<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
----
OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
----
OF 1934
For the transition period from to
Commission file number: __________
IN STORE MEDIA SYSTEMS, INC.
-------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 84-1249735
-------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
15423 East Batavia Drive, Aurora, Colorado 80011
-------------------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
(303) 364-6550
-------------------------------------------------------------------------------
(Registrant's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's classes of common stock, as of
October 30, 2000 is 57,019,138 shares, $.01 par value.
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - December 31, 1999 and September 30, 2000
(unaudited) 3
Statement of Operations - For the Three Months Ended September
30, 1999 and 2000 (unaudited). 5
Statement of Operations - For the Nine Months Ended September
30, 1999 and 2000 and for the period from December 30, 1992
(inception) through September 30, 2000 (unaudited) 6
Statement of Stockholders' Deficit - For the Nine Months Ended
September 30, 2000 (unaudited) 7
Statement of Cash Flows - For the Nine Months Ended September
30, 1999 and 2000 and for the period from December 30, 1992
(inception) through September 30, 2000 (unaudited) 8
Notes to Unaudited Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information Item 6 Exhibits and Reports of Form 8-K 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
1
<PAGE>
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
This Quarterly Report contains certain forward-looking statements that involve
risks and uncertainties. These forward-looking statements are not historical
facts but rather are based on current expectations, estimates and projections
about our industry, our beliefs and assumptions. We use words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and variations of these words and similar expressions to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements. You should not place undue reliance on these
forward-looking statements included or otherwise incorporated in the Quarterly
Report, which reflect our management's view only on the date of filing of this
report. We undertake no obligation to update these statements to reflect events
or circumstances that occur after the filing date of this Quarterly Report or to
reflect the occurrence of unanticipated events.
2
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IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and September 30, 2000
(Unaudited)
ASSETS
1999 2000
---- ----
Current assets:
Cash and cash equivalents $248,325 $ 81,055
Note receivable - related party 63,860 68,171
Inventory 117,295 117,295
Other current assets 1,559 8,689
-------- --------
Total current assets 431,039 275,210
Property and equipment, at cost:
Manufacturing equipment 341,277 341,562
Office furniture and equipment 123,016 127,323
Leasehold improvements 55,228 55,228
-------- --------
519,521 524,113
Less accumulated depreciation and amortization (206,304) (253,404)
-------- --------
Net property and equipment 313,217 270,709
Other assets:
Advances and note receivable - related parties 45,085 46,658
Loan issuance costs - 10,000
Deposits 29,159 29,159
Patent costs, net of accumulated amortization of
$18,089 (1999) and $21,206 (2000) 58,035 85,061
-------- --------
Net other assets 132,279 170,878
-------- --------
$876,535 $716,797
======== ========
See accompanying notes.
3
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and September 30, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
1999 2000
---- ----
Accounts payable $ 587,674 $ 581,012
Interest payable 599,284 789,723
Accrued wages - 56,827
Notes payable (Note 2) 2,140,087 2,065,087
Notes payable-shareholder and officer 90,000 121,000
Obligations under capital leases 3,238 -
---------- ----------
Total current liabilities 3,420,283 3,613,649
Long-term liability:
Debenture payable - related party 247,880 247,880
Stockholders' deficit (Notes 2, 4 and 5):
Preferred stock, no par value; 50,000,000 shares
authorized, 3 (2000) shares issued and outstanding - 750,000
Common stock, $.01 par value; 150,000,000 shares
authorized, 63,828,527 (1999) and 66,393,880
(2000) shares issued 638,285 663,938
Additional paid-in capital 10,242,453 11,000,659
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development
stage (13,108,616)(14,995,579)
Total stockholders' deficit (2,791,628) (3,144,732)
---------- ----------
$ 876,535 $ 716,797
========== ==========
See accompanying notes.
4
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1999 and 2000
(Unaudited)
1999 2000
---- ----
Costs and expenses:
Research and development $ 267,324 $ 13,500
General and administrative 441,967 416,930
Depreciation and amortization 24,717 16,739
--------- ---------
Operating loss (734,008) (447,169)
Other income (expense):
Interest income 22,427 1,118
Debt conversion costs (107,250) (17,956)
Interest expense (Note 2) 66,755 251,703
--------- ---------
Total other income (expense) (18,068) 234,865
--------- ---------
Net loss (Note 3) (752,076) (212,304)
Accrued dividends applicable to preferred stock - (15,658)
--------- ---------
Net loss applicable to common stock $(752,076) $(227,962)
========= =========
Basic and diluted net loss per common
share $ (.01) $ (*)
========= =========
Weighted average common shares
outstanding 53,253,000 56,919,000
========== ==========
* less than $.01 per share
See accompanying notes.
5
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999 and 2000
and for the Period from December 30 1999 (inception) through September 30, 2000
(Unaudited)
Cumulative
amounts from
1999 2000 inception
---- ---- ------------
Costs and expenses:
Research and development $ 267,324 $ 19,671 $ 3,244,673
General and administrative 849,640 1,166,042 5,951,705
Depreciation and amortization 54,423 50,216 274,608
---------- ---------- ------------
Operating loss (1,171,387) (1,235,929) (9,470,986)
Other income (expense):
Interest income 23,454 5,549 87,948
Litigation settlement - - (156,250)
Debt conversion costs (107,250) (17,956) (403,100)
Interest expense (Note 2) (195,624) 115,976 (4,298,588)
---------- ---------- ----------
Total other income (expense) (279,420) 103,569 (4,769,990)
---------- ---------- ----------
Net loss (Note 3) (1,450,807) (1,132,360) (14,240,976)
Accrued dividends applicable to
preferred stock - (15,658) (15,658)
---------- ---------- -----------
Net loss applicable to common stock $(1,450,807) $(1,148,018) $(14,256,634)
=========== =========== ============
Basic and diluted net loss per common
share $ (.03) $ (.02) $ (.30)
=========== =========== ============
Weighted average common shares
outstanding 51,000,000 56,255,000 48,247,000
=========== =========== ============
See accompanying notes.
6
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 30, 2000
(Unaudited)
<CAPTION>
Deficit
accumulated
Additional during the
Preferred stock Common stock paid-in Treasury development
Shares Amount Shares Amount capital stock stage
------ ------ ------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 - $ - 63,828,527 $638,285 $10,242,453 $(563,750) $(13,108,616)
Sale of common stock for cash and in
exchange for stock offering services
($1.00 per share) (Note 4) - - 50,000 500 49,500 - -
Exercise of warrants - - 249,642 2,496 14,147 - -
Issuance of common stock for employee
compensation ($.90 per share) - - 55,000 550 48,950 - -
Warrants exercised on a cashless basis
in consideration for loan and offering
expenses - - 2,009,202 20,092 (20,092) - -
Extension of exercise period of warrants
issued in connection with debt offerings
(Note 2) - - - - (347,369) - -
Sale of preferred stock for cash (Note 4) 3 750,000 - - 750,000 - (750,000)
Preferred stock dividends - - - - (4,603) - -
Intrinsic value of stock options granted - - - - 144,688 - -
Conversion of notes payable into common
stock (Note 2) - - 201,509 2,015 118,382 - -
Net loss for the nine months ended
September 30, 2000 - - - - - - (1,132,360)
--- -------- --------- -------- ----------- --------- ------------
Balance, September 30, 2000 3 $750,000 66,393,880 $663,938 $11,000,659 $(563,750 $(14,995,579)
=== ======== ========== ======== =========== ========= ============
</TABLE>
See accompanying notes.
7
<PAGE>
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 2000 and
for the Period from December 30 1999 (inception) through September 30, 2000
(Unaudited)
Cumulative
amounts
from
1999 2000 inception
Cash flows from operating activities:
Net loss $(1,450,807) $(1,132,36) $(14,240,976)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 54,423 50,216 274,608
Common stock and options issued for
services patents and payables 519,120 194,188 1,527,388
Amortization of debt issuance costs 14,171 (347,369) 1,371,139
Reduction in note receivable - related
party charged to research and
development 235,667 - 244,311
Changes in assets and liabilities:
Accounts receivable and notes
receivable 96,046 (4,311) (68,171)
Inventory 22,559 - (117,295)
Accounts payable (422,652) (6,662) 581,012
Interest payable 23,196 190,439 899,613
Accrued wages - 56,827 56,827
Other - (7,130) (8,689)
----------- ---------- -----------
Total adjustments 542,530 126,198 4,760,743
----------- ---------- -----------
Net cash used in operations (908,277) (1,006,162) (9,480,233)
Cash flows from investing activities:
Purchase of property and equipment (53,893) (4,592) (262,146)
Advances - related party - (1,573) (290,969)
Patent costs (14,979) (30,142) (106,265)
Lease deposits 1,811 - (29,159)
----------- ---------- -----------
Net cash used in investing activities (67,061) (36,307) (688,539)
Cash flows from financing activities:
Proceeds from sale of common stock 2,042,813 187,040 5,497,687
Proceeds from the sale of preferred stock - 750,000 750,000
Purchase of treasury stock (520,000) - (520,000)
Proceeds from common stock subscriptions (75,000) - -
Payment of preferred stock dividends - (4,603) (4,603)
Loan issuance costs - (10,000) (10,000)
Proceeds from (repayments of) stockholder
loans (23,500) 31,000 121,000
Proceeds from (repayments of) capital
leases (10,164) (3,238) (14,087)
Proceeds from notes payable - 50,000 4,740,000
Repayments of notes payable (32,000) (125,000) (310,170)
----------- ---------- -----------
Net cash provided by financing
activities 1,382,149 875,199 10,249,827
Net increase (decrease) in cash 406,811 (167,270) 81,055
Cash and cash equivalents at beginning
of period 316,444 248,325 -
----------- ---------- -----------
Cash and cash equivalents at end
of period $ 723,255 $ 81,055 $ 81,055
=========== ========== ===========
See accompanying notes.
8
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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 normal
recurring accruals) necessary for a fair presentation of the financial
position as of September 30, 2000, and the results of operations and cash
flows for the periods ended September 30, 1999 and 2000.
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 ($14,240,976 since
inception) and a stockholders' deficit at September 30, 2000 of $3,144,732.
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. 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.
During the nine months ended September 30, 2000, three shares of Series A
preferred stock were sold resulting in gross proceeds of $750,000 which
provided additional liquidity for the Company for current operations. Through
a private placement, as a means to secure additional working capital, the
Company is seeking to generate additional proceeds totaling $2,750,000
through the sale of eleven additional shares of Series A preferred stock.
In October 2000, the Company issued a letter to all note holder's providing
them the option of extending their notes and accrued interest for one
additional year or converting their notes and accrued interest for shares of
the Company's common stock.
2. Notes payable
On September 5, 2000, the Company borrowed $30,000 from an officer of the
Company. Interest on the note accrues monthly at 9.5% per annum. The note and
accrued interest is due on October 31, 2000, or upon receipt of new equity
funds in excess of $100,000. The term of the note has been extended by the
holder through January 2, 2001.
On March 1, 2000, the Company borrowed $50,000 from two individuals evidenced
by notes payable bearing interest at 10% per annum. Interest on the notes is
payable quarterly and the notes are due on demand anytime after April 1,
2000. During July 2000, the notes plus all accrued interest were paid in
full.
9
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
2. Notes payable (continued)
In connection with the notes payable issued in 1996, 1997 and 1998, the
Company issued warrants to purchase the Company stock exercisable for a
three-year period. As these warrants have neared their initial expiration
dates, the Company has extended these warrants first for 120 days and then
for successive 90 day periods.
For accounting purposes, the Company is treating these extensions as stock
appreciation rights and has recorded interest expense of $959,895 in the
fourth quarter of 1999 related to the warrants which have been extended. For
the nine months ended September 30, 1999, no expense was recorded related to
the warrant extensions. During the quarter ended September 2000, the price of
the Company's stock declined. As a result, the value assigned to the warrant
extensions was reduced by $323,565 and $347,369 for the three months and nine
months ended September 30, 2000, respectively.
During the quarter ended September 30, 2000, holders of $75,000 of notes
payable elected to convert their notes and accrued interest into common stock
or use the notes payable balance and interest to exercise their warrants. The
Company has recorded an expense of $17,956 as debt conversion costs in
recognition of the beneficial conversion terms offered.
3. Income taxes
No provision for income taxes is required at September 30, 2000 because, in
management's estimation the Company will not recognize any taxable income
through December 31, 2000.
4. Private placements
During November 1998, the Company commenced a private placement of $100,000
units, each consisting 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.
During the six months ended June 30, 2000, .5 units were sold resulting in
gross proceeds of $50,000. As of June 30, 2000, the Company concluded this
offering.
10
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
4. Private placements (continued)
During the nine months ended September 30, 2000, three shares of Series A
preferred stock were sold in a private placement resulting in gross proceeds
of $750,000 which provided additional liquidity to the Company for current
operations. The three shares of preferred stock are convertible into
1,950,000 shares of the Company's common stock and carry an annual dividend
rate of 8%. If the Company completes the sale of all of the remaining shares
of Series A preferred stock available through the private placement, the
Company would generate additional gross proceeds of $2,750,000. The Company,
however, can provide no assurance that the Company will be able to complete
the sale of any additional shares of Series A preferred stock.
The preferred stock when issued contained a favorable exchange ratio into
common stock. This favorable exchange ratio has been valued at the difference
between the market price of the stock and the conversion price and has been
reflected as an increase of $1,038,312 in additional paid-in capital and a
corresponding increase in the accumulated deficit.
5. Stock options
During the quarter ended September 30, 2000, the Company entered into
employment and consulting agreements with three individuals. In connection
with these agreements, the Company issued options to purchase 1,064,375
shares of the Company's common stock at prices ranging from $0.25 per share
to $1.00 per share, exercisable for a two-year period. Of these newly issued
options, 314,375 were fully vested at September 30, 2000, 125,000 of the
options vest over the next 10 months and the remainder vest upon the
achievement of certain milestones. In connection with the issuance of these
options, the Company has recorded compensation expense of $144,688.
6. Subsequent event
In October 2000, the Company issued a letter to all note holder's providing
them the option of extending their notes and accrued interest for one
additional year or converting their notes and accrued interest for shares of
the Company's common stock.
11
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Item 2.
Management's Discussion and Analysis of financial condition and results of
operation
Overview
The Company is a development stage company engaged in the development of its
system for distributing and electronically clearing coupons, certain components
of which are patented. The Company has generated no revenue from operations and
has incurred losses of $14,240,976 since inception through September 30, 2000.
The Company expects to incur additional losses through the end of the 2000
fiscal year.
At September 30, 2000, the Company had a stockholders' deficit of $3,144,732,
which reflects $11,288,971 of paid in capital (net of amount attributable to
treasury stock) less accumulated deficit of $15,283,891. The excess of the
accumulated deficit amount over paid in capital primarily is the result of the
amount of interest expense incurred in connection with short-term convertible
notes and debentures by the Company and its predecessor in private transactions
in 1996, 1997, 1998 and 1999. At September 30, 2000, the Company had a working
capital deficit of $3,338,439.
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 actively
pursuing several equity financing opportunities. Some of the financing
alternatives involve an investment directly into the Company, and others involve
an investment into a subsidiary that is created to develop and operate one of
the Company's products as a business unit. The Company is unable to provide any
assurance that such fund raising efforts will be achievable. 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.
Management believes that a major capital restructuring will be required in order
to attract investment capital.
The Company continues to pursue alternative sources of financing. However, the
Company has no commitments for additional financing at this time, and the
Company can provide no assurance that it will be able to secure sufficient funds
to continue operations as planned. Through September 30, 2000, the Company
remained burdened with debt obligations and a continuing lack of working
capital. If the Company is unable to secure additional working capital, it may
be forced to curtail or discontinue its operations.
Financial Condition
The Company had $716,797 in total assets and $3,861,529 in total liabilities at
September 30, 2000, as compared to $876,535 and $3,668,163 at the end of fiscal
1999, respectively. Accounts payable and accrued expenses at the end of fiscal
year 1999 were $1,186,958 as compared to $1,427,562 at September 30, 2000. The
Company had a working capital deficit of $3,338,439 at September 30, 2000, as
compared to a working capital deficit of $2,989,244 at December 31, 1999. The
difference primarily is attributed to reductions of $167,270 in available cash
and cash equivalents, and an increase in accrued interest of $190,439.
Results of Operations
The Company's operational costs historically have 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
$9,470,986 from inception through September 30, 2000. These expenses include
$3,244,673 in research and development expenses and $5,951,705 in general and
12
<PAGE>
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
plans 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.
Quarter Ended September 30, 2000, Compared To Quarter Ended September 30, 1999
For the quarter ended September 30, 2000, the Company sustained net operating
losses of $212,304, as compared to net losses of $752,076 for the quarter ended
September 30, 1999. The decrease in operating losses primarily was due to a
decrease in general and administrative expenses, a decrease in research and
development, a decrease in depreciation and amortization expenses and a decrease
in interest expense.
The Company's operating expenses for the quarter ended September 30, 2000,
decreased by approximately 39% to $477,169, as compared to operating expenses of
$734,008 for the same period last year. The decrease in operating expenses in
2000 was due to decreases in research and development expenses, general and
administrative expenses, depreciation and amortization expenses. Research and
development costs decreased by 95% to $13,500 for the quarter ended September
30, 2000, as compared to research and development costs of $267,324 for the same
quarter last year. This decrease was due to the absence of certain expenses
relating to patent development. During 1999, the Company expensed as patent
development expenses a note receivable of $244,311 from the Company's former
president, which was exchanged for certain patents. General and administrative
expenses decreased by approximately $25,037 or 6% to $416,930 for the 2000
fiscal quarter, as compared to general and administrative expenses of $441,967
for the same quarter last year. The decrease in general and administrative
expenses primarily was due to reductions in corporate salaries and wages.
Depreciation and amortization costs decreased by 32% to $16,739, as compared to
depreciation and amortization costs of $24,717 for the quarter ended September
30, 1999. The decrease in depreciation and amortization costs primarily was due
to an increase in fully-depreciated assets.
The Company's net non-operating income (including non-operating interest income
and interest expense) increased to income of $234,865 for the quarter ended
September 30, 2000, as compared to non-operating expenses of $18,068 for the
quarter ended September 30, 1999. The increase was primarily due to a 277%
decrease in interest expense, which represented 107% of the non-operating
expenses for the quarter ended September 30, 2000. The decrease in interest
expense was primarily due to the decrease in value assigned to the extension of
the warrant exercise period related to the Company's debt offerings. Debt
conversion costs for the quarter ended September 30, 2000, decreased by 83% to
$17,956 due to the decrease in the number of notes converted to common stock
during 2000 as compared to 1999.
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,
13
<PAGE>
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.
At September 30, 2000, the Company had $3,613,649 in current liabilities, of
which $2,705,778 (including $640,691 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.
At September 30, 2000, the Company was in default of its obligations under the
notes issued to investors by the Company and its predecessor. A portion of the
notes was converted into shares of the Company's common stock during the 1998,
1999, and 2000 fiscal years. In October 2000, the Company issued a letter to all
note holder's providing them the option of extending their notes and accrued
interest for one additional year or converting their notes and accrued interest
for shares of the Company's common stock. The Company anticipates completing
this process by the end of its fiscal year. At September 30, 2000, notes in the
aggregate principal amount of $2,065,087 remained outstanding, as compared to
notes in the aggregate principal amount of $2,140,087 that were outstanding on
December 31, 1999. The remaining portion of the Company's current liabilities is
primarily comprised of continuing payment obligations of approximately $490,000
(at September 30, 2000 and December 31, 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. 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.
Since the end of fiscal year 1999 through September 30, 2000, the Company's cash
position has declined. At September 30, 2000, the Company had available cash of
$81,055, as compared to available cash of $248,325 at December 31, 1999. At the
current spending rate of approximately $60,000 per month, the Company expects
that such funds will be insufficient to continue operations beyond November
2000, unless additional funds are raised.
The Company is a party to an agreement to acquire the assets of the Partnership
for Shared Marketing, Inc. for $500,000 in cash and 1,500,000 shares of common
stock, contingent upon the availability of funding. 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.
During the quarter ended September 30, 2000, the Company issued 167,250 shares
of its common stock and reduced accrued interest by $11,150 in connection with
the exercise of warrants. The Company also issued 201,509 shares of its common
stock to note holders who converted their notes into common stock.
The Company lacks sufficient capital or revenue to continue supporting the
losses generated by its development. The Company, as it is currently structured
has made progress in becoming an attractive investment for new equity investors,
but the Company has a long way to go to qualify for conventional bank or venture
capital financing. Additional equity capital is necessary to finance working
capital for development. Management is resolved to continue the search for the
right financing formula as long as it can quickly put the Company, or its
subsidiaries, on the path to generate positive cash flow. Due to the current
financial condition of the Company and the relative lack of liquidity in the
market for the Company's common stock, no assurance can be made that the Company
will be successful in raising any substantial amount of capital through the sale
of equity securities, or with additional bank debt on favorable terms in the
near future. Nevertheless, due to such conditions, the Company may be required
14
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to issue common stock to pay executives, consultants and other employees, which
may have a dilutive effect on other shareholders of the Company. Failure of the
Company to acquire additional capital in the form of either debt or equity
capital will most likely impair the ability of the Company to meet its
obligations in the near or medium term. (See - Note 1 to Financial Statements).
Item 3.
Quantitative and Qualitative Disclosure About Market Risk.
The Company does not own financial instruments that are subject to market risk.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and use of proceeds
During the three month period ended September 30, 2000, the Company issued one
share of its Series A preferred stock at a purchase price of $250,000. The share
was issued to an unrelated third-party investor. The Company did not employ the
services of any underwriter in connection with the sale of this share. This
share of Series A preferred stock is convertible into approximately 650,000
shares of the Company's common stock and entitled to annual dividends equal to
8% of the purchase price.
The share was sold in a private transaction pursuant to exemption from
registration available under Section 4(2) of the Securities Act of 1933 (the
"Securities Act") and Rule 506 of Regulation D under the Securities Act.
Item 3. Defaults Upon Senior Securities
As of September 30, 2000, the Company was in default on its notes payable to
investors in the form of convertible short-term debentures totaling $2,705,778
including accured interest of $640,691.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on September 29, 2000.
(b) Not applicable
(c) At the time of the Annual Meeting of Stockholders held on September 29,
2000, the following matters were proposed and acted upon:
(i) The uncontested election of the following nine directors to serve
until the next Annual Meeting of Stockholders and thereafter until
their successors are elected and qualified:
Donald P. Uhl
Everett E. Schulze, Jr.
Frank J. Pirri
Joel Monsky
Charles A. Schulze
Michael T. Mozer
Ronald F. Anderegg
Raymond Solomon
George E. Sattler
For all nominees the results of the vote were as follows:
For 40,852,187
Against 48,500
Abstained 8,000
Withheld or not present in person or by proxy 15,741,692
(ii) To amend and restate the Company's Articles of Incorporation to (a)
increase the number of shares of common stock authorized for issuance
from 100,000,000 shares to 150,000,000; and (b) increase the number
of shares of preferred stock authorized for issuance from 5,000,000
shares to 50,000,000 shares.
The results of the vote were as follows:
For 34,653,674
Against 350,349
Abstained 12,000
Withheld or not present in person or by proxy 21,634,356
(iii) To amend and restate the Company's Articles of Incorporation to have
the number of directors of the Company to be provided for in the
Company's bylaws.
The results of the vote were as follows:
For 34,938,023
Against 95,000
Abstained 2,000
Withheld or not present in person or by proxy 21,615,356
(iv) To ratify the appointment of Causey Demgen & Moore Inc., as the
Company's independent auditors.
The results of the vote were as follows:
For 40,873,727
Against 9,800
Abstained 2,160
Withheld or not present in person or by proxy 15,764,692
(d) Not applicable:
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (1)
(b) During the quarter ended September 30, 2000, the Registrant filed
no reports on Form 8-K.
(1) Filed herewith
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000 IN STORE MEDIA SYSTEMS, INC.
(Registrant)
By: /s/ Donald P. Uhl
Donald P. Uhl, President
and Chief Executive Officer
