ten US Patents. Mr. Parsons holds an MBA from the
University of Colorado and a Bachelor of Science in Mechanical Engineering from
Rochester Institute of Technology.
BEVERLY B. BARR, age 57, was appointed as the Company's In$taClearing
Operations Manager in 1999. Ms. Barr has over 15 years experience with coupon
processing and in-store marketing systems. She has experience in marketing
coupon clearing services for supermarkets and on coupon processing services for
packaged goods manufacturers. Before joining the Company, Ms. Barr was employed
by CompuCook, Inc., which provides a recipe based, in-store coupon system to
various large supermarket chains. Before joining CompuCook, Inc., since 1994,
Ms. Barr served as a Senior Sales Executive for International Data, Inc. Her
responsibilities included promoting and selling coupon services to grocery
retailers and purchased goods manufacturers throughout the United States. Before
that time, from 1984 to 1994, Ms. Barr was a marketing consultant for
subsidiaries of Inmar Enterprises, Inc. As marketing consultant, she was
responsible for promoting and selling the coupon clearing, reclamation and
related services.
RHONDA MCCAULEY, age 37, joined the Company as Merchandising Operations
Manager in 1999. Ms. McCauley has over 13 years experience in retail sales
marketing and has had additional training and experience in building and
maintaining client relationships with packaged goods manufacturers. Before
joining ISMSI, since 1996, she was a Key Account Manager at PIA Merchandising
Co. ("PIA"). As Key Account Manager, Ms. McCauley managed the relationship with
Albertson's and Safeway. Before that time, since 1995, she was a merchandiser
for the Target department stores. She has also worked directly with well-known
packaged goods companies such as Johnson Wax, Ralston Purina, Colgate Palmolive,
Helene Curtis, Hormel, Benckiser, Coors Brewing, Hallmark, Gillette and many
others. Ms. McCauley has a Bachelor of Science degree in Business Administration
from North Dakota State University.
-21-
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation
received for the fiscal years ended December 31, 1998, 1997 and 1996, for
services rendered to the Company in all capacities by the individual who served
as the Company's Chief Executive Officer as of the end of the 1998 fiscal year.
The total amount of the annual salary and bonus payable to each of the Company's
other executive officers for the last completed fiscal year was below $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payout
------------------- ------ ------
Restricted Stock LTIP All Other
Name and Principal Fiscal Stock Options/ Payout Compen-
Position Year Salary($) Bonus($) Other($) Awards(#) SARs(#) ($) sation($)
- ------------------ ---- --------- -------- -------- --------- ------- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Everett E. Schulze, Jr. 1998 $120,000 -0- -0- -0- 1,000,000 -0- -0-
Chairman and CEO(1) 1997 $120,000 -0- -0- -0- -0- -0- -0-
--------------
</TABLE>
(1) All other compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such
perquisites and other personal benefits constituted the lesser of
$50,000 or 10% of the total annual salary and bonus of the named
executive for such year.
DIRECTORS COMPENSATION
Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
Board of Directors, but are reimbursed for their reasonable expenses incurred in
connections with attending meetings of the Board of Directors or management
committees.
EMPLOYMENT AGREEMENTS.
The Company has entered into a three-year employment agreement with Mr.
Mortimer, pursuant to which Mr. Mortimer has agreed to serve as Senior Vice
President of Marketing and Sales at an initial annual salary of $175,000 per
year during the first year of employment commencing August 1, 1999, and $200,000
per year in the second and third years. Pursuant to his employment agreement,
Mr. Mortimer was also awarded 50,000 restricted shares of the Company's common
stock and a cash sum of $25,000 upon completing the move of his primary
household to Colorado. In addition to receiving salary and stock, the Company
granted to Mr. Mortimer options to purchase a total of 1,000,000 shares of the
Company's common stock at $1.00 per share. The options granted to Mr. Mortimer
vest in three equal increments on each anniversary date of his employment
agreement over the next three years. Mr. Mortimer is also entitled to
participate in all employee plans and benefits that may be established for
executive employees.
-22-
<PAGE>
STOCK OPTIONS AND INCENTIVE COMPENSATION
The Company plans to adopt a formal incentive compensation and stock
option plan for its officers, directors, employees and others expected to
provide significant services to the Company. To date, the Company has
established incentive bonus programs for Messrs. Everett E. Schulze and Thomas
Gorman, the Company's Chief Executive Officer and Chief Financial Officer,
respectively. The Company granted to Mr. Schulze options to purchase up to
1,000,000 shares of the Company's common stock. The options granted to Mr.
Schulze will become exercisable according to the following vesting schedule: (i)
options to purchase 250,000 shares will vest upon substantial completion of
equipment financing; (ii) options to purchase an additional 250,000 shares will
vest upon completion of seven Coupon Exchange Kiosks; and (iii) options to
purchase the remaining 500,000 shares will vest upon installation of 1,000
kiosks in retail stores.
Pursuant to Mr. Gorman's bonus program, the Company granted to Mr.
Gorman options to purchase 1,000,000 shares of the Company's common stock, of
which options to purchase 100,000 shares are vested and currently exercisable.
Under the bonus program, options to purchase the remaining 900,000 shares of the
Company's common stock vest in increments of 100,000 shares, upon the
satisfaction or completion of certain performance benchmarks. The Company is
obligated to pay Mr. Gorman a cash bonus of $15,000 concurrently with the
vesting of options to purchase each such incremental portion of the remaining
shares.
The Company also granted options to Mr. Mortimer under his employment
agreement. See "--Employment Agreements."
STOCK OPTIONS GRANTS
The following table sets forth information concerning stock options
granted during the fiscal year ended December 31, 1998, to certain of the
Company's directors and executive officers.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS/SAR ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OF APPRECIATION FOR
OPTION/SAR EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ------- ----------- --------- ---- ----- ------
<S> <C> <C> <C> <C>
Everett E. Schulze, Jr., 1,000,000 33.3% $1.00 n/a
Chairman and Chief
Executive Officer
Lawrence P. Mortimer 1,000,000 33.3% $1.00 n/a
Senior Vice President of
Marketing and Sales
Thomas Y. Gorman, 1,000,000 33.3% $1.00 n/a
Chief Financial Officer
</TABLE>
-23-
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMERICAN INTERNATIONAL INVESTMENTS' CUMULATIVE CONVERTIBLE DEBENTURE
In March of 1998, American International Investments, Inc. transferred
1,239,403 of its (pre-merger) shares of the common stock of the Company's
predecessor to satisfy past due lease payment obligations of approximately
$247,880 that the Company's predecessor owed to Northstar Financial
("Northstar"). The children of Mr. Everett E. Schulze, Jr., the Company's
Chairman and CEO, own all of the outstanding shares of capital stock of AII,
with respect to which Mr. Schulze disclaims beneficial ownership. In
consideration of AII's payment of such lease obligations, the Company issued to
AII a 16% cumulative convertible debenture in the principal amount of $247,880.
The debenture matures on or before March 13, 2003. At the maturity date, AII
will have the option of receiving cash payment or converting the amounts payable
under the debenture into 1,000,000 (post-merger) shares of the Company's common
stock. Interest accrues on a semi-annual basis and may be paid in cash upon
conversion of the debenture or earlier at the election of the Company or
converted into common stock of the Company at the rate of $1.00 per share. In
the event of any liquidation, dissolution and winding up of the Company, AII (as
holder of the convertible debenture) will be entitled to a liquidation
preference equal to the sum of the principal amount plus any accrued interest
payable on the debenture prior to any payment to the holders of the common
stock. In connection with the transaction, AII also received a security interest
in the equipment described in the original lease with Northstar.
LOANS TO AND FROM OFFICERS
In January 1994, the Company made a loan to Mr. Schulze in the
principal amount of $195,000. On May 7, 1999, the Company acquired all right,
title and interest in the United States Patent application file number 2937-9
titled "Merchandising Using Consumer Information From Surveys" from Everett E.
Schulze, Jr., the inventor, in satisfaction of the principal and interest in the
amount of $244,310.58 payable to the Company from Everett E. Schulze, Jr.
During 1997 and 1998, the Company borrowed funds from American
International Investments, Inc. Such loans are evidenced by promissory notes
bearing interest at an annual rate of 10% and payable upon demand by the holder.
As of December 31, 1998, the accumulated interest and principal amount
outstanding and payable on the note was $141,428. Management believes that such
funds were borrowed on terms no less favorable than would otherwise have been
available to the Company through unrelated third-party sources.
CERTAIN BUSINESS RELATIONSHIPS
Pursuant to a promissory note dated March 7, 1997, the Company loaned
$50,000 to Mr. Joel Monsky, a director of the Company, and two relatives of Mr.
Monsky, all of whom are shareholders of The Partnership For Shared Marketing,
Inc ("Partnership"). On January 27, 1999, the Company entered into an Asset
Purchase Agreement with Partnership, under which the Company has agreed to
purchase certain of the assets of Partnership in exchange for $500,000 and
1,500,000 shares of the Company's common stock. Pursuant to the Agreement,
$50,000 of the cash obligation will be satisfied by cancellation of the amount
payable to the Company on the promissory note issued to the Company by the
principals of Partnership in 1997. The acquisition transaction is expected to
close in 2000, when funds are available. The assets that the Company will
acquire under the purchase agreement include a database developed by
Partnership, which contains consumer information on over 73 million households.
-24-
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party are
pending nor are any known to be contemplated and the Company knows of no legal
proceedings pending or threatened, or judgments entered against any Director or
Officer of the Company in his capacity as such.
-25-
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The common stock of the Company is listed on the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc. ("NASD") under
the symbol "ISMS."
The following table shows the range of high and low quotations for the
Company's common stock for the past two fiscal years, as reported by the
National Quotation Bureau monthly reports.
STOCK QUOTATIONS
LOW PRICE HIGH PRICE DIVIDENDS
3rd Quarter 1999 1 1/4 2 1/16 None
2nd Quarter 1999 1 3/16 2 1/2 None
1st Quarter 1999 1 1/4 2 None
4th Quarter 1998 1 3/8 1 3/4 None
The quotations reflect inter-dealer price, without mark-up, markdown,
or commission and may not represent actual transactions or a liquid trading
market. The stock is regularly, but thinly traded.
As of November 30, 1999, there were approximately 258 holders of record
of the Company's common stock and no holders of the Company's preferred stock.
DIVIDENDS
The Company has not paid any dividends with respect to its common
stock, and does not intend to declare dividends in the foreseeable future. The
payment of dividends, if any, is within the discretion of the Board of Directors
and will depend on the Company's earnings, if any, its capital requirements and
financial condition and such other factors as the Board of Directors may
consider.
-26-
<PAGE>
ITEM 10. RECENT SALE OF UNREGISTERED SECURITIES
SALES IN 1999
During the period commencing on January 1, 1999, through December 1,
1999, the Company sold the following unregistered securities:
(1) During the period from January 1, 1999, through August 4,
1999, the Company sold and issued approximately 29.36 units (the
"Units") to 40 investors at an effective purchase price of $1.00 per
share. The Units were offered and sold in private transactions pursuant
to the Company's Private Placement Memorandum dated November 3, 1998.
Each Unit consisted of 100,000 shares of restricted common stock and
warrants to purchase 100,000 additional shares of common stock. The
common stock purchase warrants are exercisable at $1.25 per share if
exercised during the first 12 months following the date on which such
warrants were issued and at $1.50 per share if exercised at any time
thereafter (prior to their expiration). The Units were sold in exchange
for cash or the conversion of short term notes that were previously
issued by the Company's predecessor and assumed by the Company
following the merger. For a discussion of the conversion of notes, see
Note 3 to the Financial Statements for the period ended September 30,
1999. See also the discussion below regarding sale of unregistered
securities during the 1998 fiscal year. Richmark Securities acted as
placement agent in the offering. The Units were offered and sold in
reliance on the exemptions from registration that are available under
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and
Regulation D promulgated by the Securities and Exchange Commission
pursuant to the authority granted under the Act.
(2) During the period from January 1, 1999 through September
30, 1999, the Company issued to certain accredited investors 1,084,871
shares of its common stock in exchange for the cancellation of notes
payable by the Company in the principal sum of $368,750 and interest
thereon in the amount of $63,288 and additional cash received of
$148,750. The notes were issued to such investors by the Company's
predecessor prior to the merger in 1998. The shares were issued in
reliance on the exemptions under Section 4(2) and Regulation D
promulgated therein.
For a discussion of the notes and their conversion, see item 1
under the discussion relating to sales in 1998 below.
(3) Under the terms of an underwriting agreement, the Company
issued to Richmark Securities 520,000 shares of the Company' s
restricted common stock as consideration for services rendered in
connection with the Company's offering pursuant to the Private
Placement Memorandum dated November 3, 1998. The shares were issued in
a private transaction in reliance on exemptions from registration
available under Section 4(2) of the Act and Regulation D promulgated
thereunder.
(4) Effective as of July 13, 1999, the Company granted to Mr.
Thomas Y. Gorman, the Company's Chief Financial Officer, options to
purchase 100,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The options were granted as consideration for
services rendered upon the successful completion of field trials of the
Company's coupon selection, distribution and clearing system, pursuant
to the terms of Mr. Gorman's revised incentive bonus program dated as
of June 6, 1999. Such options were granted in reliance on Section 4(2)
of the Securities Act.
SALES IN 1998
During the period commencing on January 1, 1998, through December 31,
1998, the Company sold the following unregistered securities:
(1) In connection with the Company's merger with its
predecessor, which became effective on October 8, 1998, the Company
issued to 160 holders of shares of capital stock of its predecessor, an
aggregate of 44,000,000 shares of the Company's common stock. The
shares were issued pursuant to the terms of the merger agreement and as
consideration for the obligations set forth under the merger agreement.
No more than 35 such persons receiving shares of the Company's common
stock were non-accredited purchasers.
-27-
<PAGE>
Additionally, in connection with the merger, the Company
assumed the obligations of the predecessor under certain convertible
notes and warrants that the predecessor had issued and sold to 200
accredited investors from 1996 through August of 1998. The notes
assumed by the Company are convertible into shares of the Company's
common stock at a conversion price of $1.00 per share. From time to
time following the effective date of the merger and through September
30, 1999, the Company issued shares of its common stock upon conversion
of such notes and exercise of such warrants by the holders thereof. All
holders of such notes and warrants qualified as accredited investors.
In connection with the conversion of certain of the notes, the Company
issued additional shares of common stock to the holders. The notes were
converted at prices ranging from $.20 to $1.00 per share of common
stock. Following the merger and through the date of this Registration
Statement, the Company had issued a total of 2,780,852 shares of its
common stock to 51 noteholders (1,084,871 shares in 1999 and 1,695,981
in 1998). Following the merger and through the date of this
Registration Statement, the Company also had issued to five accredited
investors an additional 106,875 shares of common stock upon exercise of
the above-described warrants. The warrants were exercised at prices
ranging between $0.07 and $0.37 per share.
In connection with the merger and pursuant to the terms of the
Merger Agreement and Plan of Reorganization dated September 15, 1998,
the Company granted to Mr. Everett Schulze, Jr., the Company's Chairman
and CEO, options to purchase 1,000,000 shares of the Company's common
stock. Options to purchase 250,000 shares will vest upon substantial
completion of the Company's equipment financing and options to purchase
an additional 250,000 shares will vest upon completion of seven Coupon
Exchange Center kiosks. All such options are exercisable at an exercise
price of $1.00 per share. None of the options are immediately
exercisable as of the date of this Registration Statement.
The Company did not use the services of any underwriter or
placement agent in connection with the above-described sales relating
to the merger. The Company sold and issued all such securities in
private transactions in reliance on the exemptions from registration
available under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
(2) In 1998, the Company issued 937,500 shares of its
restricted common stock to certain of its officers and third party
professional consultants in consideration of services rendered. On
September 25, 1998, the Company issued to Mr. Thomas Y. Gorman, the
Company's Chief Financial Officer, 37,500 shares in consideration of
services for which the Company had agreed to Mr. Gorman the cash sum of
$9,000 (at an effective issuance price of $.24 per share). On September
22, 1998, the Company issued to Bader & Associates 150,000 shares and
on January 10, 1998, also issued to Bucholtz & Bull 750,000 shares in
exchange for legal services rendered at effective issuance prices of
$.24 and $.15 per share, respectively. The shares issued to Bader were
issued in consideration of legal services for which the Company had
agreed to pay to Bader cash compensation of $36,000. The shares issued
to Bucholtz were issued in consideration of services for which the
Company had agreed to pay to Bucholtz cash compensation of $115,000.
All such shares were issued in private transactions in reliance on
exemptions available under Section 4(2) of the Act and Regulation D
promulgated thereunder.
-28-
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
As of November 30, 1999 the authorized capital stock of the Company
consists of 100,000,000 shares of common stock, par value $0.001 per share, as
of November 30, 1999, and 5,000,000 shares of the Company's preferred stock, par
value $0.001 per share. At November 30, 1999, the Company had issued 54,427,425
shares of its common stock to approximately 268 holders of record. The Company
has not issued any preferred stock as of yet.
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Nevada law and to the provisions of the
Company's Articles of Incorporation and Bylaws, copies of which are on file with
the Commission and incorporated by reference herein.
GENERAL
The shares of preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares of
any series of preferred stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of preferred stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issuance of that
series.
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of the common
stock are entitled to share ratably in assets available for distribution after
payment of all debts and other liabilities and subject to the prior rights of
any holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized to designate with respect to each
series of preferred stock, the number of shares in each such series, the
dividend rates and dates of payment, voluntary and involuntary liquidation
preferences, redemption prices, if any, whether or not dividends shall be
cumulative and, if cumulative, the date or dates from which the same shall be
cumulative, the sinking fund provisions, if any, and the terms and conditions on
which shares can be converted into or exchanged for shares of another class or
series, and the voting rights, if any. As of the date hereof, no shares of
preferred stock have been issued. Any series preferred stock issued would rank
prior to the common stock as to dividends and as to distributions in the event
of liquidation, dissolution or winding up of the Company. The ability of the
Board of Directors to issue preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting powers of holders of common stock. The
preferred stock will, when issued, be fully paid and nonassesable. Such
provisions relating to the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company, including,
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's common stock.
-29-
<PAGE>
WARRANTS AND OPTIONS
In connection with the previously described merger transaction in
October 1998, the Company granted to Mr. Everett E. Schulze, Jr., options to
purchase an aggregate of 1,000,000 shares at an exercise price of $1.00 per
share, pursuant to the terms of the Merger Agreement and Plan of Reorganization
dated September 15, 1999, by and between the Company and its predecessor. Such
options vest as follows: (i) options to purchase 250,000 shares shall vest and
become exercisable upon substantial completion of the Company's equipment
financing; (ii) options to purchase an additional 250,000 shares shall vest and
become exercisable upon completion of seven Coupon Exchange Center kiosks; (iii)
options to purchase the remaining 500,000 shares shall vest and become
exercisable upon the installation of 1,000 kiosks in retail stores. None of the
options granted to Mr. Schulze are immediately exercisable.
The Company also granted to Mr. Thomas Gorman, the Company's Chief
Financial Officer, options to purchase 1,000,000 shares of the Company's common
stock at an exercise price of $1.00 per share. Options to purchase 100,000
shares are immediately exercisable and options to purchase the remaining 900,000
shares will vest in increments of 100,000 shares, upon the completion or
satisfaction of certain performance conditions or benchmarks.
The Company granted to Mr. Mortimer options to purchase a total of
1,000,000 shares of the Company's common stock at $1.00 per share. The options
granted to Mr. Mortimer vest in three equal increments on each anniversary date
of his employment agreement over the next three years.
In connection with the merger transaction in 1998, the Company also
assumed obligations under certain warrants that the Company's predecessor had
issued to a limited number of accredited investors in connection with several
private offering transactions in 1996, 1997 and 1998. Upon consummation of the
merger, all such warrants to purchase shares of the predecessor's capital stock
were canceled and simultaneously converted into a new warrant to acquire a total
of 8,363,024 shares of the Company's common stock (based on the same ratio of
shares of Company common stock issued in exchange for shares of the
predecessor's stock in the merger). Such warrants are exercisable at prices
ranging between $0.07 to $1.33 per share.
Pursuant to the Company's Private Placement Memorandum dated November
3, 1998, during the period from January 1 to August 4, 1999, the Company issued
and sold approximately 29.36 investment units to a limited number of accredited
investors in a series of private transactions. Each of the units consisted of
100,000 shares of the Company's common stock and warrants to purchase an
additional 100,000 shares of common stock. In connection with such offering, the
Company issued warrants to purchase an aggregate of 2,936,360 shares of common
stock. Such warrants are exercisable at exercise prices ranging from $1.25 to
$1.50 per share for a period of two years commencing on the issue date of the
warrants.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent is Alpha Tech Stock Transfer of Salt Lake
City.
-30-
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Revised Statutes and certain provisions of the Company's
Bylaws under certain circumstances provide for indemnification of the Company's
Officers, Directors and controlling persons against liabilities that they may
incur in such capacities. A summary of the circumstances in which such
indemnification is provided for is contained herein, but this description is
qualified in its entirety by reference to the Company's Bylaws and to the
statutory provisions.
In general, any Officer, Director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with a
legal proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in the Company's best interest, and were not
unlawful. Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of the Board of Directors, by legal counsel, or by a vote of the
stockholders, that the applicable standard of conduct was met by the person to
be indemnified.
The circumstances under which indemnification is granted in connection
with an action brought on behalf of the Company is generally the same as those
set forth above; however, with respect to such actions, indemnification is
granted only with respect to expenses actually incurred in connection with the
defense or settlement of the action. In such actions, the person to be
indemnified must have acted in good faith and in a manner believed to have been
in the Company's best interest, and must not have been adjudged liable for
negligence or misconduct.
Indemnification may also be granted pursuant to the terms of agreements
that may be entered in the future or pursuant to a vote of stockholders or
Directors. The statutory provision cited above also grants the power to the
Company to purchase and maintain insurance which protects its Officers and
Directors against any liabilities incurred in connection with their service in
such a position, and such a policy may be obtained by the Company.
-31-
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in Item 2. Financial
Information, and Item 15. Financial Statement and Exhibits.
-32-
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-33-
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
-34-
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND
1998 AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH DECEMBER
31, 1998:
Report of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 1996, 1997 and 1998 F-3
Statement of Operations for Years Ended December 31, 1996,
1997 and 1998, and for the Period from December 30, 1992
(Inception) Through December 31, 1998 F-5
Statement of Changes in Stockholders' Equity (Deficit)
For the Period from December 30, 1992 (Inception) Through
December 31, 1998 F-6
Statement of Cash Flows For Years Ended December 31, 1996,
1997 and 1998, and for the Period from December 30, 1992
(Inception) Through December 31, 1998 F-9
Notes to Financial Statements F-11
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
and 1999 AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH
SEPTEMBER 30, 1999:
Balance Sheet as of September 30, 1999 F-24
Statement of Operations for Nine Months Ended September 30,
1998 and 1999, and for the Period from December 30, 1992
(Inception) Through September 30, 1999 F-26
Statement of Changes in Stockholders' Equity (Deficit)
For the Period from January 1, 1999 (Inception) Through
September 30, 1999 F-27
Statement of Cash Flows For Nine Months Ended September 30,
1998 and 1999, and for the Period from December 30, 1992
(Inception) Through September 30, 1999 F-28
Notes to Financial Statements F-29
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
In Store Media Systems, Inc.
We have audited the accompanying balance sheet of In Store Media Systems,
Inc. (a development stage company) as of December 31, 1996, 1997 and 1998,
and the related statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years then ended and for the period from
December 30, 1992 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of In Store Media Systems, Inc.
as of December 31, 1996, 1997 and 1998 and the results of its operations and
its cash flows for the years then ended and for the period from December 30,
1992 (inception) through December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has been
primarily involved in research and development activities, resulting in
significant losses and a stockholders' deficit at December 31, 1998 of
$3,227,921. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
October 29, 1999, except
for Note 11 as to which
date is November 24, 1999.
F-2
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996, 1997 and 1998
ASSETS
1996 1997 1998
---- ---- ----
Current assets:
Cash and cash equivalents $ 704,740 $ 1,726 $ 316,444
Accounts receivable - Continuum (Notes 5
and 7) 656,250 300,000 100,000
Note receivable (Note 2) - 53,750 58,588
Inventory 203,608 151,154 121,075
Other current assets 29 1,029 1,459
---------- ---------- ----------
Total current assets 1,564,627 507,659 597,566
Property and equipment, at cost:
Manufacturing equipment 69,623 330,798 333,166
Office furniture and equipment 68,274 88,638 89,462
Leasehold improvements 35,077 55,336 55,228
---------- ---------- ----------
172,974 474,772 477,856
Less accumulated depreciation and
amortization (37,389) (85,841) (144,230)
---------- ---------- ----------
Net property and equipment 135,585 388,931 333,626
Other assets
Advances and note receivable - related
parties (Note 2) 233,822 259,102 280,344
Debt issuance costs, net of accumulated
amortization 464,056 147,296 14,172
Lease deposit 6,787 30,970 30,970
Patent costs, net of accumulated amortization
of $7,559 (1996), $10,546 (1997) and
$13,394 (1998) 36,397 41,058 42,890
---------- ---------- ----------
Net other assets 741,062 478,426 368,376
---------- ---------- ----------
$2,441,274 $1,375,016 $1,299,568
========== ========== ==========
See accompanying notes.
F-3
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1996 1997 1998
---- ---- ----
Current liabilities:
Accounts payable (Note 7) $ 218,776 $1,242,855 $ 943,037
Interest payable 49,862 209,723 430,468
Notes payable (Note 3) 2,622,221 3,505,693 2,782,440
Notes payable-shareholder (Note 3) - 102,500 113,500
Note payable - HealthStar (Notes 5 and 7) 700,000 310,000 -
Obligations under capital leases (Note 7) 18,077 74,758 8,274
---------- ---------- ----------
Total current liabilities 3,608,936 5,445,529 4,277,719
Obligations under capital leases (Note 7) 32,626 196,569 249,770
Commitments and contingencies (Notes 5 and 7)
Stockholders' equity (deficit) (Notes 5 and 9):
Preferred stock, no par value; 5,000,000
shares authorized, none issued - - -
Common stock, $.01 par value; 100,000,000
shares authorized, 41,519,001 (1996),
45,393,666 (1997) and 59,094,686 (1998)
shares issued 415,190 453,937 590,947
Additional paid-in capital 1,878,903 3,354,669 6,072,796
Stock subscriptions received - - 75,000
Treasury stock, at cost; 2,687,500 shares (43,750) (43,750) (43,750)
Deficit accumulated during the development
stage (3,450,631) (8,031,938) (9,922,914)
---------- ---------- ----------
Total stockholders' equity (deficit) (1,200,288) (4,267,082) (3,227,921)
---------- ---------- ----------
$2,441,274 $1,375,016 $1,299,568
========== ========== ==========
See accompanying notes.
F-4
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1996, 1997 and 1998
and for the Period from December 30, 1992 (inception) through December 31, 1998
Cumulative
amounts from
1996 1997 1998 inception
---- ---- ---- -----------
Costs and expenses:
Research and development $ 927,927 $1,728,466 $ 194,897 $2,974,129
General and administrative 695,252 840,688 866,858 3,236,362
Depreciation and amortization 31,672 51,438 61,777 158,163
--------- ---------- ---------- ----------
Operating loss (1,654,851) (2,620,592) (1,123,532) (6,368,654)
Other income (expense):
Interest income 19,039 4,791 28,147 51,977
Litigation settlement (Note 7) - (156,250) - (156,250)
Debt conversion costs (Note 3) - (257,894) (20,000) (277,894)
Interest expense (840,661) (1,551,362) (775,591) (3,172,093)
--------- ---------- ---------- ----------
Total other income (expense) (821,622) (1,960,715) (767,444) (3,554,260)
--------- --------- ---------- ----------
Net loss (Note 4) $(2,476,473)$(4,581,307)$(1,890,976)$(9,922,914)
=========== =========== =========== ===========
Basic and diluted net loss per
common share (Note 6) $ (.06) $ (.11) $ (.04) $ (.24)
====== ====== ====== ======
Weighted average common shares
outstanding (Note 6) 41,300,000 40,800,000 49,000,000 40,600,000
========== ========== ========== ==========
See accompanying notes.
F-5
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 1998
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscription stock stage Total
------ ------ ---------- ------------ -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1992
(inception) - $ - $ - $ - $ - $ - $ -
Issuance of common stock in exchange for
assignment of patent and services in
1993 ($.001 per share)(Note 5) 30,462,375 304,624 (281,529) - - - 23,095
Sale of common stock for cash in 1993
($.07 per share)(Note 5) 2,812,496 28,125 161,875 - - - 190,000
Sale of common stock for hardware,
software and lab time in 1993
($.07 per share)(Note 5) 1,125,000 11,250 67,500 - - - 78,750
Sale of common stock for cash in 1993
($.21 per share)(Note 5) 94,125 941 18,959 - - - 19,900
Sale of common stock for cash in 1994
($.08 per share)(Note 5) 5,861,005 58,610 426,390 - - - 485,000
Sale of common stock for cash in 1995
($.40 per share)(Note 5) 750,000 7,500 292,500 - - - 300,000
Exercise of warrants in 1995
($.26 per share) 19,320 193 4,864 - - - 5,057
Issuance of common stock for services
in 1995, less shares returned ($.24
per share based on original shares
issued)(Note 5) 75,000 750 41,646 - - - 42,396
Sale of common stock for cash in 1995
($.01 per share)(Note 5) 297,000 2,970 - - - - 2,970
Net loss for the period from inception
through December 31, 1995 - - - - - (974,158) (974,158)
---------- ------- -------- -------- ------- ---------- ----------
Balance, December 31, 1995 41,496,321 414,963 732,205 - - (974,158) 173,010
</TABLE>
(Continued on following page)
(See accompanying notes.
F-6
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 1998
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscription stock stage Total
------ ------ ---------- ------------ -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 41,496,321 414,963 732,205 - - (974,158) 173,010
Exercise of warrants in 1996
($.20 per share) 22,680 227 5,783 - - - 6,010
Issuance of warrants in connection
with debt offering in 1996 (Note 3) - - 1,140,915 - - - 1,140,915
Settlement reached to repurchase 2,687,500
shares of common stock of the Company
in 1996 ($.02 per share)(Note 5) - - - - (43,750) - (43,750)
Net loss for the year ended December
31, 1996 - - - - - (2,476,473) (2,476,473)
---------- ------- -------- -------- ------- ---------- ----------
Balance, December 31, 1996 41,519,001 415,190 1,878,903 - (43,750) (3,450,631) (1,200,288)
Sale of common stock for cash and
settlement of accounts payable in 1997
($.05 per share) 585,000 5,850 24,941 - - - 30,791
Issuance of warrants in connection with
debt offering (Note 3) - - 361,201 - - - 361,201
Purchase of common stock by conversion
of note principal ($.27 per share)
(Note 3) 1,416,146 14,161 608,755 - - - 622,916
Purchase of common stock by conversion
of note interest ($.27per share)(Note 3) 108,241 1,082 27,782 - - - 28,864
Additional purchases of common stock for
cash in connection with note conversions
($.27 per share)(Note 3) 1,765,278 17,653 453,088 - - - 470,741
Net loss for the year ended December
31, 1997 - - - - - (4,581,307) (4,581,307)
---------- -------- ---------- ------- ------- ---------- -----------
Balance, December 31, 1997 45,393,666 453,937 3,354,669 - (43,750) (8,031,938) (4,267,082)
</TABLE>
(Continued on following page)
(See accompanying notes.
F-7
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 1998
(Continued from preceding page)
Deficit
<CAPTION>
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscription stock stage Total
------ ------ ---------- ------------ -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 199 45,393,666 453,937 3,354,669 - (43,750) (8,031,938) (4,267,082)
Issuance of warrants in connection with
debt offering (Note 3) - - 157,996 - - - 157,996
Issuance of common stock in exchange for
services ($.17 per share) 937,500 9,375 150,625 - - - 160,000
Sale of common stock for cash
in 1998 ($.13 per share) 2,250,000 22,500 277,500 - - - 300,000
Exercise of warrants by conversion of
note interest ($.14 per share)(Note 3) 56,250 562 3,188 - - - 3,750
Additional purchases of common stock for
cash in connection with note conversions
($.27 per share)(Note 3) 427,500 4,275 109,725 - - - 114,000
Exercise of warrants by conversion of
note principal and interest ($.52 per
share) (Note 3) 4,002,793 40,028 2,050,118 - - - 2,090,146
Cash received in connection with subse-
quent conversion of note and interest
to stock - - - 75,000 - - 75,000
Issuance of common stock pursuant
to recapitalization (Note 5) 6,000,000 60,000 (60,000) - - - -
Settlement of accounts payable by the
issuance of common stock ($1.08 per
share) 26,977 270 28,975 - - - 29,245
Net loss for the year ended December
31, 1998 - - - - - (1,890,976) (1,890,976)
---------- -------- ---------- ------- -------- ---------- ----------
Balance, December 31, 1998 59,094,686 $590,947 $6,072,796 $75,000 $(43,750) $(9,922,914) $(3,227,921)
========== ======== ========== ======= ========= =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998 and for the
Period from December 30, 1992 (inception) through December 31, 1998
Cumulative
amounts
from
1996 1997 1998 inception
---- ---- ---- ---------
Cash flows from operating activities:
Net loss $(2,476,473) $(4,581,307) $(1,890,976)$(9,922,914)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amor-
tization 31,672 51,438 61,777 158,163
Common stock issued for ser-
vices, patents and payables - - 189,245 257,706
Amortization of debt issuance
costs 676,859 677,961 291,120 1,645,940
Decrease (increase) in
accounts receivable and
notes receivable 10,546 302,500 (4,838) (158,588)
Decrease (increase) in
inventory (171,233) 52,454 30,079 (121,075)
Increase (decrease) in
accounts payable 179,435 1,024,079 (299,818) 943,037
Increase in interest payable 49,862 189,674 300,822 540,358
Other (29) (1,000) (430) (1,459)
-------- ---------- -------- ---------
Total adjustments 777,112 2,297,106 567,957 3,264,082
-------- ---------- -------- ----------
Net cash used in operations(1,699,361) (2,284,201) (1,323,019) (6,658,832)
Cash flows from investing activities:
Purchase of property and
equipment (135,728) (49,995) (3,084) (215,889)
Increase in advances - related
party (102,481) (25,280) (21,242) (280,344)
Patent costs (15,769) (7,647) (5,220) (56,823)
Lease deposits (6,787) (24,183) - (30,970)
--------- ---------- --------- ----------
Net cash used in investing
activities (260,765) (107,105) (29,546) (584,026)
Cash flows from financing activities:
Proceeds from sale of common
stock 6,010 745,860 1,051,069 2,837,896
Purchase of treasury stock (43,750) - - -
Proceeds from common stock
subscriptions - - 75,000 75,000
Proceeds from stockholder loans - 102,500 11,000 113,500
Repayments of capital leases (18,056) (31,179) (13,283) (3,923)
Proceeds from notes payable - 962,500 597,500 4,690,000
Repayments of notes payable 2,673,067 (91,389) (54,003) (153,171)
--------- ---------- ---------- ----------
Net cash provided by
financing activities 2,617,271 1,688,292 1,667,283 7,559,302
---------- ---------- ---------- ----------
Net increase (decrease) in cash 657,145 (703,014) 314,718 316,444
Cash and cash equivalents at
beginning of period 47,595 704,740 1,726 -
---------- ---------- ----------- ----------
Cash and cash equivalents at
end of period $ 704,740 $ 1,726 $ 316,444 $ 316,444
========== ========== =========== ==========
(Continued on following page)
See accompanying notes.
F-9
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998 and for the
Period from January 1, 1993 (inception) through December 31, 1998
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1997 1998 inception
---- ---- ----------
Cash paid during period
for interest $479,979 $430,491 $1,187,946
Supplemental disclosure of non-cash financing activities:
Cumulative
amounts
from
1996 1997 1998 inception
---- ---- ---- ----------
Common stock issued for:
Services, patents and
payables $ - $ - $ 189,245 $ 257,706
Conversion of notes payable - 377,639 1,376,750 1,754,389
Conversion of interest - 29,813 80,077 109,890
--------- -------- ---------- ----------
$ - $407,452 $1,646,072 $2,121,985
========= ======== ========== ==========
Warrants issued in debt offer:
Additional paid-in capital 1,140,915 $361,201 $ 157,996 $1,660,112
Expensed as interest (676,859) (361,201) (157,996) (1,660,112)
Capitalized as debt issuance
costs (464,056) - - -
Capital leases recorded:
Purchase of fixed assets $ - $251,803 $ - $ 261,967
Obligations under capital
lease - (251,803) - (261,967)
See accompanying notes.
F-10
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Organization and summary of significant accounting policies
Organization:
In Store Media Systems, Inc., a Nevada corporation, was organized on December
30, 1992 to develop and market an electronic coupon clearing system for use
in grocery stores. The Company is considered to be a development stage
enterprise as more fully defined in Statement No. 7 of the Financial
Accounting Standards Board. Activities from inception include research and
development activities, seeking patents, as well as fund raising.
On October 8, 1998, the Company consummated an agreement and plan of merger
with Crescent Gold (Crescent), in which Crescent acquired all of the issued
and outstanding common shares of the Company (see Note 5). The Company was
merged into Crescent, and Crescent changed its name to In Store Media
Systems, Inc. For accounting purposes, the acquisition has been treated as a
recapitalization of the Company, based upon historical cost, a reverse
acquisition with the Company as the acquirer. The Company owns 100% of Data
Driven Marketing, Inc. which has had no activity through December 31, 1998.
Basis of presentation and management's plans:
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and development
activities. This has resulted in significant losses ($9,922,914 since
inception) and a stockholders' deficit at December 31, 1998 of $3,227,921.
The Company's continued existence is dependent on its ability to obtain the
additional funding necessary to complete development of the coupon clearing
system and successfully market the product.
As described in Note 3, the Company has completed a private placement of debt
which provided $350,000 of additional liquidity for the Company for current
operations. Subsequent to year end, the Company has raised approximately
$2,900,000 in additional equity financing. The financial statements do not
include any adjustment relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or
other adjustments that might be necessary should the Company be unable to
continue as a going concern in its present form.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Organization and summary of significant accounting policies (continued)
Income taxes:
The Company provides for income taxes utilizing the liability approach under
which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable.
Inventory:
Inventory consists of computer components and television sets to be used in
the Company's product. Inventory is stated at lower of cost or market,
determined by the first in-first out method.
Property and equipment:
Property and equipment is recorded at cost. Depreciation commences as items
are placed in service and is computed using straight-line and accelerated
methods over their estimated useful lives of five years or the term of the
lease for leasehold improvements. Maintenance and repairs are expensed, and
improvements and major renewals are capitalized.
Patent costs:
Patents are stated at cost less accumulated amortization which is calculated
on a straight-line basis over the useful lives of the assets, estimated by
management to average 16 years. Research and development costs and any costs
associated with internally developed patents (with the exception of legal
costs) and costs incurred to establish the technological feasibility of
computer software are expensed in the year incurred.
Impairment of long-lived assets:
The Company evaluates the potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. The Company annually reviews the amount of recorded
long-lived assets for impairment. If the sum of the expected cash flows from
these assets is less than the carrying amount, the Company will recognize an
impairment loss in such period.
Stock options:
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 Accounting for
Stock-Based Compensation. Accordingly, compensation is recorded
only when the quoted market price of the Company's stock at the
date of grant exceeds the amount an employee must pay to acquire
the stock.
F-12
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Organization and summary of significant accounting policies (continued)
Advertising costs:
The Company expenses the costs of advertising as incurred. Advertising
expense was $17,328, $10,817 and $13,843 for the years ended December 31,
1996, 1997 and 1998, respectively.
Cash equivalents:
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At December 31,
1998 and at times during the years, the balance at one financial institution
exceeded FDIC limits.
2. Notes receivable
Notes receivable - officer:
The Company's president received no salary until May 15, 1996. However, the
Company has made a loan to the President and has paid certain storage and
other expenses on his behalf. The effective date of the loan agreement and
promissory note was January 3, 1994. The loan is unsecured and interest began
to accrue on the outstanding balance as of September 30, 1996. Through
December 31, 1998, the president drew $232,201 and repaid $37,200 leaving a
balance of $236,892 (including accrued interest at the prime rate plus 2% of
$41,891). Through December 31, 1998, the Company has advanced $43,452 to a
company owned by the President. The Company has entered into negotiations to
acquire certain proprietary technology owned by the president which the
Company believes will compliment the Coupon Exchange Center System and add
substantially to the Company's future revenues. The Company anticipates that
forgiveness of the loan would be part of any technology or licensing
acquisition payment to the President by the Company. The Company expects to
complete the transaction during 1999 and for that reason, the note and
accrued interest included in the balance have been held in abeyance since the
maturity date.
Other notes receivable:
The Company has advanced to a director of the Company and two of his
relatives $50,000 to be applied toward the purchase of the assets of a
partnership owned by these individuals. If the transaction is not closed, the
advance is secured with a note and personal guarantees. The note was due on
June 15, 1997 including interest at 9% per annum.
F-13
<PAGE>
3. Notes payable
Notes payable consisted of the following at December 31, 1996, 1997 and 1998:
Effective February 14, 1996, the Company initiated a private offering of 16
(the minimum) to 200 units each consisting of a $25,000 convertible,
Promissory Note ("Notes") and warrants to purchase 56,250 shares of the
Company's common stock. During the years ended December 31, 1996, 1997 and
1998, the Company sold an aggregate of 170 units and issued notes payable of
$3,040,000, $962,500 and $247,500, respectively. The term of the Notes was
one year from date of issue and they bore interest at the rate of 9% per
annum payable quarterly. The warrants consisted of 18,750 "A", "B", and "C"
warrants to purchase shares of the Company's stock at an exercise price of
$.07; $.67; and $1.33 per share, respectively. In addition, the Company has
granted to a broker/dealer "A", "B", and "C" warrants equal to 10% of the
warrants included in the units at the same price and also granted to an
attorney 402,968 warrants to purchase common stock at $.67 per share
exercisable for a period of five years from December 4, 1995. The Company has
also paid the broker/dealer a 10% selling commission and a 3% non-accountable
expense allowance on each unit sold and in conjunction with the offering, and
has issued warrants to purchase 1,875,000 shares of the Company's stock to a
consultant who facilitated the offering. The exercise price for these
warrants is approximately $.05 per share and they shall be exercisable for a
period of five years from date of the close of the offering. The warrants
issued to the note holders were valued at $1,069,996 and have been reflected
as additional paid-in capital and a discount, proportionate to the issuance
of the notes which is being amortized over the one year term of the notes.
The warrants issued to the broker/dealer and the attorney were valued at
$525,000 and have been reflected as additional paid-in capital and debt
issuance costs, proportionate to the issuance of the notes, which is being
amortized over the one-year term of the notes.
In April of 1997, the Company requested note holders to extend the due date
of the Notes. Note holders representing 62 Notes agreed to extensions of
between 120 and 180 days. As of September 30, 1997, the Company had repaid
$5,000 toward Notes which matured and were not extended. In consideration of
a selling agent's assistance in getting note holder extensions, the Company
agreed to pay a 5% cash commission and 5% of the warrants issued in
connection with the Notes which were extended. The selling agent was issued
380,881 "A", "B", and "C" warrants.
In a letter to the 1996 note holders in July 1997, the Company offered the
note holders the opportunity to purchase the Company's restricted common
stock at $0.20 per share with the principal of their notes, the accrued
interest and/or additional cash. In 1997, $377,639 of the principal purchased
1,416,146 shares of common stock, $28,864 of the accrued interest purchased
108,241 shares of common stock and $470,741 of additional cash sales
purchased 1,765,278 shares of common stock. The additional shares received as
compared to the convertible provisions in the additional note have been
reflected as additional interest expense and consideration received in the
conversion amounting to $245,277. In January and February of 1998, the
short-term note holders purchased 427,500 of the Company's shares of common
stock with $114,000 of cash, or $0.27 per share.
F-14
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
3. Notes payable (continued)
During 1998, the Company offered its note holders the opportunity to exercise
their warrants with note principal and accrued interest and to purchase
additional shares of common stock with cash. The note holders purchased
4,002,793 shares of common stock in consideration for $1,376,750 in note
principal, $175,889 of accrued interest and cash of $735,750 less offering
costs of $198,243.
During 1998, the Company initiated a private offering of a maximum of
$800,000 of Promissory Notes bearing interest at 10% per annum and warrants
to purchase 320,000 shares of common stock exercisable at $1.00 per share for
one year. As of December 31, 1998, $350,000 had been raised and 140,000
warrants were issued. The warrants issued were valued at $65,116 and have
been reflected as additional paid-in capital and a discount on the issuance
of the notes which is being amortized over the one year term of the notes.
Notes payable at December 31, 1996, 1997 and 1998 consisted of the following:
1996 1997 1998
---- ---- ----
9% Notes payable, interest payable
quarterly, principal past due, un-
secured, in default at December 31,
1998 $3,040,226 $3,620,086 $2,490,836
10% Notes payable, interest payable
quarterly, principal past due, un-
secured - - 350,000
Unamortized discount (418,005) (114,393) (58,396)
---------- ---------- ----------
$2,622,221 $3,505,693 $2,782,440
========== ========== ==========
Notes payable - shareholder at December 31, 1996, 1997 and 1998 consisted of
the following:
1996 1997 1998
---- ---- ----
6% Notes payable - shareholder,
interest accrued monthly, principal
due at various dates during 1998, in
default, unsecured, default interest
rate set at 18% $ - $102,500 $113,500
==== ======== ========
4. Income taxes
At December 31, 1998, the Company has a net operating loss carryforward of
approximately $4,023,700, future tax deductions of $3,650,000 which may be
used to offset future taxable income, and unused tax credits of $220,000. The
future tax deductions result from capitalizing pre-operating costs for income
tax reporting purposes and expensing these costs for financial statement
purposes. Differences between the book loss and the tax net operating loss
consists primarily of the above plus valuation of warrants and stock issued
in connection with notes payable and for services. The net operating loss
carryforward expires as follows:
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
4. Income taxes (continued)
2010 $ 339,700
2011 1,110,000
2012 2,054,000
2013 520,000
----------
$4,023,700
==========
At December 31, 1996, 1997 and 1998, total deferred tax assets and valuation
allowance are as follows:
1996 1997 1998
---- ---- ----
Deferred tax assets resulting from:
Net operating loss carryforwards $ 540,000 $1,307,000 $1,500,000
Capitalized pre-operating costs 607,000 995,000 1,361,000
Research and development tax credits 82,000 209,000 220,000
--------- ---------- ----------
Total 1,229,000 2,511,000 3,081,000
Less valuation allowance (1,229,000) (2,511,000) (3,081,000)
---------- ---------- ----------
$ - $ - $ -
========== ========== ==========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonable assured.
5. Stockholders' equity
Recapitalization:
On October 8, 1998, the Company entered into an agreement and plan of merger
with Crescent to exchange all of the issued and outstanding common shares of
the Company, in exchange for approximately 44,000,000 shares of Crescent's
$.01 par value common stock, in a reverse acquisition.
Pursuant to the agreement, Crescent agreed to have no unpaid liabilities at
the effective date of the transaction. The exchange was consummated on
October 8, 1998, and is presented on the statement of changes in
stockholders' equity (deficit) as an issuance of 6,000,000 shares of common
stock for cash proceeds of $0 pursuant to recapitalization. The net effect of
this transaction was to record an increase in common stock and related
decrease to additional paid-in capital of $60,000.
Following the exchange, the Company's shareholders own approximately 88% of
the outstanding common stock of Crescent. The reverse acquisition has been
accounted for as a recapitalization of the Company based upon historical
cost. Accordingly, the number of authorized and issued common shares, par
value of common stock and additional paid-in capital have been restated on
the balance sheet and the statement of stockholders' equity to give
retroactive effect to the recapitalization.
F-16
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
5. Stockholders' equity (continued)
Capital contributions:
During the year ended December 31, 1993, 30,462,375 shares of the Company's
common stock was issued in exchange for assignment of patents and services
valued at $23,095, 2,812,496 shares were issued to Peter Indovina, et al for
$190,000 cash, 94,125 shares were issued for $19,900 in cash, and 1,125,000
shares were issued to two vendors who provided an aggregate of $78,750 of
hardware, software, laboratory time, and man hours for the development of the
coupon exchange prototype which is included in research and development
expense on the statement of operations. Additionally, the Company included in
"units" sold in conjunction with a private offering memorandum, 30,900
warrants to purchase one share each of common stock for $.0267. In the
aggregate, 19,320 of these warrants were exercised and the balance have
expired.
During 1994, the Company sold 2,437,500 shares of common stock to HealthStar,
Inc. for $250,000 in cash, 3,374,755 shares to Peter Indovina, et al for
$225,000 in cash, and 48,750 shares to others for $10,000 in cash.
During the year ended December 31, 1995, 250,000 and 500,000 shares were sold
to HealthStar, Inc. and Peter Indovina, et al, respectively, at $.40 per
share and in addition, 1,500,000 warrants to purchase one share of common
stock at $.67 per share were issued for a total of $300,000 cash. The
warrants expired in 1997.
During 1995, 187,500 shares were issued to an employee of the Company for
services performed valued at $42,396. In November 1996, the Company recovered
the unvested portion of the shares which amounted to 112,500 of the 187,500
shares issued.
During 1995, the Company issued 297,000 shares of its common stock upon
conversion of warrants issued in consideration for a bridge loan.
As settlement of the Company's lawsuit against HealthStar, Inc. and Thomas
Stateman (HealthStar/Stateman (see Note 7)), the Company recovered: 2,687,500
shares of its common stock; warrants to purchase 666,666 shares; and, all
royalty rights by issuing a note payable to HealthStar for $700,000. This
note also replaced a previous note of $656,250 resulting in an increase of
$43,750 which amount has been reflected as treasury stock. The Company and
HealthStar then jointly sued Continium Technology Corporation (Continium) and
further modifications of the note were made (see Note 7).
In 1997 and 1998, the Company issued 3,289,665 and 4,580,293 shares
respectively, under the offering of convertible debt outlined in Note 3.
F-17
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
5. Stockholders' equity (continued)
During 1998, the Company issued 937,500 shares of its common stock in
exchange for services valued at $.17 per share. This issuance includes the
750,000 shares issued to the attorney in the Continuum/HealthStar lawsuit
(see Note 7).
Stock warrants:
The following is a summary of stock warrant activity:
Exercise Number of
price shares
-------- ---------
Issued in 1993 $.0267 30,900
Issued in 1995 $.013, $.053 and $.667 4,084,940
Exercised in 1995 $.013 and $.027 (316,320)
Expired in 1995 $.027 (11,580)
----------
Balance at December 31, 1995 3,787,940
Issued in 1996 $.067, $.667 and $1.33 6,840,511
Exercised in 1996 $.05 and $.50 (22,680)
----------
Balance at December 31, 1996 10,605,771
Issued in 1997 $.067, $.667 and $1.33 2,165,625
Expired in 1997 $.667 (1,500,000)
----------
Balance at December 31, 1997 11,271,396
Issued in 1998 $.067, $.667, $1.25 and $1.33 1,839,146
Exchanged in 1998 $1.33 (125,950)
Exchanged in 1998 $1.00 167,933
Exercised in 1998 $.067, $.667 and $1.33 (3,413,113)
----------
Balance at December 31, 1998 9,739,412
==========
Stock options:
During 1998, the board of directors granted to two individuals, options to
purchase up to 2,000,000 shares of the Company's common stock in the
aggregate in exchange for services the Company received during 1998. The
options are exercisable at $1.00 per share and vest upon the attainment of
certain goals. None of the goals have been reached as of December 31, 1998.
No compensation was recorded under this award.
F-18
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
5. Stockholders' equity (continued)
The following is a summary of stock option activity:
Option Weighted
price average
per exercised Number of
share price shares
------ --------- ---------
Balance December 31, 1995 $ - $ - -
Granted $ - $ - -
Exercised $ - $ - -
----- ----- ---------
Balance December 31, 1997 $ - $ - -
Granted $1.00 $1.00 2,000,000
Exercised $ - $ - -
----- ----- ---------
Balance December 31, 1998 $1.00 $1.00 2,000,000
=========
The following is additional information with respect to those options and
warrants outstanding at December 31, 1998:
Weighted
average Weighted
remaining average
Price contractual exercise Number of
per share life in years price shares
--------- ------------- -------- ---------
Options $1.00 4.5 $1.00 2,000,000
Warrants $.053 - $1.33 1.25 $ .60 9,739,412
6. Basic and diluted warrants net loss per share
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods. Shares issued for nominal consideration are
considered outstanding since inception. Diluted loss per share has not been
presented as exercise of the outstanding stock options and warrants would
have an anti-dilutive effect.
F-19
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
7. Commitments and contingencies
Unisys:
In 1997, the Company entered into a long-term, limited joint venture contract
with Unisys Corporation (Unisys) in which Unisys will provide at its cost,
most of the hardware, middleware, software and depot level maintenance for
the Company's Coupon Exchange Center (CEC) system. Unisys will initially
provide these services and build seven Coupon Exchange Centers for
$1,901,000. Unisys will manufacture CEC's thereafter for a price to be
determined by volume along with certain minimum annual fees to be paid by a
royalty on each CEC In$taCa$h coupon redeemed. Through December 31, 1998, the
Company has paid Unisys $693,716 and has recorded a payable of $740,688 at
December 31, 1998. The Company will owe an estimated $1,100,000 (net of
$250,000 paid in 1999) upon delivery of product. Certain of the amounts in
excess of agreed upon expenditure ceilings are subject to negotiation and may
affect the future amounts owed.
Continuum/HealthStar:
The Company and HealthStar/Stateman accepted a settlement of their joint
lawsuit against Continuum Technology Corporation. The litigation was
initiated to recover $656,250 paid by the Company and HealthStar to Continuum
that was to produce 25 CEC's to be owned by HealthStar/Stateman and operated
by In Store Media Systems, Inc. The agreement required Continuum to make
payments totaling $200,000 to HealthStar/Stateman and $100,000 to the
Company. As part of the joint settlement with Continium and HealthStar,
HealthStar agreed to reduce its note obligation from $700,000 to $500,000 for
the Company's agreement to have Continium make payments directly to
HealthStar. A loss on litigation of $156,250 has been recorded in the
accompanying financial statements. In the event Continuum defaulted on its
payments before HealthStar/Stateman had received a total of $500,000 from the
Company and Continuum, the Company was obligated to make up Continuum's
payments. After HealthStar/Stateman was paid a total of $500,000 by the
Company and Continuum, the Company acquired sole right to the $656,250
stipulated judgment against Continuum, which it may exercise if Continuum
defaults on any of its payments to the Company. Through December 31, 1997,
the Company paid $190,000, leaving a balance of $310,000. In 1998, the
Company made a total of eleven monthly payments of $10,000. The $200,000
balance due HealthStar/Stateman was paid during 1998 by Continuum Technology
Corporation. During 1999, Continuum made five payments of $20,000 per month
to the Company. In connection with the litigation against HealthStar, the
Company entered into a contingency fee agreement with an attorney which
entitles the attorney to receive 750,000 shares of the Company's common
stock.
The Company also accepted an offer of settlement of its lawsuit against Peter
Indovina, et al. The settlement gives the Company the right to recover
6,687,242 shares of the Company's stock, warrants to purchase the Company's
stock and certain royalties payable by the Company. The Company exercised its
right during 1999 by the payment of $500,000 in cash.
F-20
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
7. Commitments and contingencies (continued)
Operating lease commitments:
The Company leases office space and its telephone system under operating
leases. The lease for the office is at $3,040 per month starting May 1, 1996,
for 36 months at a total annual rental of $36,492. Rent expense for the years
ended December 31, 1996, 1997 and 1998 amounted to $15,080, $34,417 and
$37,560, respectively.
Capital lease commitments:
The Company leases equipment under capital leases. During the year ended
December 31, 1998, a major shareholder of the Company assumed the $247,880
remaining balance on certain capital leases and the deposit received of
$27,892 by issuing to the lessor 929,552 shares of the Company's restricted
common stock owned by the shareholder. During 1999, an agreement was
formalized whereby the Company issued a convertible debenture in settlement
of the capital lease obligation to the major shareholder (see note 11). The
current minimum annual commitments under the operating and capital leases are
as follows:
Operating
Year ended December 31, Capital leases leases Total
1999 $170,875 $23,014 $193,889
2000 75,054 6,840 81,894
2001 69,457 3,285 72,742
2002 23,909 - 23,909
-------- ------- --------
Total minimum lease payments 339,295 $33,139 $372,434
======= ========
Amount representing interest 81,251
--------
Present value of future minimum
payments 258,044
Current portion of lease obligations 8,274
--------
Obligations under capital leases due
after one year $249,770
========
F-21
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
7. Commitments and contingencies (continued)
Property recorded under capital leases include the following amounts:
1996 1997 1998
---- ---- ----
Manufacturing equipment $49,467 $301,157 $301,157
Office furniture and equipment 24,079 37,688 37,688
Accumulated amortization (19,819) (42,377) (89,071)
------- -------- --------
Net capitalized leased property $53,727 $296,468 $249,774
======= ======== ========
8. Financial instruments
The carrying values of cash, advances and note receivable-shareholder,
accounts payable and notes payable approximated fair value due to the short-
term maturities of these instruments.
9. Subsequent events
Conversion offer:
Through August 31, 1999, the Company has issued 1,084,871 shares of its
common stock in exchange for the conversion of notes payable of $398,750,
interest of $40,299 and cash received of $227,500 (includes the $75,000 stock
subscription received as of December 31, 1998).
Private placement:
During November 1998, the Company commenced a private placement of common
stock and warrants. The Company proposes to sell a minimum of 18 units and a
maximum of 68 units at a price of $100,000 per unit which could result in
gross proceeds to the Company of between $1,800,000 and $6,800,000 before
deducting offering expenses. Each unit consists of 100,000 shares of common
stock and warrants to purchase 100,000 shares of common stock exercisable
during the first year at $1.25 per share and at $1.50 per share during the
second year.
Through August 31, 1999, 29.36 units have been sold resulting in gross
proceeds of $2,936,360 (including conversion of note principal of $300,000,
reduction of accounts payable of $100,000 and cash of $2,500,000).
F-22
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
10.Corrections to prior financial statements
Certain adjustments were made to previously issued unaudited financial
statements primarily due to (1) valuation of stock issued for software,
hardware and services, (2) valuation of warrants issued to note holders and
brokers, (3) reclassification of the issuance of stock by a stockholder to
assume a capitalized lease, (4) correction of an error in recording
conversions of notes payable into common stock, (5) offset of the amount of
treasury stock against common stock and (6) recording additional accounts
payable and accrued interest.
The effects of the above adjustments on the previously issued financial
statements are as follows:
Inception
1996 1997 1998 to date
---- ---- ---- ---------
Assets $ 215,559 $ (66,788) $ (19,326) $ -
Liabilities 418,005 114,394 (1,397,681) -
Equity (633,564) (47,606) 1,417,007 -
Operations (507,351) (1,359,262) (377,626) (2,022,988)
11. Settlement of capital lease agreement
On November 24, 1999, an agreement was formalized whereby The Company issued
a convertible debenture in settlement of the capital lease obligation to the
major shareholder. The debenture is payable on March 13, 2003 including
interest at 16% per annum. At maturity, the shareholder can request payment
in cash or 1,000,000 shares of the Company's common stock in payment of the
principal of the debenture and can convert the interest accrued into common
stock at the rate of $1.00 per share.
F-23
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
Unaudited
September 30, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 723,255
Note receivable 62,542
Inventory 98,516
Other current assets 1,459
----------
Total current assets 885,772
Property and equipment, at cost:
Manufacturing equipment 340,908
Office furniture and equipment 101,125
Leasehold improvements 55,228
Demonstration Equipment 34,488
----------
531,749
Less accumulated depreciation and amortization (195,522)
----------
Net property and equipment 336,227
Other assets
Advances and note receivable - related parties 44,677
Lease deposits 29,159
Patent costs, net of accumulated amortization of
$16,526 54,737
----------
Net other assets 128,573
----------
$1,350,572
==========
See accompanying notes.
F-24
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
Unaudited
September 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 520,385
Interest payable 453,664
Notes payable 2,081,690
Notes payable-shareholder 90,000
----------
Total current liabilities 3,145,739
Obligations under capital leases 247,880
Stockholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares
authorized, none issued -
Common stock, $.01 par value; 100,000,000 shares
authorized, 63,779,667 issued 637,797
Additional paid-in capital 9,256,627
Treasury stock, at cost; 9,374,742 shares (563,750)
Deficit accumulated during the development stage (11,373,721)
----------
Total stockholders' equity (deficit) (2,043,047)
----------
$1,350,572
==========
See accompanying notes.
F-25
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
Unaudited
For the Nine Months Ended September 30, 1998 and 1999 and for the
Period from December 30, 1992 (inception) through September 30, 1999
Cumulative
amounts from
1998 1999 inception
---- ---- -------------
Costs and expenses:
Research and development $ 192,425 $ 267,324 $ 3,241,453
General and administrative 540,986 849,640 4,086,002
Depreciation and amortization 38,880 54,423 212,586
---------- ---------- -----------
Operating loss (772,291) (1,171,387) (7,540,041)
Other income (expense):
Interest income 22,047 23,454 75,431
Litigation settlement - - (156,250)
Debt conversion costs - (107,250) (385,144)
Interest expense (626,081) (195,624) (3,367,717)
---------- ---------- -----------
Total other income (expense) (604,034) (279,420) (3,833,680)
---------- ---------- -----------
Net loss (Note 2) $(1,376,325) $(1,450,807)$(11,373,721)
============ =========================
Basic and diluted net loss per common
share $ (.03) $ (.03) $ (.27)
====== ====== ======
Weighted average common shares
outstanding 48,000,000 51,000,000 41,750,000
=========== =========== ==========
See accompanying notes.
F-26
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Unaudited
For the period January 1, 1999 through September 30, 1999
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscriptions stock stage Total
----------------- ---------- ------------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 59,094,686 $590,947 $ 6,072,796 $75,000 $(43,750) $(9,922,914) $(3,227,921)
Issuance of common stock
by conversion of note
principle and interest
($0.70 per share) 1,084,871 10,849 677,189 (75,000) - - 613,038
Sale of common stock for
cash and in exchange for
stock offering services
in 1999 ($1.00 per share) 3,456,360 34,564 2,445,579 - - - 2,480,143
Exercise of warrants 93,750 937 16,563 - - - 17,500
Issuance of common stock
for employee compensation
($0.90 per share) 50,000 500 44,500 - - - 45,000
Purchase of 6,687,242
treasury shares - - - - (520,000) - (520,000)
Net loss for the nine months
ended September 30,1999 - - - - - (1,450,807) (1,450,807)
---------- -------- ---------- -------- --------- ------------- -----------
Balance September 30, 1999 63,779,667 $637,797 $9,256,627 $ - $(563,750) $(11,373,721) $(2,043,047)
========== ======== ========== ======== ========= ============ ===========
</TABLE>
See accompanying notes.
F-27
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Unaudited
For the Nine Months Ended September 30, 1998 and 1999 and for and for
the Period from December 30, 1992 (inception) through September 30, 1999
Cumulative
amounts
from
1998 1999 inception
Cash flows from operating activities:
Net loss $(1,376,325) $(1,450,807)$(11,373,721)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 38,880 54,423 212,586
Common stock issued for services,
patents and payables 45,000 145,000 402,706
Amortization of debt issuance costs 27,120 14,171 1,660,111
Patent & Prototype Development Exp. 22,559 266,870 266,870
Decrease (increase) in advances -
related party 15,945 235,667 (44,677)
Decrease (increase) in accounts receivable
and notes receivable 196,372 96,046 (62,542)
Decrease (increase) in inventory 22,560 22,559 (98,516)
Increase (decrease) in accounts payable (230,667) (422,652) 520,385
Increase in interest payable 253,975 23,196 546,054
Note conversion expense - 107,250 107,250
Other (500) - (1,459)
----------- ---------- -----------
Total adjustments 391,244 542,530 3,508,768
----------- ---------- -----------
Net cash used in operations (985,081) (908,277) 7,864,953)
Cash flows from investing activities:
Purchase of property and equipment (2,879) (53,893) (269,782)
Patent costs (2,899) (14,979) (71,802)
Lease deposits - 1,811 (29,159)
----------- ---------- -----------
Net cash used in investing activities (5,778) (67,061) (370,743)
Cash flows from financing activities:
Proceeds from sale of common stock 630,898 2,042,813 4,898,209
Proceeds from common stock subscriptions - (75,000) -
Proceeds from stockholder loans 76,000 - 113,500
Repayments of stockholder loans (290,000) (23,500) (23,500)
Repayments of capital leases (3,156) (10,164) (14,087)
Proceeds from notes payable 597,500 - 4,690,000
Repayments of notes payable - (32,000) (185,171)
Purchase of treasury stock - (520,000) (520,000)
----------- ---------- -----------
Net cash provided by financing
activities 1,011,242 1,382,149 8,958,951
----------- ---------- -----------
Net increase (decrease) in cash 20,383 406,811 723,255
Cash and cash equivalents at beginning of
period 1,726 316,444 -
----------- ---------- -----------
Cash and cash equivalents at end of period $ 22,109 $ 723,255 $ 723,255
=========== ========== ===========
See accompanying notes.
F-28
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1999
1. Basis of presentation
The accompanying financial statements have been prepared by the Company, without
audit. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only recurring accruals)
necessary for the fair presentation of the financial position as of September
30, 1999, and the results of operations and cash flows for the periods ended
September 30, 1998 and 1999.
2. Income taxes
No provision for income taxes is required at September 30, 1999 because, in
management's opinion, of the net operating loss carryover from previous years.
3. Conversion offer and private placement.
Through September 30, 1999, the Company has issued 1,084,871 shares of its
common stock in exchange for the conversion of notes payable of $368,750,
interest of $63,288 and cash received of $148,750. Conversion expenses of
$107,250 were imputed on the exchange.
During November, 1998, the Company commenced a private placement of common stock
and warrants. The Company proposes to sell a minimum of 18 units and a maximum
of 68 units at a price of $100,000 per unit which could result in gross proceeds
to the Company of between $1,800,000 and $6,800,000 before deducting expenses.
Each unit consists of 100,000 shares of common stock and warrants to purchase
100,000 shares of common stock exercisable during the first year at $1.25 per
share and at $1.50 per share during the second year.
Through September 30, 1999, 29.36 units have been sold resulting in gross
proceeds of $2,936,360 (including conversion of note principal of $300,000,
reduction of accounts payable of $100,000 and cash received of $2,536,360).
Offering costs of $426,856 were incurred for the 29.36 units.
F-29
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has caused its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
IN STORE MEDIA SYSTEMS, INC.
(Registrant)
Date: ____________, 1999
By /s/ Everett E. Schulze, Jr.
---------------------------------------
Everett E. Schulze, Jr.
Chairman of the Board
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- --------------------------------------------------------------------------------
2.1 Merger Agreement and Plan of Reorganization dated
September 15, 1998, by and between the Registrant
(formerly known as Crescent Gold Corporation) and
In Store Media Systems, Inc., a Colorado corporation (2)
3.1 Articles of Incorporation (1)
3.1.2 Certificate of Amendment filed with the Nevada
Secretary of State as of October 7, 1998 (1)
3.2 Bylaws of the registrant (as amended) (1)
4.1 Specimen of Common Stock of Registrant (2)
10.1 Memorandum of Understanding dated January 13, 1997,
with Unisys Corporation (2)
10.1.2 Memorandum of Understanding dated February 25, 1997,
with Unisys Corporation (2)
10.1.3 Memorandum of Understanding dated March 19, 1997,
with Unisys Corporation (2)
10.1.4 Memorandum of Understanding dated April 4, 1997,
with Unisys Corporation (2)
10.2 Employment Agreement dated August 1, 1999, by and
between Registrant and Lawrence Mortimer (2)
10.3 Revised Incentive Bonus Program dated June 7, 1999, relating
to bonus program for Thomas Gorman (2)
10.4 Commitment Letter dated February 17, 1998, addressed to the
Company from Dougherty Funding LLC (1)
10.5 Asset Purchase Agreement dated January 27, 1999, by and
between Registrant and Partnership for Shared Marketing, Inc.,
and amendments thereto (1)
27.1 Financial Data Schedule (1)
- -----------------
(1) Filed herewith
(2) Will be filed with subsequent amendment to this Registration Statement.
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
FEB 19 1993
CHERYL A. LAU SECRETARY OF STATE
/S/ CHERYL A LAU
ARTICLES OF INCORPORATION
-------------------------
OF
--
CRESCENT GOLD CORPORATION
KNOW ALL MEN BY THESE PRESENTS:
I, the undersigned, do this day voluntarily acknowledge the forming of a
corporation under and pursuant to the law of the State of Nevada, and I HEREBY
CERTIFY:
FIRST: The name of the corporation is
Crescent Gold Corporation
SECOND: The registered office of this corporation is to be at
675 Fairview Drive Suite 246 - 264
P.O. Box 2849
in the city of Carson 89702 State of Nevada.
FIRST CARTEL, INC. is hereby named as Resident Agent of this corporation
and in charge of it's said office in Nevada.
THIRD: The nature of the business, object and purpose to be transacted,
promoted, or carried on by the corporation are:
A. To conduct any lawful business, to promote any lawful purpose, and to
engage in any lawful act or activity for which corporations may be organized
under the Central Corporation Law of the State of Nevada and to act in every
kind of fiduciary capacity and generally to do all things necessary or
convenient which are incident to or which a natural person might or could do.
B. To purchase, receive, take by grant, gift, devise, bequest or
otherwise lease, or otherwise acquire, own, hold, improve, employ, use and
otherwise deal in and with real or personal property. or any interest therein,
wherever situated, and to sell, convey, lease, exchange, transfer or otherwise
dispose of, or mortgage or pledge, all or any of it's property and assets, or
any interests therein, wherever situated.
C. To engage generally in the mining business as principal, and in any
lawful capacity, and generally to take, lease purchase, or otherwise acquire,
and to own, use, hold, sell, convey, exchange, lease, mortgage, work, clear,
improve develop, and otherwise handle manage, operate, deal in and dispose of
real estate, real property, lands, multiple-dwelling structures, houses,
buildings and other works and any interest or right therein; to take lease,
purchase or otherwise handle or acquire, and to own, use, hold, sell, convey,
exchange, hire, lease pledge, mortgage, and otherwise handle, and deal in and
dispose of, as principal agent or in any lawful capacity, such personal
property, chattels, chattels real, rights, easements, privileges, choses in
action, notes, bonds, mortgages and securities as may lawfully be acquired,
held, or disposed of.
(1)
<PAGE>
To generally deal in and with as principal, agent, broker, and in any lawful
capacity, a general oil exploration, mining exploration and management business
as principal, agent, representative, contractor, and in any other lawful
capacity. To deal and trade in goods, wares, merchandise, and property of any
and every class and description, and in any part of the world.
D. To apply for register, obtain, purchase, lease, take licenses in
respect of or otherwise acquire, or dispose of and in any manner deal with and
contract with reference to:
Inventions, devices, formulae, processes, improvements and modifications
thereof, letters patent, patent rights, patented processes, copy rights,
designs, and similar rights, trade-marks, trade names, franchises, licenses,
grants and concessions.
E. To make, enter into, perform and carry out contracts of every kind and
description with any person, firm, association, corporation or government or
agency or instrumentality thereof.
F. To lend money in furtherance of it's corporate purposes, and on such
terms and on such security, if any, as the Board of Directors of the corporation
may determine and direct any officer to complete. To borrow money without limit
as to amount and to such rate of interest as it may determine; from the time to
time to issue and sell its securities, including it's shares of stock, notes,
bonds, debentures, and other obligations, in and such amounts and such terms and
conditions, for such purposes and for such prices, and or hereafter permitted by
the laws of the State of Nevada and by the Board of Directors of the corporation
as they may determine; and to secure any of its obligations.
G. To be a promoter or manager of other corporations of any type or kind;
and to participate with others in any corporation, partnership, limited
partnership, joint venture, or other association of any kind, or in any
transaction, undertaking or arrangement which the corporation would have power
to conduct itself, whether or not such participation involves sharing or
delegation of control with or to others.
H. To promote and exercise all or any part of the foregoing purposes and
powers in and all parts of the world, and to conduct it's business in all or any
branches in any lawful capacity.
The foregoing enumeration of specific purposes and powers shall not be
held to be limited or restricted in any manner the purposes and powers of the
corporation by references to or inference from the terms of provisions of any
other clause, but shall be regarded as independent purposes.
FOURTH: No director or officer of the corporation shall be personally
liable to the corporation or any of its stockholders for damages for breach of
fiduciary duty as a director or officer involving any act or emission of any
such director or officer, provided, however that the foregoing provision shall
not eliminate or limit the liability of a director or officer for acts or
omissions which involve international misconduct, fraud or a knowing violation
of law.
(2)
<PAGE>
FIFTH: The amount of the total capital stock of the corporation is TWENTY
FIVE THOUSAND DOLLARS ($25,000.00) consisting of two million five hundred
thousand shares of common stock par value one cent each.
SIXTH: The number of the governing board shall be styled DIRECTORS and
the number of such directors shall be not less than one (1) or more than five
(5). The first board of directors shall be one member whose name and post office
address is as follows:
Mr. James B. Somervail
2290 Saddle Ridge Ct.
Reno, Nevada 89509
SEVENTH: The initial number of stockholders will be one (1). Additional
stockholders may be obtained. The number of directors may be changed as provided
in N.R.S. 78.330.
EIGHTH: The capital stock of this corporation after the amount of the
subscription price or par value has been paid in, shall not be subject to
assessment to pay debts of this corporation and no stock issued as fully paid up
shall ever be assessable or assessed and the Articles of Incorporation shall not
be amended in this particular.
NINTH: This corporation is to have perpetual existence.
I, the undersigned, being the original incorporator for the purpose of
forming a corporation to do business both within and without the State of
Nevada, and in pursuance of the General Corporation Law of the State of Nevada,
effective March 31, 1925 and as subsequently amended do make and file this
certificate, hereby declaring and certifying that the facts herein above stated
are true.
This 19th day of February 1993.
/s/ Garver Caplz
------------------------------------
Address: P.O. Box 2849 Carson City Nv.
State of Nevada:
ss
City of Carson:
On February 19 1993 before me the undersigned, a Notary Public in and for said
State, personally appeared Carver Caple to me known to be the person whose name
is subscribed to the within instrument and acknowledged to me that he executed
the same.
WITNESS my hand and official seal.
/s/ Jano Barnhurst
------------------------------
Notary Public
JANO BARNHURST
NOTARY PUBLIC - NEVADA
[SEAL HERE] CARSON CITY
My Appt. Expires Dec 9, 1993
(3)
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
OCT 07 1998
No. C1792-93
/s/ Dean Heller
DEAN HELLER, SECRETARY OF STATE
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CRESCENT GOLD CORPORATION
(After Issuance of Stock)
We the undersigned President and Secretary of Crescent Gold Corporation,
a Nevada corporation, do hereby certify:
That the Board of Directors of said corporation, on September 30, 1998,
unanimously adopted a resolution to amend the articles as follows:
Article V of the Articles of Incorporation of this corporation is hereby
amended to read as follows:
"FIFTH: The aggregate amount of the total authorized capital
stock the corporation shall have the authority to issue is One Hundred
Million (100,000,000) shares of Common Stock, each having a par value of
$0.00l, and Five Million (5,000,000) shares of Preferred Stock, par value
$0.001. All stock when issued shall be fully paid and nonassessable.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors of the Corporation (the "Board of
Directors") is expressly authorized to provide for the issuance of all
or any of the shares of the Preferred Stock in one or more series, and to
fix the number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and such
designations, preferences, and relative, participating, optional, or
other rights and such qualifications, limitations, or restrictions
thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issuance
of such shares (a "Preferred Stock Designation") and as may be permitted
by the Nevada Corporation Law. The Board of Directors is also expressly
authorized to increase or decrease (but not below the number of shares of
such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series. In case the number of
shares of any such series shall be so decreased, the shares constituting
such decrease shall resume the status that they had prior to the adoption
of the resolution originally fixing the number of shares of such series."
The number of shares of the corporation outstanding and entitled to vote
on an amendment to the Articles of Incorporation is Two Million (2,000,000);
that the said change and amendment have been consented to and approved by a
majority vote of the stockholders holding at least a majority of each class of
stock outstanding and entitled to vote thereon.
/s/ Adam R. Stull
- -----------------
ADAM R STULL
President and Secretary
1 of 2
<PAGE>
STATE OF CA )
) SS.
COUNTY OF ORANGE )
On 10-6, 1998, before me, Maria Gonzalez, Notary Public, personally appeared
Adam R. Stull, personally known to me, or X proved to me on the basis of
satisfactory evidence to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his authorized
capacity and that by his signature on the instrument, the person or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Signature: Maria Gonzalez
--------------
(This area for official notarial seal)
MARIA GONZALEZ
[SEAL HERE] Commission #1191180
Notary Public - California
Orange County
My Comm. Expires Jul 25, 2002
2 at 2
BYLAWS
OF
CRESCENT GOLD CORPORATION
(the "Corporation").
Article I.
Office
The Board of Directors shall designate and the Corporation shall maintain a
principal office. The location of the principal office may be changed by the
Board of Directors. The Corporation also may have offices in such other places
as the Board may from time to time designate. The location of the initial
principal office of the Corporation shall be designated by resolution.
Article II.
Shareholders Meetings
1. Annual Meetings
The annual meeting of the shareholders of the Corporation shall be held at
such place within or without the State of Nevada as shall be set forth in
compliance with these Bylaws. The meeting shall be held on the third Friday of
February of each year. If such day is a legal holiday, the meeting shall be on
the next business day. This meeting shall be for the election of Directors and
for the transaction of such other business as may properly come before it.
2. Special Meetings
Special meetings of shareholders, other than those regulated by statute, may
be called by the President upon written request of the holders of 50% or more of
the outstanding shares entitled to vote at such special meeting. Written notice
of such meeting stating the place, the date and hour of the meeting, the purpose
or purposes for which it is called, and the name of the person by whom or at
whose direction the meeting is called shall be given.
3. Notice of Shareholders Meetings
The Secretary shall give written notice stating the place, day, and hour of
the meeting, and in the case of a special meeting, the purpose or purposes for
which the meeting is called, which shall be delivered not less than ten or more
than fifty days before the date of the meeting, either personally or by mail to
1
<PAGE>
each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail,
addressed to the shareholder at his address as it appears on the books of the
Corporation, with postage thereon prepaid. Attendance at the meeting shall
constitute a waiver of notice thereof.
4. Place of Meeting
The Board of Directors may designate any place, either within or without the
State of Nevada, as the place of meeting for any annual meeting or for any
special meeting called by the Board of Directors. A waiver of notice signed by
all shareholders entitled to vote at a meeting may designate any place, either
within or without the State of Nevada, as the place for the holding of such
meeting. If no designation is made, or if a special meeting is otherwise called,
the place of meeting shall be the principal office of the Corporation.
5. Record Date
The Board of Directors may fix a date not less than ten nor more than sixty
days prior to any meeting as the record date for the purpose of determining
shareholders entitled to notice of and to vote at such meetings of the
shareholders. The transfer books may be closed by the Board of Directors for a
stated period not to exceed fifty days for the purpose of determining
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other purpose.
6. Quorum
A majority of the outstanding shares of the Corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. If less than a majority of the outstanding shares are represented
at a meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. At a meeting resumed after any such
adjournment at which a quorum shall be present or represented, any business may
be transacted, which might have been transacted at the meeting as originally
noticed.
7. Voting
A holder of an outstanding share, entitled to vote at a meeting, may vote at
such meeting in person or by proxy. Except as may otherwise be provided in the
currently filed Articles of Incorporation, every shareholder shall be entitled
to one vote for each share standing in his name on the record of shareholders.
Except as herein or in the currently filed Articles of Incorporation otherwise
provided, all corporate action shall be determined by a majority of the votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
2
<PAGE>
8. Proxies
At all meetings of shareholders, a shareholder may vote in person or by
proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
six months from the date of its execution.
9. Informal Action by Shareholders
Any action required to be taken at a meeting of the shareholders, may be
taken without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by a majority of the shareholders entitled to vote with
respect to the subject matter thereof.
Article III.
Board Of Directors
1. General Powers
The business and affairs of the Corporation shall be managed by its Board of
Directors. The Board of Directors may adopt such rules and regulations for the
conduct of their meetings and the management of the Corporation as they
appropriate under the circumstances. The Board shall have authority to authorize
changes in the Corporation's capital structure.
2. Number, Tenure and Qualification
The number of Directors of the Corporation shall be a number between one and
five, as the Directors may by resolution determine from time to time. Each of
the Directors shall hold office until the next annual meeting of shareholders
and until his successor shall have been elected and qualified.
3. Regular Meetings
A regular meeting of the Board of Directors shall be held without other
notice than by this Bylaw, immediately after and, at the same place as the
annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than this resolution.
4. Special Meetings
Special meetings of the Board of Directors may be called by order of the
Chairman of the Board or the President. The Secretary shall give notice of the
time, place and purpose or purposes of each special meeting by mailing the same
at least two days before the meeting or by telephone, telegraphing or
3
<PAGE>
telecopying the same at least one day before the meeting to each Director.
Meeting of the Board of Directors may be held by telephone conference call.
5. Quorum
A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business, but less than a quorum may adjourn any
meeting from time to time until a quorum shall be present, whereupon the meeting
may be held, as adjourned, without further notice. At any meeting at which every
Director shall be present, even though without any formal notice, any business
may be transacted.
6. Manner of Acting
At all meetings of the Board of Directors, each Director shall have one
vote. The act of a majority of Directors present at a meeting shall be the act
of the full Board of Directors, provided that a quorum is present.
7, Vacancies
A vacancy in the Board of Directors shall be deemed to exist in the case of
death, resignation, or removal of any Director, or if the authorized number of
Directors is increased, or if the shareholders fail, at any meeting of the
shareholders, at which any Director is to be elected, to elect the full
authorized number of Director to be elected at that meeting.
8. Removals
Directors may be removed, at any time, by a vote of the shareholders holding
a majority of the shares outstanding and entitled to vote. Such vacancy shall
be filled by the Directors then in office, though less than a quorum, to hold
office until the next annual meeting or until his successor is duly elected and
qualified, except that any directorship to be filled by election by the
shareholders at the meeting at which the Director is removed. No reduction of
the authorized number of Directors shall have the effect of removing any
Director prior to the expiration of his term of office.
9. Resignation
A Director may resign at any time by delivering written notification thereof
to the President or Secretary of the Corporation. A resignation shall become
effective upon its acceptance by the Board of Directors; provided, however,
that if the Board of Directors has not acted thereon within ten days from the
date of its delivery, the resignation shall be deemed accepted.
4
<PAGE>
10. Presumption of Assent
A Director of the Corporation who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken shall be presumed to
have assented to the action(s) taken unless his dissent shall be placed in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a Director who voted in favor of such
action.
11. Compensation
By resolution of the Board of Directors, the Directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors or a
stated salary as Director. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
12. Emergency Power
When, due to a national disaster or death, a majority of the Directors are
incapacitated or otherwise unable to attend the meetings and function as
Directors, the remaining members of the Board of Directors shall have all the
powers necessary to function as a complete Board, and for the purpose of doing
business and filling vacancies shall constitute a quorum, until such time as all
Directors can attend or vacancies can be filled pursuant to these Bylaws.
13. Chairman
The Board of Directors may elect from its own number a Chairman of the
Board, who shall preside at all meetings of the Board of Directors, and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors. The Chairman may by appointment fill any vacancies on the Board of
Directors.
Article IV.
Officers
1. Number
The Officers of the Corporation shall be a President, one or more Vice
Presidents, and a Secretary Treasurer, each of whom shall be elected by a
majority of the Board of Directors. Such other Officers and assistant Officers
as may he deemed necessary may be elected or appointed by the Board of
Directors. In its discretion, the Board of Directors may leave unfilled for any
such period as it may determine any office except those of President and
5
<PAGE>
Secretary. Any two or more offices may be held by the same person. Officers may
or may not be Directors or shareholders of the Corporation.
2. Election and Term of Office
The Officers of the Corporation to be elected by the Board of Directors
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of the shareholders. If the
election of Officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient. Each Officer shall hold office until his
successor shall have been duly elected and shall have qualified or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
3. Resignations
Any Officer may resign at any time by delivering a written resignation
either to the President or to the Secretary. Unless otherwise specified therein,
such resignation shall take effect upon delivery.
4. Removal
Any Officer or agent may be removed by the Board of Directors whenever in
its judgment the best interests of the Corporation will be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an Officer or agent shall not of
itself create contract rights. Any such removal shall require a majority vote of
the Board of Directors, exclusive of the Officer in question if he is also a
Director.
5. Vacancies
A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, or if a new office shall be created, may be
filled by the Board of Directors for the un-expired portion of the term.
6. President
The President shall be the chief executive and administrative Officer of the
Corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, at meetings of the Board of Directors. He
shall exercise such duties as customarily pertain to the office of President and
shall have general and active supervision over the property, business, and
affairs of the Corporation and over its several Officers, agents, or employees
other than those appointed by the Board of Directors. He may sign, execute and
deliver in the name of the Corporation powers of attorney, contracts, bonds and
other obligations, and shall perform such other duties as may be prescribed from
time to time by the Board of Directors or by the Bylaws.
6
<PAGE>
7. Vice President
The Vice President shall have such powers and perform such duties as may be
assigned to him by the Board of Directors or the President. In the absence or
disability of the President, the Vice President designated by the Board or the
President shall perform the duties and exercise the powers of the President. A
Vice President may sign and execute contracts and other obligations pertaining
to the regular course of his duties.
8. Secretary
The Secretary shall keep the minutes of all meetings of the stockholders and
of the Board of Directors and, to the extent ordered by the Board of Directors
or the President, the minutes of meetings of all committees. He shall cause
notice to be given of meetings of stockholders, of the Board of Directors, and
of any committee appointed by the Board. He shall have custody of the corporate
seal and general charge of the records, documents and papers of the Corporation
not pertaining to the performance of the duties vested in other Officers, which
shall at all reasonable times be open to the examination of any Directors. He
may sign or execute contracts with the President or a Vice President thereunto
authorized in the name of the Corporation and affix the seal of the Corporation
thereto. He shall perform such other duties as may be prescribed from time to
time by the Board of Directors or by the Bylaws.
9. Treasurer
The Treasurer shall have general custody of the collection and disbursement
of finds of the Corporation. He shall endorse on behalf of the Corporation for
collection checks, notes and other obligations, and shall deposit the same to
the credit accounts to any Director of the Corporation upon application at the
office of the Corporation during business hours; and, whenever required by the
Board of Directors or the President, shall render a statement of his accounts.
He shall perform such other duties as may be prescribed from time to time by the
Board of Directors or by the Bylaws.
10. Other Officers
Other Officers shall perform such duties and shall have such powers as may
be assigned to them by the Board of Directors.
11. Salaries
The salaries or other compensation of the Officers of the Corporation shall
be fixed from time to time by the Board of Directors, except that the Board of
Directors may delegate to any person or group of persons the power to fix the
salaries or other compensation of any subordinate Officers or agents. No Officer
shall be prevented from receiving any such salary or compensation by reason of
the fact that he is also a Director of the Corporation.
7
<PAGE>
12. Surety Bonds
In case the Board of Directors shall so require, any Officer or agent of the
Corporation shall execute to the Corporation a bond in such sums and with such
surety or sureties as the Board of Directors may direct, conditioned upon the
faithful performance of his duties to the Corporation, including responsibility
for negligence and for the accounting for all property, moneys or securities of
the Corporation, which may come into his hands.
Article V.
Contracts, Loans, Checks And Deposits
1. Contracts
The Board of Directors may authorize any Officer or Officers, agent or
agents, to enter into any contract or execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances.
2. Loans
No loan or advance shall be contracted on behalf of the Corporation, no
negotiable paper or other evidence of its obligation under any loan or advance
shall be issued in its name, and no property of the Corporation shall be
mortgaged, pledged, hypothecated or transferred as security for the payment of
any loan, advance, indebtedness or liability of the Corporation unless and
except as authorized by the Board of Directors. Any such authorization may be
general or confined to specific instances.
3. Deposits
All funds of the Corporation not otherwise employed shall be deposited from
time to time to the credit of the Corporation in such banks, trust companies or
other depositories as the Board of Directors may select, or as may be selected
by an Officer or agent of the Corporation authorized to do so by the Board of
Directors.
4. Checks and Drafts
All notes, drafts, acceptances, checks, endorsements and evidence of
indebtedness of the Corporation shall be signed by such Officer or Officers or
such agent or agents of the Corporation and in such manner as the Board of
Directors from time to time may determine. Endorsements for deposits to the
credit of the Corporation in any of its duly authorized depositories shall be
made in such manner as the Board of Directors may from time to time determine.
8
<PAGE>
5. Bonds and Debentures
Every bond or debenture issued by the Corporation shall be in the form of an
appropriate legal writing, which shall be signed by the President or Vice
President and by the Treasurer or by the Secretary, and sealed with the seal of
the Corporation. The seal may be facsimile, engraved or printed. Where such bond
or debenture is authenticated with the manual signature of an authorized Officer
of the Corporation or other trustee designated by the indenture of trust or
other agreement under which such security is issued, the signature of any of the
Corporation's Officers named thereon may be facsimile. In case any Officer who
signed, or whose facsimile signature has been used on any such bond or
debenture, shall cease to be an Officer of the Corporation for any reason before
the same has been delivered by the Corporation, such bond or debenture may
nevertheless be adopted by the Corporation and issued and delivered as though
the person who signed it or whose facsimile signature has been used thereon had
not ceased to be such Officer.
Article VI.
Capital Stock
1. Certificate of Share
The shares of the Corporation shall be represented by certificates prepared
by the Board of Directors and signed by the President. The signatures of such
Officers upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
Corporation itself or one of its employees. All certificates for shares shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation. All certificates surrendered to the Corporation for transfer shall
be canceled except that in case of a lost destroyed or mutilated certificate, a
new one may be issued therefor upon such terms and indemnity to the Corporation
as the Board of Directors may prescribe.
2. Transfer of Shares
Transfer of shares of the Corporation shall be made only on the stock
transfer books of the Corporation by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of authority to
transfer, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares. The person in whose name shares
stand on the books of the Corporation shall be deemed by the Corporation to be
the owner thereof for all purposes.
9
<PAGE>
3. Transfer Agent and Registrar
The Board of Directors of shall have the power to appoint one or more
transfer agents and registrars for the transfer and registration of certificates
of stock of any class, and may require that stock certificates shall be
countersigned and registered by one or more of such transfer agents and
registrars.
4. Lost or Destroyed Certificates
The Corporation may issue a new certificate to replace any certificate
theretofore issued by it alleged to have been lost or destroyed. The Board of
Directors may require the owner of such a certificate or his legal
representative to give the Corporation a bond in such sum and with such sureties
as the Board of Directors may direct to indemnify the Corporation as transfer
agents and registrars, if any, against claims that may be made on account of the
issuance of such new certificates. A new certificate may be issued without
requiring any bond.
5. Consideration for Shares
The capital stock of the Corporation shall be issued for such consideration
as shall be fixed from time to time by the Board of Directors. In the absence of
fraud, the determination of the Board of Directors as to the value of any
property or services received in full or partial payment of shares shall be
conclusive.
6. Registered Shareholders
The Corporation shall be entitled to treat the holder of record of any share
or shares of stock as the holder thereof, in fact, and shall not be bound to
recognize any equitable or other claim to or on behalf of this Corporation to
any and all of the rights and powers incident to the ownership of such stock at
any such meeting, and shall have power and authority to execute and deliver
proxies and consents on behalf of this Corporation in connection with the
exercise by this Corporation of the rights and powers incident to the ownership
of such stock. The Board of Directors, from time to time, may confer like powers
upon any other person or persons.
Article VII.
Indemnification
No Officer or Director shall be personally liable for any obligations of the
Corporation or for any duties or obligations arising out of any acts or conduct
of said Officer or Director performed for or on behalf of the Corporation. The
Corporation shall and does hereby indemnify and hold harmless each person and
his heirs and administrators who shall serve at any time hereafter as a Director
10
<PAGE>
or Officer of the Corporation from and against any and all claims, judgments and
liabilities to which such persons shall become subject by reason of his having
heretofore or hereafter been a Director or Officer of the Corporation, or by
reason of any action alleged to have heretofore or hereafter taken or omitted to
have been taken by him as such Director or Officer, and shall reimburse each
such person for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability, including power to defend such
persons from all suits or claims as provided for under the provisions of the
Nevada Revised Statutes; provided, however, that no such persons shall be
indemnified against, or be reimbursed for, any expense incurred in connection
with any claim or liability arising out of his own negligence or willful
misconduct. The rights accruing to any person under the foregoing provisions of
this section shall not exclude any other right to which he may lawfully be
entitled, nor shall anything herein contained restrict the right of the
Corporation to indemnify or reimburse such person in any proper case, even
though not specifically herein provided for. The Corporation, its Directors,
Officers, employees and agents shall be fully protected in taking any action or
making any payment, or in refusing so to do in reliance upon the advice of
counsel.
Article VIII.
Notice
Whenever any notice is required to be given to any shareholder or Director
of the Corporation under the provisions of the Articles of Incorporation, or
under the provisions of the Nevada Statutes, a waiver thereof in writing signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Attendance at any meeting shall constitute a waiver of notice of such meetings,
except where attendance is for the express purpose of objecting to the holding
of that meeting.
Article IX.
Amendments
These Bylaws may be altered, amended, repealed, or new Bylaws adopted by a
majority of the entire Board of Directors at any regular or special meeting. Any
Bylaw adopted by the Board may be repealed or changed by the action of the
shareholders.
Article X.
Fiscal Year
The fiscal year of the Corporation shall be fixed and may be varied by
resolution of the Board of Directors.
11
<PAGE>
Article XI.
Dividends
The Board of Directors may at any regular or special meeting, as they deem
advisable, declare dividends payable out of the surplus of the Corporation.
Article XII.
Corporate Seal
The seal of the Corporation shall be in the form of a circle and shall bear
the name of the Corporation and the year of incorporation per sample affixed
hereto.
Date: February 19, 1993
/s/ Barry Somervail
- -------------------
Barry Somervail, Secretary
12
DOUGHERTY FUNDING
- -----------------
February 18, 1998
Everett Schulze
President/CEO
In Store Media Systems, Inc.
15423 East Batavia
Drive Aurora, CO 80011
Dear Mr. Schulze:
Mike Mozer and I are very pleased with the progress we made during our
organizational meeting last Thursday and Friday. Our areas of greatest progress
include (i) finalizing the terms of our Engagement Letter to provide Equipment
Financing and a Line of Credit (together referred to as "Financing"); (ii)
establishment of the contractual responsibilities to be performed by all
parties; and (iii) establishing a time line for the final development of the
System and a manufacturing schedule to place in service the first 750 machine.
75 Store "POD" (Plan Operational Development).
Dougherty Funding has committed to provide debt financing of up to $200 million
to fund the manufacture and installation of the In$taClearing System equipment
and an additional $200 million to advance to stores the cash amount of their
coupon redemptions. Within the next few days. we will finalize the specific
terms of this engagement and you may share these terms with your other funding
sources at your discretion.
Prior to the funding by DF of the Financing. ISMSI must raise additional capital
to cover its operating expenses until the first pod is a operational and to fund
the manufacture and/or purchase and installation of the individual components
which make up the System. As a result. I am writing this letter to convey to you
the current status of our provision of the Financing so that you, in turn, can
describe this status to your other funding sources.
As with any financing commitment, ours has contingencies which we and ISMSI feel
can be reasonably satisfied in the course of assembling the financing.
Generally, they involve completion of our due diligence and execution of certain
agreements between ISMSI and its affiliates as specified in the Engagement
Letter. We intend to fund our commitment in stages as the system is installed on
a "POD-by-POD" basis where each POD will consist of approximately 75 stores.
Provided ISMSI meets the requirements of our financing commitment, we are very
confident that we will be successful in providing the financing described here.
DOUGHERTY FUNDING LLC
90 SOUTH SEVENTH STREET, SUITE 4300
MINNEAPOLIS, MINNESOTA 55402-4114
<PAGE>
Everett Schulze
February 18, 1998
Page Two
Dougherty Funding is a unit of Minneapolis-based Dougherty Financial Group LLC.
Dougherty Financial businesses have been in existence for over 20 years and
offer a wide variety of securities, investment, lending and leasing products. I
have attached a very brief profile of Dougherty Funding to give you some more
detail.
If I may answer any questions relating to our efforts on behalf of ISMSI, please
feel free to call me at (612) 317-2129.
Sincerely,
/s/ Russell S. King
Russell S. King
Senior Vice President
RSK:jin
<PAGE>
DOUGHERTY FUNDING
- -----------------
February 17, 1.998
Everett Schulze
President/CEO
In Store Media Systems, Inc.
15423 East Batavia Drive
Aurora, CO 80011
Re: Engagement to Provide Placement Agent Services for
In Store Media Systems, Inc.
$200,000,000 Equipment Financing
$200,000,000 Revolving Line of Credit Financing
Dear Mr. Schulze:
In Store Media Systems. Inc. ("ISMSI") is currently pursuing development and
implementation of its In$taClearing(TM) electronic coupon clearing system (the
"System"). In order to implement the System, ISMSI is seeking $200,000,000 in
equipment financing to fund the costs of manufacture and/or purchase of the
electronic and mechanical components of the System ("Equipment Financing").
ISMSI is also seeking a $200,000,000 revolving line of credit to be used to
finance the advance payment of coupon redemption reimbursements made to
participating stores ("Line of Credit"). Both the Equipment Financing and the
Line of Credit are referred to together as "Financings."
Exclusive Agreement
- -------------------
The purpose of this Engagement Letter is to set forth the terms by which
Dougherty Funding LLC ("DF") will act as exclusive placement agent to ISMSI, its
affiliates and assignees ("Borrower") in placing the Financings with a lender or
lenders to be identified by DF (the "Lender"). When executed by DF and Borrower,
the Engagement Letter (the "Agreement") will provide the basis for our business
relationship.
Agent Relationship, Costs of Financing
- --------------------------------------
DF is acting only as agent in arranging the Financings and DF will attempt to
place the Financings on a best efforts basis. All costs of said Financings,
including but not limited to legal fees, closing costs, engineering reports,
travel, origination fees and other expenses paid either to Lender or to other
third parties, shall be the sole responsibility of Borrower. DF shall provide
Borrower with estimates of such costs prior to Borrower accepting any
application for financing delivered to Borrower under this Agreement
Furthermore, DF is under no obligation, express or implied, to purchase or fund
the Financings.
DOUGHERTY FUNDING LLC
90 SOUTH SEVENTH STREET, SUITE 4300
MINNEAPOLIS, MINNESOTA 55402-4114
<PAGE>
Everett Schulze
February 17, 1998
Page Two
Terms of Financings
- -------------------
The proposed terms of the Equipment Financing are set forth in Exhibit A to this
Agreement. The proposed terms of the Line of Credit are set forth in Exhibit B
to this Agreement. Exhibits C and D set forth the additional terms regarding the
contracts and business relationships relating to the manufacturers and servicers
of the System's components, the third party coupon processors enlisted to assist
in the administration of the System, the packaged goods manufacturers and the
retail stores. Borrower hereby acknowledges that DF and Lender will rely upon
the information contained in Exhibits A. B, C and D in structuring and placing
the Financings and that any deviation from these terms could have an adverse
impact on DF's ability to place the Financings.
Placement Fees
- --------------
In the event that DF or any Lender identified by DF issues an application to
fund either the Equipment Financing or the Line of Credit substantially in
conformity with the terms set forth in Exhibits A and B respectively hereto (the
"Term Sheets"), or on such other terms as are mutually a greed upon by Borrower
and DF. Borrower shall pay DF the fee indicated on the respective Term Sheet
(the "Placement Fee"). Such Placement Fees shall be payable upon funding of the
Financing prior to any funds being released to Borrower.
Non-Circumvention
- -----------------
In the event that Borrower obtains financing for any purpose from any lenders or
investors first introduced to it by DF for a period of five years from the
execution of the Agreement, DF shall earn a Placement Fee on that financing to
be paid at its funding. if calculation of the Placement Fee is not practical due
to the nature of the financing obtained from a lender pursuant only to this
paragraph of the Agreement, DF shall be paid a fee equal to 2% of the amount of
such financing to be paid at closing prior to the release of any funds to
Borrower.
Break-Up Fee
- ------------
In the event Borrower accepts an application or loan commitment from Lender to
fund either or both of the Financings substantially on the terms set forth on
the related Term Sheet, or on such other terms as are mutually agreed upon by
Borrower and DF in writing, but the Financings fail to close due to failure of
Borrower to perform its obligations under the application, DF shall be paid a
"break-up" fee of $100,000 due and payable immediately.
<PAGE>
Everett Schulze
February 17, 1998
Page Three
Exclusivity, Indemnification
- ----------------------------
DF shall have the exclusive rights to represent Borrower in placement of the
Equipment Financing and the Line of Credit for a period of 180 days and 60 days,
respectively, from the date Borrower has in place contractual provisions that
satisfy the terms set forth in Exhibit C and D (the "Exclusive Agent Period").
The Exclusive Agent Period shall commence upon notice delivered to Borrower by
DF that such contractual provisions referred to in the preceding sentence are in
place to the satisfaction of DF to the extent they relate to the first
installation of the System in no less than 75 stores. if Borrower receives any
Financing application during this Exclusive Agent Period, the Exclusive Agent
Period shall be extended for a period of five years from the date of this
Agreement ("Extended Exclusive Agent Period"). Further, during such Extended
Exclusive Agent Period, DF shall have exclusive rights to place all debt
Financings, including the financing of the coupon dispensing systems (referred
to by ISMSI as "Coupon Exchange Centers") and DF shall earn Placement Fees set
forth in Exhibit A for such debt placement. Such Extended Exclusive Agent Period
will be effective regardless of when or if the Financing for which Borrower has
received an application ultimately closes. Borrower hereby represents that it
shall engage no other agent during the Exclusive Agent Period or the Extended
Exclusive Agent Period to place such Financings without the written consent of
DF. Furthermore, Borrower hereby indemnifies DF against any claims which may be
asserted against DF by other parties engaged by Borrower to place said
Financings.
Exclusion from Engagement
- -------------------------
Specifically not included in this exclusive engagement are (i) any debt
financings to provide working capital; (ii) any financing to obtain funds to pay
for the completion of development costs for the System; (iii) any funds to cover
ordinary business expenses including office equipment and overhead; and (iv) any
additional equity.
Governing Law
- -------------
This Agreement shall be governed by, construed and enforced in accordance with
the laws of the State of Minnesota.
<PAGE>
Everett Schulze
February 17. 1998
Page Four
ENGAGEMENT TO PROVIDE PLACEMENT AGENT SERVICES FOR:
IN STORE MEDIA SYSTEMS, INC.
$200,000,000 EQUIPMENT FINANCING
$200,000,000 WORKING CAPITAL FINANCING
DOUGHERTY FUNDING LLC
By: /s/ Michael T. Mozer
---------------------------
Michael T. Mozer
Senior Vice President
AGREED AND ACCEPTED:
This 19 day of FEB 1998.
IN STORE MEDIA SYSTEMS, INC.
By: /s/ signature
---------------------------
Its: PRESIDENT/CEO
--------------------------
<PAGE>
EXHIBIT A
$200,000,000
IN STORE MEDIA SYSTEMS, INC.
IN$TACLEARING SYSTEM
EQUIPMENT FINANCING
SUMMARY OF FINANCING TERMS
BORROWER: A to-be-named bankruptcy remote single purpose corporation,
wholly-owned by In Store Media Systems, Inc. ("ISMSI").
PLACEMENT AGENT: Dougherty Funding LLC
AMOUNT: $200,000,000 funding amount.
PURPOSE: To provide funds for the manufacture and/or acquisition and
installation of the electronic and mechanical components and
software which make up the In$taClearing System (the
"System").
ADVANCES: Financing will be advanced as needed by Borrower with a
minimum initial advance amount of $3,000,000 and minimum
incremental advance amounts of $100,000. Such advances will be
made upon the installation of the System in its intended
retail locations, the execution of a certificate of acceptance
by the Store and the execution of appropriate warranties,
service agreements and processing contracts contemplated by
the System.
ELIGIBLE
EXPENDITURES: Direct costs of components manufactured by ISMSI, installation
costs, actual cash purchase price of equipment and software
purchased from third parties and out-of-pocket costs of the
financing.
AMORTIZATION/
TERM: 5 year amortization, 5 year term.
INTEREST RATE: Subject to market conditions and other factors outside our
control, the annual interest rate of the financing is
estimated as follows:
(1) $0-$20,000,000 total advances - 30 day LIBOR plus 7.50%.
<PAGE>
(2) $20,O00,000-$50,000,000 total advances -30 day LIBOR plus
4.50%.
(3) $50,000,000-$200,000,000 total advances - 30 day LIBOR
plus 2.50%.
Interest rates may be lower or higher than these indicative
levels based upon operating experience of the System.
PLACEMENT FEE: 2% of funding amount payable at funding of each advance, plus
1% of the aggregate outstanding financed amount accruing on an
annualized basis and payable quarterly in arrears.
Additionally, Placement Agent will receive warrants to
purchase 5% of the outstanding shares of ISMSI at a price
equal to $.50 per share. Such warrants will be valid for 5
years and will be protected from dilution due to stock splits
and dividends. The warrants also will hold "piggy-back"
registration rights by which ISMSI will, at ISMSI's expense,
register the shares to be issued pursuant to these warrants if
ISMSI pursues at any time a registration of its shares. After
two years, ISMSI will have a one-time right to purchase all of
these warrants for $1.00 per share. Prior to exercising this
repurchase option, ISMSI shall give Placement Agent at least
60 days notice of its intention to purchase these warrants.
Upon receipt of such notice, Placement Agent shall have 60
days to exercise its warrants at $.50 per share and such
repurchase option shall be void.
The specific terms of these warrants shall be agreed upon by
Placement Agent and ISMSI pursuant to a separate stock warrant
agreement. Such agreement shall be executed within 10 days of
the execution of this Agreement or this Agreement shall be
null and void.
<PAGE>
EXHIBIT B
$200,000,000
IN STORE MEDIA SYSTEMS, INC.
IN$TACLEARING SYSTEM
REVOLVING LINE OF CREDIT FINANCING
SUMMARY OF FINANCING TERMS
BORROWER: A to-be-named bankruptcy remote single purpose corporation,
wholly-owned by In Store Media Systems, Inc. ("ISMSI").
PLACEMENT AGENT: Dougherty Funding LLC
AMOUNT: $200,000,000.
PURPOSE: To provide funds for advances to stores of Eligible Advances.
ADVANCES: Financing will be advanced as needed by Borrower from a
secured revolving line of credit provided by a financial
institution acceptable to ISMSI. Such advances will be made
upon the conveyance of acceptable coupon redemption
receivables payable by a packaged goods manufacturer to each
of the retail stores participating in the System and the
satisfaction of other contractual and legal requirements
customarily imposed for a secured revolving line of credit
borrowers.
ELIGIBLE
RECEIVABLES: Valid coupon redemption receivables due from packaged goods
manufacturers acceptable to Placement Agent. Such receivables
can not be more than 90 days old and can not be the subject of
any dispute.
TRUSTEE: A commercial bank will provide trust services necessary to
appropriately administer the Line of Credit.
ADVANCE RATE: Approximately 90% of the aggregate receivables amounts. The
initial advance rate must be acceptable to the Stores selected
for the initial installation of $3,000,000 of equipment.
Thereafter, ISMSI and DF shall work jointly to increase the
advance rate on a best efforts basis.
<PAGE>
AMORTIZATION/
TERM: One year revolving line of credit. Renewable for an ultimate
term of two years.
INTEREST RATE: We estimate the annualized interest expense on advances shall
be as follows, subject to market conditions and the financial
condition of the Borrower.
(1) $0-$20,000,000 total advances - 30 day LIBOR plus 5.50%.
(2) $20,000,000-$50,000.000 total advances -30 day LIBOR plus
3.50%.
(3) $50.000,000-$200,000,000 total advances - 30 day LIBOR
plus 1.50%.
Interest rates may be lower or higher than these indicative
levels based upon operating experience of the System and the
recovery rate experienced on the receivables.
PLACEMENT FEE: 2% of the committed financing amount payable upon funding of
each incremental advance up to the full utilization of the
committed amount. Such Placement Fee shall be payable for all
two year extensions permitted beyond the initial Term.
<PAGE>
DOUGHERTY FUNDING
- -----------------
EXHIBIT C
February 17, 1998
Everett Schulze
President/CEO
In Store Media Systems, Inc.
15423 East Batavia Drive
Aurora, CO 80011
Re: Flow Financing Proposal for Coupon Processing Scanners
Up to $200,000,000
Dear Everett,
Based on our discussions to-date, we are prepared to undertake the placement of
$200,000,000 in financing of coupon processing systems on behalf of In Store
Media Systems, Inc. ("ISMSI"). In addition, we request the option of obtaining,
on your behalf, the necessary banking credit facility to fund coupon redemptions
to the retailers which utilize the redemption coupon scanning systems.
Both financing arrangements assume the following contractual arrangements:
1. UNISYS CONTRACTS - Unisys will agree to a non-cancelable contract which
will have a term extending no shorter than the term of the financing
which includes the following:
a. Provide all software components at a fixed cost for the coupon
scanners.
b. Provide for system installations and operational certifications for
each pod of 75 scanners.
c. Maintenance contracts for the performance of all hardware/software
components based upon defined minimum capacities, and other
performance criteria, including all data storage, retrieval,
sorting, recovery and related data transmission functions required
by the program.
d. Joint management contract with a representative of ISMSI to install,
operate and maintain the pod performance.
e. Unisys is paid through prearranged financing commitment only after
on-site operational certification.
DOUGHERTY FUNDING LLC
90 SOUTH SEVENTH STREET, SUITE 4300
MINNEAPOLIS, MINNESOTA
<PAGE>
Everett Schulze
February 17, 1998
Page Two
f. A performance evaluation of all hardware in the scanner system
manufactured by ISMSI and third parties.
2. REGIONAL COUPON CLEARANCE HOUSE ("RCLH") CONTRACTS - The following must
be part of contract:
a. Term: No shorter than the financing term.
b. Terminable only for cause with sixty day default cure period.
c. Guarantees a geographic market exclusive to ISMSI.
d. Fixed fees for coupons processed.
e. As part of income data, a store by store, two year historical coupon
redemption history.
f. The RCCH must provide historical coupon redemption remittance from
all coupon issuers/manufacturers and stores served by RCCH.
g. All coupon redemption funds and coupon clearing fees from
manufacturers must flow through trust accounts or other arrangements
satisfactory to ISMSI and the bank credit facility provider.
3. SUPERMARKET CONTRACT -
a. In store lease for critical components, egress/ingress rights for
phone/electric equipment/storage/display and interconnection with
existing checkout scanners for a term no shorter than the financing
term.
b. Exclusive right to install scanners at all existing and future cash
registers for similar term.
c. Redemption procedures and cash remittance procedures.
d. Electronic remittance procedures with bank providing credit facility
including bank set off rights for non-payment or other causes
typically provided for in a similar commercial financing.
e. Prohibition on engaging other clearing houses or replacement
equipment.
<PAGE>
Everett Schulze
February 17, 1998
Page Three
4. BANK CREDIT FACILITY PROVIDER CONTRACTS -
a. Revolving Credit Agreement/Note/Security Agreement with ISMS.
b. Coupon Redemption Agency and Security Agreement with RCCH including
lock box arrangement.
c. Cash Remittance Agreement with supermarkets and/or ISMSI.
These are the key contractual arrangements that need to be negotiated to
implement the program.
Everett, give us your thoughts. As soon as we have your financial projections,
we will address finance structure and terms.
Sincerely,
/s/ Michael T. Mozer
Michael T. Mozer
Senior Vice President
MTM:jin
cc: Russell S. King
Steven D. McWhirter
<PAGE>
EXHIBIT D
IN STORE MEDIA SYSTEMS, INC.
COUPON CLEARING SYSTEM
SUMMARY OF COUPON PROCESSING RESPONSIBILITIES
OVERVIEW: Vendor has developed the InstaClearing System proprietary
electronic coupon clearing system (the "System") which
significantly reduces the costs associated with the
processing of manufacturer's Coupons, as well as Losses
incurred as a result of fraudulent redemptions. The System
is described in more detail in Exhibit I. Additionally,
Vendor has arranged commercial financing to advance to
grocers the funds that they are to receive from
manufacturers in payment for redeemed Coupons.
VENDOR: In Store Media Systems. Inc., developer of the InstaClearing
System. Vendor manufacturers certain mechanical components
of the System.
PROCESSOR: Established processor/clearing house of packaged goods
manufacturers' ("PGM") coupons and rebates ("Coupons").
Processor will assist in the implementation of the System in
retail stores within the geographic area serviced by
Processor and to perform other functions described herein.
SUPPLIER: Unisys Corporation, Payment Systems Division, has developed
and manufactured the electronic components and software
utilized by the System to meet the specifications and
requirements determined by Vendor.
STORES: Supermarkets will be enrolled to utilize the System pursuant
to an exclusive contract with Vendor.
SERVICER: Supplier and Vendor (collectively "Servicer") will share the
responsibility of servicing the electronic and mechanical
components of the System, respectively. Vendor will perform
on-site periodic maintenance and depot level service will be
performed by Supplier.
SYSTEM RESPONSIBILITIES
- -----------------------
SCAN: Cashier inserts each coupon into the System scanner which
reads the barcode and the extended barcode data of each
coupon.
<PAGE>
VERIFY: System verifies that the consumer actually purchased the
product and checks for correct brand and size.
REJECTED COUPONS: Coupons which do not match the product purchased are
automatically rejected and returned to the consumer.
DISCOUNT: When verified, the System stores the data in the Vendor's
on-site computer and notifies the Store's point of sale
system to deduct the value of the coupon from the consumer
bill.
SHRED: Concurrently, the Scanner automatically shreds the coupon.
DATA TRANSFER: At a specified time each day, System contacts Vendor by
telephone. System uploads composite barcode data and
extended barcode data to Vendor. System also reports to
Vendor its service status and any need for non-critical
service.
SERVICE CALLS: System automatically contacts Vendor by telephone to report
any critical problems which require immediate service.
STORE RESPONSIBILITIES
- ----------------------
PLACEMENT
AGREEMENT: Store will enter into a contract with Vendor to accommodate
the System. Contract will provide that Store will use the
System on an exclusive basis for a period of five years.
Such contract will be cancellable only in the event that the
System fails to meet Performance Standards or
Vendor/Processor fail to convey payments from PGM to Store
as agreed.
Placement Agreement will also provide (1) the space needed
to physically accommodate the equipment required by the
System; (2) System access to telephone service needed to
transfer coupon data to Vendor and Processor; and (3)
reasonable access by Vendor, during agreed upon business
hours, to store and equipment for purposes of installation,
maintenance modification and deinstallation.
ACCEPTANCE: Store will sign a Certificate of Acceptance upon the
installation and performance certification of the equipment.
LIMITED SERVICE: Store may be required to perform only limited service to
empty shredder waste and periodically clean the equipment.
All other service and maintenance will be provided by
Servicer.
2
<PAGE>
COST: The System will be installed without cost to Store. Vendor
charges no rent or fee for the ongoing operation of the
System. Store pays only for electricity usage required by
System.
PROCESSOR RESPONSIBILITIES
- --------------------------
SALES: Establish contact with stores and assist Vendor in
soliciting Store's enrollment in the System and execution of
Placement Agreement.
Establish contact with PGM's or with FSI clearing
certification authority to establish the System as an
acceptable method of clearing FSI coupons.
CERTIFICATION: Assist in the certification of each installed System prior
to the acceptance of each installed System by the
participating Store. Certification criteria will be
developed jointly by Vendor and Processor to meet industry
standards and requirements.
DATA FILE: Maintain a current data file, as obtained from
manufacturers, of all barcodes and extended barcodes.
Processor will convey this file each day to Vendor.
INVOICE: Invoice each manufacturer daily on an invoice form
acceptable to each manufacturer and consistent with
historical requirements and practices. Each invoice must be
copied to Vendor. The invoice will be prepared by Processor
relying upon data gathered by the System and provided to
Processor by Vendor. Such invoice will instruct manufacturer
to disburse Coupon redemption funds either to the Processor
or to Vendor's lockbox.
SPECIAL HANDLING: Handle all special handling coupon that can not be destroyed
at the point of sale in accordance with current coupon
handling procedures.
REPORTING: Compile and submit all reports required by manufacturers
with copies to Vendor and others as required.
CONTROLS: Maintain ongoing operational control standards and conduct
review to ensure compliance with manufacturers'
requirements.
VENDOR RESPONSIBILITIES
- -----------------------
SALES: Accompany Processor's sales person on the initial contact
with each Store. Subsequently assume primary responsibility
for the sales process culminating with the execution of the
Store Contract.
STORE CONTRACT: Negotiate and execute a Placement Agreement with each Store
setting forth
<PAGE>
the responsibilities of each party.
SYSTEM: Provide a complete turnkey System including all electronic
hardware and software, as well as scanner, shredder and
other items as called for in the System Specifications.
INSTALLATION: Direct the installation of the System within each Store;
conduct on-site tests and certify the full function of the
System.
SERVICE CONTRACT: Provide service, either directly or through a third party
provider, pursuant to a Servicer Contract which will ensure
compliance with Performance Specification at no cost to the
Store.
DATA COLLECTION: Download data regarding Coupon redemption daily from each
Store. Sort the data for each store according to product,
offer code and manufacturer. Barcode data is used in the
preparation of the invoice. Extended barcode data is used
and disseminated by Vendor at its discretion.
VALIDATION: Compare coupon redemptions to PGM's Data File of valid
product/offer codes as such Data File is received each day
from PGM.
INVOICE: Forwards redemption data obtained from the System to the
Processor so that Processor can prepare invoices for PGM.
SYSTEM REQUIREMENTS
- -------------------
DEVELOPMENT: The equipment, software and all other components of the
System will be fully developed prior to any funding
arrangements according to Performance Specifications to be
agreed to by all parties.
WARRANTY: The Supplier and Vendor will warrant that the System will
meet Performance Specifications. The Warranty will provide
that manufacturer will repair or upgrade at no cost
installed components to the extent that such components fail
to meet Performance Specifications. The warranty will run
for a period of five years.
PERFORMANCE
SPECIFICATIONS: Prior to the execution of any contracts relating to the
System, Vendor will establish Performance Specifications
relating to minimum throughput, minimum accuracy, maximum
downtime and minimum hardware life.
PRODUCTION VOLUME: Vendor and Supplier will agree to provide minimum volume
levels of System components to meet estimated demand.
<PAGE>
SERVICE CONTRACT REQUIREMENTS
- -----------------------------
CONTRACT: For each installed location, Vendor will enter into a
contract to provide service for the mechanical components of
the System, either directly or through a third party. Vendor
will also contract with Supplier to provide service of the
electronic components. The contracts shall run for a term of
at least five years.
FIXED COST: The Service Contract shall provide for a fixed cost per
month for all service to be performed on the System. Such
cost will be paid by Vendor.
OTHER PROVISIONS: The contract shall require compliance with Performance
Specifications and other provisions as agreed upon by all
parties.
ASSET PURCHASE AGREEMENT
------------------------
This Agreement entered into this 27 day of January, 1999 by and between In Store
Media Systems, Inc. a Colorado Corporation whose principal place of business is
15423 East Batavia Drive, Aurora, Colorado 80011 (hereinafter referred to as
"ISMSI") and Partnership For Shared Marketing, Inc. Parker Plaza, 400 Kelby
Street, Suite 1500, Fort Lee, New Jersey, 07024 (hereinafter referred to as
"PSM") collectively (the "Parties").
RECITALS
WHEREAS, PSM owns the multi-categorical database and other assets described in
Exhibit A and;
WHEREAS, PSM desires to sell its multi-categorical database and other assets
under certain terms and conditions and;
WHEREAS, ISMSI has loaned Fifty Thousand and 00/100 Dollars ($50,000.00) to the
principals of PSM pursuant to a Promissory Note (the "Note") dated March 7,
1997, Exhibit B and;
WHEREAS, ISMSI is currently in the process of raising equity in the amount of
$6.8 million by means of Private Placement Offering dated November 3, 1998 (the
"Private Placement"); and
WHEREAS, ISMSI desires to purchase all of PSM's assets and;
WHEREAS, the Parties wish to execute an Asset Purchase Agreement
(the "Agreement") between the Parties.
NOW THEREFORE, in consideration of mutual covenants, promises and other valuable
consideration the Parties hereto mutually agree:
ARTICLE I
PURCHASE
SECTION 1.1 TRANSFER OF ASSETS Subject to the terms and conditions contained
herein, ISMSI agrees to purchase and PSM agrees to sell, transfer and convey,
free and clear of debt and without liens or encumbrances of any kind, all of
PSM's rights, title and interest in and to all of the assets of PSM, of whatever
nature and kind (the "Assets") as listed on attached Exhibit A and which Assets
include without limitation, PSM's original data records and all extant copies of
household names, addresses and other information set forth in Exhibit A hereto.
The Assets shall also include any arrangement, agreement, contract,
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 1 of 8 Rev 03/29/99
<PAGE>
purchase order and other sources of revenue of PSM, whether presently existing
or created subsequent to the execution of this Agreement, for a total purchase
price of Five Hundred Thousand and % Dollars ($500,000.00) and One Million Five
Hundred Thousand Shares (1,500,000) of ISMSI common stock, which stock shall be
"restricted" under Rule 144 promulgated by the SEC pursuant to its powers under
the Securities and Exchange Act of 1934 (the "Stock").
SECTION 1.2 Payment
The purchase price of $500,000 plus 1,500,000 shares of the Stock shall be paid
at closing as follows:
(a) $50,000.00 in the form of the discharge of the Note.
(b) $450,000.00 in cash or certified funds.
(c) 1,500,000 shares of the Stock.
SECTION 1.3 Registration Rights
All stock issued to PSM pursuant to the Agreement is subject to Demand
Registration Rights by PSM after one year of date of issue (excepting only that
PSM may not exercise Demand Registration Rights within 180 days of any proposed
public offering by ISMSI) and Piggyback Registration Rights anytime ISMSI files
a Registration Statement of its shares for its own account, provided, that PSM
must advise ISMSI of its decision to register some or all of its shares within
ten (10) days of receipt of notice from ISMSI that ISMSI intends to register
some of its shares for sale to the public.
SECTION 1.4 REDUCTION OF PAYMENT The Payment shall be reduced by any account
payable of PSM that must be paid by ISMSI to acquire the Assets, or any one of
the Assets, free and clear of all liens and encumbrances.
SECTION 1.5 ISMSI and PSM agree that subject to the provisions of the above, the
payment of Five Hundred Thousand and 00/100 Dollars ($500,000.00) and 1,500,000
shares of ISMSI common stock is acceptable to both parties and that upon
Closing, the shareholders of PSM shall have no further claim whatsoever to the
Assets except as specified in Article IX.
ARTICLE II
CLOSING
Subject to the provisions of Article IX, the Closing for the purchase and sale
of the Assets as described in Articles I and II shall take place on or before
May 15, 1999. The Closing
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 2 of 8 Rev 03/29/99
<PAGE>
is to occur at a place to be agreed upon by the Parties. Nothing herein shall
preclude the Parties from Closing at an earlier date.
ARTICLE III
CONDUCT OF PSM BUSINESS OPERATIONS PRIOR TO CLOSING
SECTION 3.1 EXCLUDED ASSETS ISMSI and PSM agree that the term "Assets" shall not
include any of PSM's accounts receivable in connection with orders, contracts or
jobs which are completed prior to the date of Closing.
SECTION 3.2 PRO-RATA APPORTIONMENT OF SERVICES In the event that PSM has
accepted payment in advance from a client for specific services, none of which
services have been performed by PSM at the time of Closing, the cash payment by
ISMSI to PSM shall be reduced at Closing by the amount prepaid. In the event
that PSM has accepted payment in advance from a client for a specific service
only partially performed by PSM at the time of Closing, PSM shall retain the
payment pending determination of the ratio of services performed prior to the
Closing to services performed after the Closing. In the event that PSM's
pro-rata share is less than that prepaid to it, then PSM shall refund the excess
to ISMSI not later than ten (10) days after the Closing. PSM shall provide a
preliminary, and immediately prior to Closing, shall provide a final, report on
all contracts for which payment has been received, but for which services have
only been partially performed, or for which no services have been performed or
for which payables remain. The report shall be updated monthly and shall include
all of the then available information so that the Parties ultimately may
determine the ratio of services performed prior to the Closing to services
performed subsequent to the Closing.
SECTION 3.3 APPROVAL OF CONTRACTS Upon execution of this agreement, PSM shall
submit to ISMSI for review and approval all contracts that call for services of
$50,000.00 or more to be performed by PSM. ISMSI has the right to approve such
contracts, which approval shall not be unreasonably withheld. ISMSI agrees to
review such contracts within five (5) business days.
SECTION 3.4 OPERATION OF BUSINESS PSM agrees to operate its business in the
usual course until Closing. Any actions not in the usual course of business must
be pre approved in writing by ISMSI which approval shall not be unreasonably
withheld. PSM shall retain (subject to 3.2 above) all net operating revenues
generated before Closing from PSM's business operations until Closing. However,
ISMSI reserves the right to conduct periodic financial review, of all of PSM
books and records during the interim period before Closing upon reasonable,
written notice to PSM.
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 3 of 8 Rev 03/29/99
<PAGE>
ARTICLE IV
TRANSFER OF OWNERSHIP
ISMSI and PSM agree that upon payment of the purchase price in accordance with
Article I above, and subject to the provisions of Article II above, at Closing
PSM shall transfer to ISMSI all its right, title, interest and ownership in its
entirety of the Assets.
ARTICLE V
WARRANTIES
SECTION 5.1 WARRANTIES PSM warrants and guarantees that the Assets to be
purchased by ISMSI are free and clear of any liens or encumbrances whatsoever or
that to the extent that any of the Assets shall have any liens judgments or
other encumbrances on them, PSM will use the funds paid at Final Payment to
satisfy such obligations. If PSM is unable to satisfy and discharge such liens,
judgements or other encumbrances from the payment at Final Payment, both parties
shall have the right to terminate the Agreement pursuant to the provisions of
Article IX.
SECTION 5.2 INSPECTION OF BOOKS AND RECORDS PSM agrees to provide current
financial and services contract information, and to permit ISMSI and its
representatives to inspect the books and records of PSM prior to Closing. PSM
represents that the financial information provided to ISMSI is and will be true
and correct, and further agrees that it will promptly advise ISMSI of any
material change to its financial condition.
ARTICLE VI
EMPLOYMENT AGREEMENTS
ISMSI and PSM agree that as further consideration for the purchase of the
Assets, that ISMSI through its subsidiary shall enter into employment agreements
at Closing with each of the following parties: Joel G. Monsky; and, Stanley A.
Monsky (hereinafter "Monskys"). The employment agreements shall be in the form
attached hereto as Exhibits C, D and E.
ARTICLE VII
FORMATION OF NEW CORPORATION
SECTION 7.1 DATA DRIVEN MARKETING. INC. On January, 9, 1997, ISMSI formed a
wholly-owned subsidiary corporation, Data Driven Marketing Inc. ("DDMI"). ISMSI
and PSM agree that upon Closing, ISMSI shall name new officers and directors of
DDMI to which it will contribute as capital, the Assets purchased under this
Agreement.
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 4 of 8 Rev 03/29/99
<PAGE>
SECTION 7.2 DDMI MONTHLY CASH MINIMUM DDMI's monthly operating cash revenues are
to come from billed services provided to independent third parties or to ISMSI.
Therefore, for a period of fourteen (14) months following Closing, ISMSI agrees
to subsidize DDMI monthly cash revenues to the extent funds are available, in
the amount mutually agreed prior to Closing to be necessary to meet the monthly
cash requirements of DDMI (the "Monthly Cash Minimum") as follows:
(a) To provide up to a maximum of $50,000.00 at the end of each
month in which a subsidy is required to reach the Monthly
Cash Minimum.
(b) In any month of ISMSI's fourteen (14) month subsidy
obligation period in which DDMI cash revenues exceed the
Monthly Cash Minimum for that month, the maximum subsidy
obligation of ISMSI in the following month shall be reduced
by the amount of the excess in the previous month.
(c) At any time the aggregate cash revenues of DDMI in excess of
the Monthly Cash Minimum totals more than the aggregate of
the maximum subsidizing obligation of ISMSI to DDMI, then
ISMSI shall have no further obligation to subsidize DDMI's
operating expenses.
ARTICLE VIII
EXPENSES
ISMSI and PSM mutually agree that each Party shall bear all of its own expenses
whatsoever incurred in connection with the transactions contemplated hereby,
including without limitation, the negotiation and finalization of the definitive
agreement, whether or not a definitive agreement is executed or the transactions
contemplated hereby are consummated.
ARTICLE IX
DEFAULT
SECTION 9.1 EVENTS OF DEFAULT The following shall constitute Events of Default
by either of the parties:
(a) Failure to provide requested information about business operations.
(b) Failure to disclose material, adverse changes in the operational or
financial status.
(c) Failure to Close or comply with other terms of the Agreement.
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 5 of 8 Rev 03/29/99
<PAGE>
SECTION 9.2 NOTIFICATION OF DEFAULT ISMSI and PSM agree that in the event either
Party is in default of any of the terms and conditions contained in the
Agreement, that the party claiming a default shall give written notice by
certified mail, return receipt requested-to the other party at the address
listed in Article X below, identifying such default, and said defaulting party
shall have Sixty (60) days in which to cure the default.
SECTION 9.3 FAILURE TO CURE DEFAULT In the event the default is not cured within
the sixty (60) day cure period, the Agreement may be terminated by either party.
Notwithstanding the foregoing, ISMSI and PSM agree that in the event of default
by either Party, ISMSI and PSM shall negotiate in good faith to preserve the
Agreement by amendment of its terms.
ARTICLE X
TERMINATION
In the event of Default by either Party, which Default is not cured pursuant to
IX above, the Agreement may be terminated by written notice to the Party not in
Default.
ARTICLE XI
NOTIFICATION
All written notices and correspondence shall be delivered to the address listed
below:
IN STORE MEDIA SYSTEMS, INC. PARTNERSHIP FOR SHARED MARKETING, INC.
15423 East Batavia Drive Parker Plaza
Aurora, Colorado 80011 400 Kelby Street, Suite 1500
Fort Lee, New Jersey 07024
ARTICLE XII
MODIFICATION
The Agreement shall not be modified or altered in any manner whatsoever except
in writing and with the expressed written consent of the Parties.
ARTICLE XIII
SEPARABILITY OF PROVISIONS
The provisions of the Agreement shall be considered to be separable and
independent of each other, and in the event any provisions of the Agreement
shall be found to be invalid,
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 6 of 8 Rev 03/29/99
<PAGE>
such finding shall not affect the validity or effectiveness of any other, or
all, of the remaining provisions hereof
ARTICLE XIV
BINDING EFFECT
The Agreement is not transferable. It shall be binding upon and shall inure to
the benefit of (a) ISMSI and its successors and assigns and (b) PSM and Monskys'
successors and assigns, heirs. legatees, executors, administrators, or legal
representatives.
ARTICLE XV
JURISDICTION
The Agreement shall be construed under the laws of the State of Colorado. The
Parties agree to submit all disputes to arbitration pursuant to the applicable
rules of the American Arbitration Association.
ARTICLE XVI
EXECUTION
The Agreement is executed and delivered with the understanding that it reflects
the entire understanding of the Parties and supersedes any prior written or
verbal agreements.
Executed this 27 day of January by:
For: For:
IN STORE MEDIA SYSTEMS, INC. PARTNERSHIP FOR SHARED
MARKETING, INC.
/s/ Everett E. Schulze, Jr. /s/ Marvin Monsky
- ------------------------------ ------------------------------
Everett E. Schulze, Fr. Marvin Monsky
President/CEO President
Witness:
/s/ Donald P. Uhl VP /s/ Joel Monsky
- ------------------------------ ------------------------------
Joel Monsky
Executive Vice President
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 7 of 8 Rev 03/29/99
<PAGE>
APPROVED:
DATA DRIVEN MARKETING, INC.
/s/ Everett E. Schulze /s/ Stanley A. Monsky
- ------------------------------ ------------------------------
President/CEO Stanley A. Monsky
Vice President
Date: 1-27-99
--------------
E211.001b ISMSI and PSM Asset Purchase Agreement / Page 8 of 8 Rev 03/29/99
<PAGE>
Exhibit A
ASSETS
------
PROPRIETARY SYSTEMS AND OPERATIONS
(PC LEVEL SYSTEMS. PROCEDURES AND PROGRAMS)
1. ACT Sales Targeting and Client Control System - Network
2. GEOSTAR: Geographic Client Integration System
3. Database Management and Modeling System
4. Telephone Survey System
5. The RED PHONE: Phone-Mail Customize Print Survey System
6. Database Inventory and Reporting System
7. Information Warehousing and Customer Service Systems
8. Sales Tracking and Accounting System
9. Novell Netware V3
10. Lotus 123 V2.2
11. Lotus 123 V5
12. Impress
13. Allways
14. Visio V3.O
15. WordPerfect 6.0 for Windows
16. WordPerfect 5.0
17. Reachout V5.0
18. ProComm Plus V2
19. WinFax Pro V4
20. Monarch V1
21. FoxPro for Windows v2.6
22. Lotus Approach V3
23. MAR Report
24. DOS V6.0
25. Windows 3.1
26. Windows 95
27. Microsoft Presentation
28. Windows File Management
29. Xtree for Windows VI File Management
30. Norton Utilities V1 (utility software)
31. Norton Utilities V6 (utility software)
32. CA Clipper V5 (programming)
33. Microsoft Office (including Word, Excel, PowerPoint, Schedule+)
34. Equipment - see attached listing
exhibitA-assets.wpd
12/09/09
<PAGE>
<TABLE>
DATABASE ASSETS
---------------
ALL UPDATED AS OF 11/98
UPDATE CYCLE IS QUARTERLY
<S> <C>
1. Database Name: American Purchase Diary (APD) Master Database
Description: Household names with state, address, etc.
Inventory Qty as of 12/98: 70,376,680 households
105,350,969 individuals
2. Database Name: APD Household Names with Telephone Numbers
Description: " " " " " "
Inventory Qty as of 12/98: 57,000,000 households
3. Database Name: APD Families with Teenage Children
Description: Families with teenager living at home
Inventory Qty as of 12/98: 4,681,384 households
4. Database Name: APD Mail Order Buyer Transactions
Description: Mail order purchases by category
Inventory Qty as of 12/98: 223,000,000 individual mail order purchases
Total processed 2+ billion MOB records
5. Database Name: PSM Completed (Enhanced) Telephone Surveys
Description: " " " " " "
Inventory Qty as of 12/98: 880,000
6. Database Name: Smokers Master Database by Brand
Description: " " " " "
Inventory Qty as of 12/98: 6,375,149
7. Database Name: Adult Exact Date of Birth Database
Description: " " " "
Inventory Qty as of 12/98: 98,000,000
exhibitA-assets.wpd
12/09/09
<PAGE>
8. Database Name: Household Names with Credit Cards
Description: " " " " "
Inventory Qty as of 12/98: 68,000,000 bank
36,000,000 retail
2,856,000 premium
13,089,000 finance loans
9. Database Name: Financial Marketing Database
Description: Combination of all financial information on APD
Inventory Qty as of 12/98: 105,000,000
10. Database Name: Print Survey Database
Description: Responses to (completed) print questionnaires
Inventory Qty as of 12/98: 8,902,000
11. Database Name: Kids and Pets Database
Description: Families with at least one child between age 0-18
Inventory Qty as of 12/98: 6,138,014
2,304,949 have both kids and pets
12. Database Name: Sufferers and Ailment Database
Description: Individuals who suffer from specific diseases and
ailments
Inventory Qty as of 12/98: 7,500,000
</TABLE>
exhibitA-assets.wpd
12/09/09
<PAGE>
ATTACHMENT TO EXHIBIT A
EQUIPMENT
- ---------
1 x Pitney Bowes Fax Machine, Model: 9300 (Discontinued/Refurbished)
1 x Brother Fax Machine, Model: Intellifax 635
1 x Pitney Bowes Digital Postal Scales, Model: 5820
PC Hardware:
- ------------
1 x Intel Pentium II CPU, 300mhz/128mb/6.4gb
1 x Pentium 166, 1.44mb/1.6gb
1 x 486DX, S0mhz/340mb
2 x 486DX, 33mhz/340mb
Printers
- --------
2 x Hewlett Packard Laserjet 6L Printer
1 x Hewlett Packard Laserjet III Printer
1 x Epson LQ-2070 Printer
1 x Hewlett Packard 620 Color Printer
exhibitA-assets.wpd
12/09/09
<PAGE>
15 Cairngorm Road
New City, NY 10956
February 24, 1999
Messrs. Joel Monsky and Stanley Monsky
The Pantnership For Shared Marketing, Inc.
Parker Plaza
400 Kelby Street, Suite 1500
Fort Lee, NJ 07024
RE: In Store Media Systems, Inc. Asset Purchase of
The Partnership For Shared Marketing, Inc. (PSM)
Dear Sirs,
As discussed, I am prepared to sign the Asset Purchase Agreement pertaining to
the above-referenced, as a one-third owner of PSM, with the following provision.
Paragraph 6 of the referenced Asset Purchase Agreement provides for employment
agreements to be executed by Marvin Monsky, Stanley Monsky and Joel Monsky. It
is my desire, for personal reasons, to be excluded from the requirement of
executing an employment agreement for the completion of this transaction. I
thereby authorize you to have my name removed from this paragraph, at which time
I will provide the requested signature.
All other terms and conditions of the Asset Purchase Agreement will, by
definition, remain in place.
Sincerely,
/s/ Marvin Monsky
Marvin Monsky
ACCEPTED AND AGREED TO:
/s/ Joel Monsky 2/24/99
---------------------- ------------
Joel Monsky Date
/s/ Stanley Monsky 2/25/99
---------------------- ------------
Stanley Monsky Date
<PAGE>
CONFIDENTIAL
THE PARTNERSHIP
FOR SHARED MARKETING, INC.
Parker Plaza
400 Kelby Street, Suite 1500 Fort Lee, NJ 07024
Tel. (201) 461-2341 - FAX (201) 461-9665
FACSIMILE TRANSMISSION
FROM: TO:
Name: Joel Monsky Name: Everett Schulze
Compnay: ISMSI
Fax Number: 201-461-9665 Fax Number: 303-364-6550
Voice Phone: 201-461-2341 Voice Phone:
FAX NOTES
- --------------------------------------------------------------------------------
Please find attached the Database Assets listing with values which was
erroneously omitted from the signed A.P.A. package sent to you last week.
- --------------------------------------------------------------------------------
Date of transmission: 4/14/99
Number of pages including this cover sheet: 3
<PAGE>
<TABLE>
DATABASE ASSETS with value
--------------------------
ALL UPDATED AS OF 11/98
UPDATE CYCLE IS QUARTERLY
<S> <C>
1. Database Name: American Purchase Diary (APD) Master Database
Description: Household names with state, address, etc.
Inventory Qty as of 12/98: 70,376,680 households
105,350,969 individuals
Seller's Estimated Value: $2,500,000
2. Database Name: APD Household Names with Telephone Numbers
Description: " " " " " "
Inventory Qty as of 12/98: 57,000,000 households
Seller's Estimated Value: $1,710,000
3. Database Name: APD Families with Teenage Children
Description: Families with teenager living at home
Inventory Qty as of 12/98: 4,681,384 households
Seller's Estimated Value: $200,000
4. Database Name: APD Mail Order Buyer Transactions
Description: Mail order purchases by category
Inventory Qty as of 12/98: 223,000,000 individual mail order purchases
Total processed 2+ billion MOB records
Seller's Estimated Value: $5,520,000
5. Database Name: PSM Completed (Enhanced) Telephone Surveys
Description: " " " " " "
Inventory Qty as of 12/98: 880,000
Seller's Estimated Value: $352,000
6. Database Name: Smokers Master Database by Brand
Description: " " " " "
Inventory Qty as of 12/98: 6,375,149
Seller's Estimated Value: $3,100,000
7. Database Name: Adult Exact Date of Birth Database
Description: " " " "
Inventory Qty as of 12/98: 98,000,000
Seller's Estimated Value: $2,550,000
exhibitA-assets.wpd
12/09/09
<PAGE>
8. Database Name: Household Names with Credit Cards
Description: " " " " "
Inventory Qty as of 12/98: 68,000,000 bank
36,000,000 retail
2,856,000 premium
13,089,000 finance loans
Seller's Estimated Value: $1,785,000
9. Database Name: Financial Marketing Database
Description: Combination of all financial information on APD
Inventory Qty as of 12/98: 105,000,000
Seller's Estimated Value: $1,380,000
10. Database Name: Print Survey Database
Description: Responses to (completed) print questionnaires
Inventory Qty as of 12/98: 8,902,000
Seller's Estimated Value: $1,450,000
11. Database Name: Kids and Pets Database
Description: Families with at least one child between age 0-18
Inventory Qty as of 12/98: 6,138,014
2,304,949 have both kids and pets
Seller's Estimated Value: $2,500,000
12. Database Name: Sufferers and Ailment Database
Description: Individuals who suffer from specific diseases and
ailments
Inventory Qty as of 12/98: 7,500,000
Seller's Estimated Value: $2,500,000
</TABLE>
exhibitA-assets.wpd
12/09/09
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10 FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FORM 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 316,444
<SECURITIES> 0
<RECEIVABLES> 158,588
<ALLOWANCES> 0
<INVENTORY> 121,075
<CURRENT-ASSETS> 597,566
<PP&E> 477,856
<DEPRECIATION> (144,230)
<TOTAL-ASSETS> 1,299,568
<CURRENT-LIABILITIES> 4,277,719
<BONDS> 0
0
0
<COMMON> 590,947
<OTHER-SE> (3,818,868)
<TOTAL-LIABILITY-AND-EQUITY> 1,299,568
<SALES> 0
<TOTAL-REVENUES> 28,147
<CGS> 0
<TOTAL-COSTS> 1,123,532
<OTHER-EXPENSES> 20,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 775,591
<INCOME-PRETAX> (1,890,976)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,890,976)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,890,976)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10 FOR THE PERIOD ENDED SEPTEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FORM 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 723,255
<SECURITIES> 0
<RECEIVABLES> 62,542
<ALLOWANCES> 0
<INVENTORY> 98,516
<CURRENT-ASSETS> 885,772
<PP&E> 531,749
<DEPRECIATION> (195,522)
<TOTAL-ASSETS> 1,350,572
<CURRENT-LIABILITIES> 3,145,739
<BONDS> 0
0
0
<COMMON> 637,797
<OTHER-SE> (2,680,844)
<TOTAL-LIABILITY-AND-EQUITY> 1,350,572
<SALES> 0
<TOTAL-REVENUES> 23,454
<CGS> 0
<TOTAL-COSTS> 1,171,387
<OTHER-EXPENSES> 107,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,624
<INCOME-PRETAX> (1,450,807)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,450,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,450,807)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
