<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
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)
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<PAGE>
ITEM 1. BUSINESS
Our business is subject to certain risks and uncertainties that are discussed in
the section entitled "Business Risks" beginning on page 6 of this Registration
Statement.
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 in-store, closed-loop
couponing system, which incorporates the Company's patented process for
dispensing coupons to supermarket consumers through the Coupon Exchange Center.
When used by consumers at the supermarket checkout lane, each coupon is
registered electronically using the Company's electronic coupon clearing system.
Manufacturers that receive the coupons use this information, including the
customer's identity and time of use, to "close the loop" by adjusting their next
coupon promotion incentive offered through the Coupon Exchange Center. To date,
the Company primarily has been engaged in developing its technology, securing
patent protection, formulating its business strategy, raising initial capital
and developing necessary relationships with third parties, such as supermarkets,
product goods manufacturers and others, such as Unysis Corporation in connection
with the manufacture of the hardware and systems incorporated into the Company's
product line. We regard these relationships as necessary, since further
development of our systems and products, their introduction to the market and
their acceptance by consumers will require the assistance and participation of
these and other participants in the coupon industry.
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,
which incorporates certain components that are proprietary to the Company.
Point-of-sale ("POS") system is a commonly used term used to describe the system
through which stores record product sales and accept payment through terminals
located in each checkout lane of a supermarket. The heart of the POS system is
the store's central computer, which can be used to record the details of every
transaction.
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 also has developed an
electronic coupon clearing system for installation and use at supermarket check
out lanes. The Company has conducted market research and completed over 30 field
interviews with key industry participants, including representatives from
Proctor & Gamble, Coca-Cola, Ralston Purina, Brown & Williamson, RJ Reynolds,
Nestle, SmithKline Beecham, Nabisco, Tropicana and Gillette. We rely on
published industry information set forth in the "Electronic Coupon Clearing
Guidelines A Best Practices Approach", which was prepared by Robert D. Hemphill
& Associates for the Joint Industry Coupon Committee. Based on the Company's
market research and published industry information, the Company believes an
immediate need exists for electronic coupon clearing at virtually every checkout
lane in every supermarket in the United States. Based on our research, similar
systems do not exist in the market today, and we are not 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.
The Company has not generated any revenue from operations to date.
Since inception through September 30, 1999, the Company incurred accumulated
losses in excess of $11,373,721 since inception through September 30, 1999. We
may be unable to continue as a going concern if we are unable to secure
additional funds to finance our operating costs and expenses as contemplated in
this Registration Statement.
COUPON INDUSTRY INFORMATION
The $6.2 billion 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 cleared electronically. 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
-------------------
The following industry statistics were compiled from information
presented in the 1998 Consumer Behavior Study prepared by NCH NuWorld Marketing
Limited and a report entitled 1998 Coupon Usage Trends prepared by Coupon
Manufacturers Services ("CMS"). NCH NuWorld Marketing Limited is the oldest and
largest manufacturer agent clearinghouse in the coupon redemption industry. CMS
is the manufacturing clearing agent subsidiary of INMAR, Inc. NCH NuWorld and
INMAR, Inc. are two of the three leading competitors in the coupon redemption
industry, as discussed below under the section entitled "Competition--Coupon
Redemption Competitors".
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>
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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. Based on an article published in the October 1999 issue of Promo
Magazine, industry sources estimate that the annual revenues from this segment
is $700 to $800 million. Promo Magazine is a monthly trade publication focused
on the retail promotion industry.
Because the in-store coupon can be more easily targeted to a specific
consumer, it should continue to enjoy long-term growth as the manufacturers'
database marketing programs become more sophisticated and retailer loyalty
programs become more entrenched. Retailer loyalty programs are promotional
programs that supermarkets implement to motivate shoppers to shop repeatedly
either at a particular store or a particular chain. The most common retailer
loyalty program is the "frequent shopper card", which provides consumers special
savings at the checkout on repeat purchases. The ISMS Free Money Card is the
Company's version of the frequent shopper card, which can be used to complement
or substitute similar supermarket programs.
PRODUCTS AND SERVICES
The Company has not completed development of any of its products and
services. The Company intends to continue development of its products and
services, subject to the availability of additional funds. We can provide no
assurance or guarantee that we will be able to secure the funds necessary to
complete the development of our products and services and introduce them to
market successfully. The Company's products and services will incorporate
patented technology. The Company's Coupon Exchange Center(TM) system is
protected by a patent issued to and owned by the Company in January 1996, which
includes 37 allowed claims. The proprietary electronic coupon clearing system
(In$taClearing(TM)) and the consumer marketing data system ("In$taData(TM)) are
protected by the patent application process under the titles "Coupon Redemption
System" and "Merchandising Using Consumer Information from Surveys"
respectively.
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 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. At the present, brand managers may be required to wait
four to six months to receive marketing research results from a previously
completed promotional coupon program. By using the Company's system, the brand
manager will be able to enter an order for a promotional program in the morning
and receive a printout of the redemption results almost immediately. Each CEC
and in-lane clearing system is connected through the Internet to a centralized
data repository, which is constantly communicating information across the system
network. 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
types of coupons currently in circulation. 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 will provide
manufacturers, who are spending over $6 billion per year in the
distribution and redemption of coupons, the ability to account
for and verify accurately the effectiveness of the coupon
redemption processes.
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).
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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$h coupons redeemed, which is
issued by the Coupon Exchange Center's coupon scanner/checkwriter(TM) system, at
the checkstand.
From the consumer's perspective, the In$taCash coupon is very similar
to ordinary cents-off coupons distributed in newspaper publications. Instead of
a discount, however, the consumer receives cash at checkout (in the form of a
negotiable check) for the aggregate amount of the rebate value of all of the
In$taCash coupons redeemed. For example, a consumer who redeemed eight In$taCash
coupons at checkout might receive a check for about $5.60.
The In$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$h coupons provide brand managers immediate feedback on
the coupons distributed and redeemed.
Data Driven Marketing, Inc.
---------------------------
The Company has one wholly owned subsidiary, Data Driven Marketing,
Inc. ("DDMI"). DDMI's mission is to take the accumulating transaction data and
combine it with additional demographic household data, which is collected by the
Company. The Company collects data directly through its clearing system, as well
as telephone and written surveys conducted in connection with the issuance of
the Free Money Cards. The Company also collects data indirectly by acquiring
them from third-party sources. This data, which will be continually supplemented
with transaction data from the Coupon Exchange Centers, will provide DDMI a
unique product to the manufacturers - household specific data on consumers'
purchasing history and intentions. In addition, the Company is establishing an
Internet website, 1stnationalcouponbank.com, which will provide customized
access to redemption data for payment and verification, and customized data
withdrawal and analysis.
The Company believes that DDMI and its coupon information website will,
upon introduction, offer the following benefits to users. We are still in the
process of developing our products and systems, and we can provide no assurance
or guarantee that we will develop our products and introduce them to market
successfully.
o After completion of development and introduction of its two
in-store services (In$taCa$h coupons dispensed from Coupon
Exchange Centers and In$taClearing in-lane electronic coupon
clearing), the ability to collect information about consumers'
buying habits and future purchase intentions.
o The future expected ability to provide fast and detailed industry
information to packaged goods manufacturers with speed and
accuracy.
o The future expected ability to provide manufacturers with data
about consumer brand preferences that can be applied immediately
through the Company's in-store coupon program.
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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 manufacture and installation of 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 $200 million committed will be used as a revolving line of credit to
finance the accounts receivables with the manufacturers after the Company
reimburses the retailer. these latter funds essentially will be used to advance
to stores the cash amount of their coupon redemption. Under the engagement
letter, Dougherty Funding will have no obligation to provide such funding until
such time as the Company demonstrated an operational system in a store
environment and completes the production and installation of the subsidiary
components that comprise the system, and has satisfied certain other conditions.
The Company must raise additional capital to cover its operating expenses
through the completion of this development phase. Dougherty Funding agreed to
provide such funding on a best efforts basis. Under the terms of its engagement
letter with Dougherty Funding, the Company will be responsible for all expenses
and costs relating to the financing transactions, including (without limitation)
legal fees, closing costs, engineering reports, travel, origination fees and
other expenses paid either to the lender or to other third parties. Dougherty
Funding has no obligation to fund either of the proposed financing transactions
directly. See Item 2. Financial Information under "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
As compensation for its services, Dougherty Funding will receive a
placement agent fee equal to 2% of the funding amount payable at funding of each
advance. Dougherty Funding also will be entitled to a placement agent fee equal
to 1% of the aggregate outstanding financed amount, with respect to the
financing of the manufacture and installation of the equipment comprising the
In$taClearing System. As additional placement agent fees, Dougherty Funding also
will receive warrants to purchase 5% of the Company's outstanding shares at a
price equal to $0.50 per share. The warrants issued to Dougherty Funding will be
entitled to certain "piggy-back" registration rights.
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.
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MANUFACTURING SUPPORT FROM UNISYS CORPORATION
Since inception, the Company has been engaged primarily in 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 under the principal terms set forth in
the memoranda of understanding executed by the Company and Unisys.
Unysis and the Company are developing an arrangement under which Unysis
will provide manufacturing support to the Company, in connection with the
manufacture of the Company's systems and products. Beginning in January 1997,
the Company and Unysis entered into four memorandums of understanding (the
"MOUs") with the Payment Systems Division of the Unysis Corporation ("Unysis").
The MOUs outline the parties' mutual understanding regarding their arrangement
relating to the production of the Coupon Exchange Center kiosks, the coupon
scanner check-writer and the data center. The parties expect to enter into a
definitive master agreement covering the terms and subject matter of the MOUs
when the Company secures the necessary funds to proceed with this production
effort.
Under the terms outlined in the MOUs, Unysis agreed to provide most of
the hardware, software and depot level maintenance for the Company's Coupon
Exchange Center kiosk. Unysis agreed to manufacture the Coupon Exchange Centers
for a price to be determine by volume. Under the terms of the MOUs, Unysis has
provided certain services for which the Company has advanced funds to Unysis, as
described below. By mutual agreement, Unysis will complete the remaining work
when the Company has in place the necessary funds to continue production.
As part of the arrangement, the Company will pay Unysis a royalty on
each In$taCa$h coupon redeemed that was dispensed by the Coupon Exchange Center,
subject to an annual minimum. Unysis also will receive additional license fees
per kiosk and additional royalties for each redeemed free standing insert
coupon.
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.
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PLAN OF OPERATIONS
The Company is a development-stage enterprise, has not generated any
revenue from operations and has incurred losses continuously since the inception
of its Predecessor in 1992. To date, the Company has incurred losses in excess
of $11,373,721. The Company expects that its cash reserves will be sufficient to
fund its operations through the end of April of this year. We need additional
funds to implement our business strategy, as contemplated in this Registration
Statement. The Company may be unable to continue as an going concern if it fails
to generate sufficient revenue or obtain additional funds in a timely manner to
finance its capital requirements. 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
its systems and implement its plan of operation for the next 12-months. The
Company has no commitments or arrangements in place to obtain such additional
funds at this time. In the past, the Company has raised equity capital through
arrangements with registered broker-dealers and the sale of restricted
securities to selected investors in private transactions. The Company expects
to rely on similar financing alternatives to obtain additional funding in the
future. The Company may also seek bridge financing and other forms of financing
through venture capital firms in the future. Additionally, if operating costs
and expenses are more than currently expected, the need for additional working
capital may arise earlier than expected. There can be no assurance that any such
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. At September 30, 1999, the Company had
approximately $720,000 in cash. Such amount is insufficient to implement the
plan intended by the Company. In addition, the Company has been in default of
its repayment obligations on notes issued between 1996 and 1999. At December 31,
1998, the Company's was in default of repayment obligations in excess of
$2,840,836. At September 30, 1999, the Company was in default of repayment
obligations in excess of $2,081,690. The Company is therefore dependent upon
additional financing to continue operations.
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Dependence on 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 on 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 on 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. "Allowed claims" is a term used by the
United States Patent Office to define the unique features of a patent. Each
allowed claim (or "issued claim") of the patent is protected under the patent
number awarded and is allowed over other prior art, publications or devices. 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 $3,241,453 spent from inception to date by the Company on
research and development, $1,923,363, or 59%, 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, in 1998, it spent $194,897, and in 1999, it spent
$267,324. Such research and development expenses related predominantly to
developing the technology included in the Coupon Exchange System and the coupon
clearing system. The Company anticipates that research and development expenses
will continue to be its most significant expenditures until product
introduction.
COST OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company is unaware of any pending or proposed environmental laws,
rules or regulations, the effect of which would be adverse to its contemplated
operations.
EMPLOYEES
The Company currently has 14 full-time employees. The Company considers
its relations with its employees to be excellent. None of the employees are
represented by a labor union, and the Company has not experienced any work
stoppage. The Company anticipates that it will be required to add a significant
number of new employees when Coupon Exchange Centers and In$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
On December 15, 1999, the Company filed with the Securities and
Exchange Commission its Registration Statement on Form 10, as amended by this
Amendment No. 1 thereto. After the effectiveness of its 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) $ (3,680,153)
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 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) (3,833,680)
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 system for selecting, distributing and electronically clearing coupons,
certain components of which are patented, as more fully described in Item 1.
Business under the heading of "Patents, Trademarks and Tradenames." 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
debt conversion costs in 1998, as compared to debt conversion costs of $257,894
in 1997. The Company also incurred litigation settlement expenses of $156,250 in
1997, as compared to no such costs in 1998. 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 of
$31,672 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 or
debt conversion costs 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 and debt conversion costs 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 $2,494,658 (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 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
BACKGROUND
Before the rollover of the year from 1999 to 2000, many of the world's
computer systems and programs used two-digit date fields to designate a year,
which meant that two-digit date systems would recognize the year 2000 as 1900 or
not at all. 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.
Although the transition to the Year 2000 did not have any significant
impact on the Company or its reporting systems and operations, the Company will
continue to assess the impact of the Year 2000 Problem on its systems and those
of third-party service providers. 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.
<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%
15423 East Batavia Drive
Aurora, Colorado 80011
Charles Chavez 1,045,875 (4) 1.9%
15423 East Batavia Drive
Aurora, Colorado 80011
Frank Pirri 525,000 1.0%
15423 East Batavia Drive
Aurora, Colorado 80011
Larry Mortimer 50,000 *
15423 East Batavia Drive
Aurora, Colorado 80011
Thomas Y. Gorman 137,500 (3) *
15423 East Batavia Drive
Aurora, Colorado 80011
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. Ms. Barr currently provides services to the Company as a
consultant. She devotes more than 50% of her time to performing her duties for
the Company and, to the Company's knowledge, is not otherwise engaged as a
consultant or employed by any other firm or business enterprise at this time.
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, 1999, 1998 and 1997, 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 1999 fiscal year
and another highly compensated executives of the Company. 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. 1999 $120,000 -0- -0- -0- -0- -0- -0-
Chairman and CEO(1) 1998 $120,000 -0- -0- -0- 1,000,000 -0- -0-
1997 $120,000 -0- -0- -0- -0- -0- -0-
Thomas Y. Gorman(1) 1999 $ 96,000 $15,000 -0- -0- -0- -0- -0-
1998 $ 48,000 5,000 -0- 37,500 1,000,000 -0- -0-
1997 $ 0 -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>
SUMMARY OF COMMON FACTS RELATED TO SALES IN 1999 AND 1998
Each of the investors that purchased securities from the Company in
1998 and 1998 (not including Richmark Securities) executed a subscription
agreement, under which they substantially represented to the Company as follows:
1) That such investor is a sophisticated investor and has such
knowledge and experience in financial and business matters so as to be capable
of making an informed decision regarding such investor's investment in the
Company.
2) That such investor was purchasing the securities for investment
purposes only for the investor's account and not for the account of or on behalf
of any other person or otherwise with a view to distributing such securities.
3) That such investor understood that the securities (including the
underlying securities) were not transferable other than pursuant to a valid
exemption from registration under the Securities Act.
The Company provided a private placement memorandum to each investor.
In addition, investors had the opportunity to ask questions and receive answers
from the Company's executive officers regarding the Company's business and the
proposed investment.
Each investor also completed and returned a questionnaire indicating
that such investor was an accredited investor at the time of the investment.
At the time of the transactions described above in item 3 under the
section entitled Sales in 1999, Richmark Securities was a broker-dealer
registered with the National Association of Securities Dealers ("NASD").
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
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
($.27 per share)(Note 3) 1,765,278 17,653 453,088 - - - 470,741
Net loss for the year ended December
31, 1997 - - - - - (4,581,307) (4,581,307)
---------- -------- ---------- ------- ------- ---------- -----------
Balance, December 31, 1997 45,393,666 453,937 3,354,669 - (43,750) (8,031,938) (4,267,082)
</TABLE>
(Continued on following page)
(See accompanying notes.
F-7
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 1998
(Continued from preceding page)
Deficit
<CAPTION>
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscription stock stage Total
------ ------ ---------- ------------ -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 45,393,666 453,937 3,354,669 - (43,750) (8,031,938) (4,267,082)
Issuance of warrants in connection with
debt offering (Note 3) - - 157,996 - - - 157,996
Issuance of common stock in exchange for
services ($.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 which are capitalized) 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 and is currently considered
to be due on demand pending the outcome of the asset purchase.
F-13
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
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 consultant and the attorney were valued at
$397,500 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. The warrants were valued at $127,500 and
were treated as additional paid - in capital and debt issuance costs which
are amortized to expense during 1997 and 1998.
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 $0.27 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 to a shareholder
related to the Company's president
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. No compensation costs would
have been recorded if such costs were computed under the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock -
Based Compensation.
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. On March 18, 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 $368,750,
interest of $63,288 and cash received of $223,750 (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: January 28, 2000
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)(3)
10.1.2 Memorandum of Understanding dated February 25, 1997,
with Unisys Corporation (2)(3)
10.1.3 Memorandum of Understanding dated March 19, 1997,
with Unisys Corporation (2)(3)
10.1.4 Memorandum of Understanding dated April 4, 1997,
with Unisys Corporation (2)(3)
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) Previously filed with the Commission on December 15, 1999 with the Company's
Registration Statement on Form 10.
(2) Filed herewith.
(3) Portions ommitted pursuant to a confidential treatment request to be filed
separately with the Commission.
================================================================================
MERGER AGREEMENT AND PLAN OF REORGANIZATION
Dated as of September 15, 1998
by and among
CRESCENT GOLD CORPORATION
and
IN STORE MEDIA SYSTEMS, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
THE MERGER...................................................................1
SECTION 1.1 The Merger......................................................1
SECTION 1.2 Effective Time of the Merger....................................1
ARTICLE II
PRE-CLOSING ACTIONS BY PARENT CORPORATION....................................2
SECTION 2.1 Parent Outstanding Shares.......................................2
SECTION 2.2 Directors.......................................................2
ARTICLE III
CONVERSION OF SHARES.........................................................2
SECTION 3.1 Conversion of Company Shares In the Merger......................2
SECTION 3.2 {RESERVED}......................................................2
SECTION 3.3 Exchange of Certificates........................................3
SECTION 3.4 Conversion of Options and Warrants..............................3
SECTION 3.5 No Fractional Securities........................................3
SECTION 3.6 Closing.........................................................3
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT.....................................5
SECTION 4.1 Organization and Qualification..................................5
SECTION 4.2 Capitalization..................................................5
SECTION 4.3 Subsidiaries....................................................6
SECTION 4.4 Authority; Non-Contravention; Approvals.........................6
SECTION 4.5 Reports and Financial Statements................................7
SECTION 4.6 Absence of Undisclosed Liabilities..............................8
SECTION 4.7 Absence of Certain Changes or Events............................8
SECTION 4.8 Litigation......................................................8
SECTION 4.9 No Violation of Law.............................................8
SECTION 4.10 Compliance with Agreements......................................8
SECTION 4.11 Taxes...........................................................9
SECTION 4.12 Employee Benefit Plan: ERISA....................................9
SECTION 4.13 Investment Company Act..........................................9
SECTION 4.14 Labor Controversies............................................10
SECTION 4.15 Certain Agreements.............................................10
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................10
SECTION 5.1 Organization and Qualification.................................10
SECTION 5.2 Capitalization.................................................11
SECTION 5.3 Authority; Non-Contravention; Approvals........................11
ARTICLE VI
ADDITIONAL AGREEMENTS.......................................................12
SECTION 6.1 Access to Information..........................................12
SECTION 6.2 Company Stockholders' Approval.................................13
SECTION 6.3 Expenses.......................................................13
SECTION 6.4 Agreement to Cooperate.........................................13
-i-
<PAGE>
SECTION 6.5 Public Statements..............................................13
SECTION 6.6 Company Principal Shareholder Agreement........................13
ARTICLE VII
CONDITIONS..................................................................13
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger.....13
SECTION 7.2 Conditions to Obligation of the Company to Effect the Merger...14
SECTION 7.3 Conditions to Obligations of Parent to Effect the Merger.......15
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER...........................................16
SECTION 8.1 Termination....................................................16
SECTION 8.2 Effect of Termination..........................................16
SECTION 8.3 Amendment......................................................16
SECTION 8.4 Waiver.........................................................16
ARTICLE IX
GENERAL PROVISIONS..........................................................16
SECTION 9.1 Survival of Representations and Warranties.....................16
SECTION 9.2 Brokers........................................................16
SECTION 9.3 Notices........................................................17
SECTION 9.4 Interpretation.................................................17
SECTION 9.5 Miscellaneous..................................................17
SECTION 9.6 Counterparts...................................................17
SECTION 9.7 Parties in Interest............................................17
EXHIBITS
A-1 Colorado Articles of Merger
A-2 Nevada Articles of Merger
B Certificate of Amendment
C Parent's Financial Statements
D Company Principal Shareholder Agreement
E Parent Legal Opinion
-ii-
<PAGE>
MERGER AGREEMENT AND PLAN OF REORGANIZATION
MERGER AGREEMENT AND PLAN OF REORGANIZATION, dated as of September 15,
1998 (the "Agreement") is entered into by and among Crescent Gold Corporation, a
Nevada corporation ("Parent") and In Store Media Systems, Inc., a Colorado
corporation (the "COMPANY").
RECITALS
WHEREAS, the Boards of Directors of Parent and the Company have
approved the merger of the Company with and into Parent pursuant to this
Agreement (the "Merger") and the transactions contemplated hereby upon the terms
and subject to the conditions set forth herein; and
WHEREAS, it is intended that Parent and the Company and their
respective stockholders will recognize no gain or loss for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder as a result of the consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time in accordance with Colorado and Nevada law, the
Company shall be merged with and into Parent and the separate existence of the
Company shall thereupon cease. Parent shall be the surviving corporation in the
Merger (hereinafter sometimes referred to as the Surviving Corporation").
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at
such time (the "Effective Time") as the Articles of Merger, in the form set
forth as Exhibit A hereto, are filed with the Secretaries of State of the State
of Colorado and Nevada (the "Merger Filings"): such filings shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.6.
1
<PAGE>
ARTICLE II
PRE-CLOSING ACTIONS BY PARENT CORPORATION
SECTION 2.1 PARENT OUTSTANDING SHARES. Prior to the Closing, Parent shall take
such actions as are necessary to ensure that Parent shall have authorized for
issuance 100,000,000 shares of Common Stock, par value $.001 per share,
6,000,000 of which shall be issued and outstanding, and 5,000,000 shares of
preferred stock, none of which shall be issued. Prior to or concurrently with
the making of the Merger Filings, Parent shall file with the Secretary of State
of Nevada a certificate of amendment to the Articles of Incorporation of the
Parent substantially in the form attached hereto as Exhibit B (the "Amendment
Filing").
SECTION 2.2 DIRECTORS. Immediately prior to the Merger, Parent shall amend its
By-laws to cause the authorized number of its directors to be increased to five
(5). The Board of Directors of Parent shall take such corporate action as may be
necessary to cause Parent's Board of Directors to be comprised of (i) four (4)
members selected from and designated by the Board of Directors of the Company
immediately prior to the Effective Time and (ii) one member selected by Parent.
Prior to Closing, all existing Directors of Parent (other than the one
continuing Director) shall deliver to the Company his or her resignation which
resignation shall become effective as of the Effective Time.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OR COMPANY SHARES IN THE MERGER. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder of any
capital stock of the Company each issued and outstanding share of Common Stock
of the Company ("Company Common Stock"), shall be converted into the right to
receive, and become exchangeable for, a pro rata portion of 44,000,000 shares of
validly issued, fully paid and nonassessable share of common stock of Parent
("Parent Common Stock"), as determined by multiplying each such issued and
outstanding share of Company Common Stock by the Exchange Ratio. For purposes of
this Agreement, the Exchange Ratio shall be equal to a fraction the numerator of
which shall be equal to 44,000,000, and the denominator of which shall be equal
to the aggregate number of shares of Company Common Stock outstanding as of the
Effective Time.
SECTION 3.2 {RESERVED}
2
<PAGE>
SECTION 3.3 EXCHANGE OF CERTIFICATES.
(a) From and after the Effective Time, each holder of an outstanding
certificate which immediately prior to the Effective Time represented shares of
Company Common Stock shall be entitled to receive in exchange therefor, upon
surrender thereof to an exchange agent selected by Parent (the "Exchange
Agent"), a certificate or certificates theretofore representing the number of
whole shares of Parent Common Stock to which such holder is entitled pursuant to
Section 3.1.
(b) Promptly after the Effective Time, Parent shall make available to
the Exchange Agent the certificates representing shares of Parent Common Stock
required to effect the exchange referred to in Section 3.3(a).
SECTION 3.4 CONVERSION OF OPTIONS AND WARRANTS. At the Effective Time, each
option, warrant or other right to acquire or purchase shares of Company Common
Stock (the "Options") shall automatically, and without any action required by
the holders thereof, convert into the right to purchase or acquire a number of
shares of Parent Common Stock multiplied by the Exchange Ratio at an exercise
price equal to the original exercise price divided by the Exchange Ratio. Each
Option holder may, but shall not be obligated to, submit his or her agreement or
other evidence of the Options and shall be entitled to receive a new agreement
or other evidence of an option to purchase Parent Common Stock having the same
terms and conditions.
SECTION 3.5 NO FRACTIONAL SECURITIES. Notwithstanding any other provision of
this Agreement, no certificates or scrip for fractional shares of Parent Common
Stock shall be issued in the Merger and no Parent Common Stock dividend, stock
split or interest shall relate to any fractional security. In lieu of any such
fractional shares, each holder of Company Common Stock who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock upon
surrender of Company Common stock certificates for exchange pursuant to this
Article III shall be entitled to receive from Parent a stock certificate
representing the next highest whole number of shares.
SECTION 3.6 CLOSING.
(a) The closing (the "Closing") of the transactions contemplated by
this Agreement shall take place at the offices of Jeffers, Wilson, Shaff & Falk,
LLP, on the business day immediately after the last of the conditions set forth
in Article VII hereof is fulfi11ee or waived, or at such other time and place as
Parent and the Company shall agree (the date on which the Closing occurs being
the "Closing Date").
(b) Deliveries by Company to Parent. On the Closing Date, the Company
will deliver to Parent the following:
3
<PAGE>
(i) a certificate from the appropriate Secretary of State or
other similar government official of the State of Colorado as to the
good standing of the Company, as of a date within five (5) days of the
Closing Date;
(ii) copies of the resolutions or consents of the Board of
Directors of Company approving the Merger and the other agreements and
transactions contemplated hereby, certified by the corporate secretary
or assistant corporate secretary of the Company, and certified copies
of the resolutions or consents, in form and substance reasonably
satisfactory to Parent, certified by the corporate secretary or
assistant corporate secretary of the Company, constituting shareholder
approval of the Merger and all other agreements and transactions
contemplated hereby by all of the stockholders- of the Company;
(iii) the officers' certificates referred to in Section 7.3(a)
hereof;
(iv) an executed copy of the Company Principal Shareholder
Agreement referred to in Section 6.6 hereof;
(v) a certificate of the corporate secretary or an assistant
corporate secretary of the Company certifying the name, title and true
signature of each officer of Company executing any of the other
documents and certificates to be delivered pursuant to or in connection
with this Agreement, as applicable; and
(vi) such other documents as are required to be delivered
prior to or on the Closing Date pursuant to this Agreement or as may
reasonably be requested by Parent.
(c) Deliveries by Parent. On the Closing Date, Parent will deliver to
Company the following:
(i) a copy of the charter of Parent certified as of a date
within five (5) days of the Closing Date by the Secretary of State of
the state of incorporation of each such corporation and certified by
the corporate secretary or an assistant corporate secretary of Parent
as to the absence of any amendments between the dates of certification
by such official and the Closing Date;
(ii) a certificate from the appropriate Secretary of State or
other similar government official of the jurisdiction of incorporation
as to the good standing of the Parent and each of its subsidiaries, as
of a date within five (5) days of the Closing Date;
(iii) copies of the resolutions or consents of the Board of
Directors of Parent approving the Merger, the issuance of Parent Common
Stock subject hereto and the other agreements and transactions
contemplated hereby, as applicable, and, certified by the corporate
secretary or an assistant corporate secretary of Parent;
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(iv) the officers' certificates referred to in Section 7.2(a)
hereof;
(v) a certificate of the corporate secretary or an assistant
corporate secretary of Parent certifying the name, title and true
signature at each officer of Parent any of the Agreements and the other
documents and certificates to be delivered pursuant to or in connection
with this Agreement;
(vi) all Approvals from third parties as are required for
Parent to consummate the Merger and the other transactions contemplated
by the Agreements hereto; and
(vii) such other documents as are required to be delivered
prior to or on the Closing Date pursuant to this Agreement or as may be
reasonably requested by Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION Parent is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and has the requisite power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. Parent is qualified to do business and is in good standing in
each jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary. True,
accurate and complete copies of Parent's Articles of Incorporation and By-laws,
in each case as in effect on the date hereof, including all amendments thereto,
have heretofore been delivered to the Company.
SECTION 4.2 CAPITALIZATION.
(a) The authorized capital stock of Parent consists at 2,500,000 shares
of Parent Common Stock, $.O1 par value per share. As of the date hereof, all of
the issued and outstanding capital stack of Parent was as set forth on Schedule
4.2(a) hereto. All of the issued and outstanding shares of Parent Common Stock
are validly issued, fully paid, nonasseasable and free of preemptive rights.
(b) As of the date hereof, there are no outstanding subscriptions,
options, calls, contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement obligating Parent
or any subsidiary of Parent to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock of Parent of
obligating Parent or any subsidiary of Parent to grant, extend or enter into any
such agreement of commitment, except for this Agreement. There are no voting
trusts, proxies or other agreements or understandings to
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which Parent or any subsidiary of Parent is a party of is bound with respect to
the voting of any shares of capital stock of Parent. The shares of Parent Common
Stock issued to stockholders of the Company in the Merger will be at the
Effective Time duly authorized, validly issued, fully paid and nonassessable and
free of preemptive rights,
(c) The Parent Common Stock is duly approved for trading on the
National Association of Securities Dealers Automated Quotation System,
Electronic Bulletin Board.
SECTION 4.3 SUBSIDIARIES Each direct and indirect corporate subsidiary of Parent
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Each subsidiary of Parent is
qualified to do business, and is in good standing, in each jurisdiction in which
the properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing will not, when taken together with all such
other failures, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of Parent and its subsidiaries, taken as a whole. All of the
outstanding shares of capital stock of each corporate subsidiary of Parent are
validly issued, filly paid, nonassessable and free of preemptive rights, and
those owned directly or indirectly by Parent are owned free and clear of any
liens, claims, encumbrances, security interests, equities, charges and options
of any nature whatsoever. There are no subscriptions, options, warrants, rights,
calls, contracts, voting trusts, proxies or other commitments, understandings,
restrictions or arrangements relating to the issuance, sale, voting, transfer,
ownership or other rights with respect to any shares of capital stock of any
corporate subsidiary of Parent, including any right of conversion or exchange
under any outstanding security, instrument or agreement. As used in this
Agreement, the term "subsidiary" shall mean any corporation, partnership, joint
venture or other entity of which the specified entity, directly or indirectly,
controls or which the specified entity (either acting alone or together with its
other subsidiaries) owns, directly or indirectly, 50% or more of the stock or
other voting interests, the holders of which are, ordinarily or generally, in
the absence of contingencies (which contingencies have not occurred) or
understandings (which understandings have not yet been required to be performed)
entitled to vote for the election of a majority of the board of directors or any
similar governing body.
SECTION 4.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement, and the consummation by Parent of the
transactions contemplated hereby, have been duly authorized by Parent's Boards
of Directors and shareholders, and no other corporate proceedings on the part of
Parent are necessary to authorize the execution and delivery of this Agreement
and the consummation by Parent of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Parent, and,
assuming the due authorization, execution
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and delivery hereof by the Company, constitutes a valid and binding agreement of
Parent enforceable against it in accordance with its terms, except that such
enforcement may be subject to (a) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (b) general equitable principles.
(b) The execution and delivery of this Agreement by each of Parent do
not, and the consummation by Parent of the transactions contemplated hereby will
not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Parent or any of
its subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or by-laws of Parent or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable to
Parent or any of its subsidiaries or any of their respective properties or
assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument obligation or
agreement of any kind to which Parent or any of the subsidiaries is now a party
or by which Parent or any of its subsidiaries or any of their respective
properties or assets may be bound or affected, excluding from the foregoing
clauses (ii) and (iii) such violations, conflicts, breaches, defaults,
terminations, accelerations or creations of liens, security interests, charges
or encumbrances that would not in the aggregate, have a material adverse elect
on the business, operations, properties, assets, condition (financial or other),
results of operations or prospects of Parent and its subsidiaries, taken as a
whole.
(c) Except for the making of the Merger Filings with the Secretaries of
State of the State of Colorado and Nevada in connection with the Merger, and the
making of the Amendment Filing with the Secretary of State of Nevada, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by Parent or the
consummation by Parent of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of Parent and its subsidiaries, taken as a whole.
SECTION 4.5 REPORTS AND FINANCIAL STATEMENTS. Parent has previously delivered to
the Company copies of its financial statement for the fiscal year ended December
31, 1996 (the "Parent's Financial Statements"); (b) minutes of all meetings of
its directors and stockholders (whether annual or special) and actions by
written consent in lieu of directors and stockholders meeting from inception
until the date hereof. The Parent's Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on an
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present the financial
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position of Parent and its subsidiaries as of the dates thereof and the results
of the operations and changes in financial position for the periods then ended,
subject, to normal year-end adjustments and any other adjustments described
therein.
SECTION 4.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as expressly disclosed
and described in Parent's Financial Statements, neither Parent nor any of its
subsidiaries had at December 31, 1996, or has incurred since that date, any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature, except liabilities, obligations or contingencies which are
accrued or reserved against in the Parent's Financial Statements or reflected in
the notes thereto.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. From December 31, 1996 through
the date hereof, there has not been any material adverse change in the business,
operations, properties, assets, liabilities, condition (financial or other),
results of operations or prospects of Parent and its subsidiaries, taken as a
whole.
SECTION 4.8 LITIGATION. There are no claims, suits, actions or proceedings
pending or, to the knowledge of Parent, threatened against, relating to or
affecting Parent or any of its subsidiaries, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator.
Neither Parent nor any of its subsidiaries is subject to any judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator which prohibits or
restricts the consummation of the transactions contemplated hereby or would have
any material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of Parent and
its subsidiaries.
SECTION 4.9 NO VIOLATION OF LAW. Neither Parent nor any of its subsidiaries is
in violation of, or has been given notice or been charged with any violation of,
any law, statute, order, rule, regulation, ordinance, or judgment (including,
without limitation, any applicable environmental law, ordinance or regulation)
of any governmental or regulatory body or authority, except for violations
which, in the aggregate, do not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Parent and its subsidiaries, taken as a whole. As of
the date of this Agreement, to the knowledge of Parent, no investigation or
review by any governmental or regulatory body or authority is pending or
threatened, nor has any governmental or regulatory body or authority indicated
an intention to conduct the same.
SECTION 4.10 COMPLIANCE WITH AGREEMENTS. Parent and each of its subsidiaries are
not in breach or violation of or in default in the performance or observance of
any term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under, (a) the respective
charters, by-laws or other similar organizational instruments of Parent or any
of its subsidiaries or (b) any contract, comments, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which Parent or any
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of its subsidiaries is a party or by which any of them is bound or to which any
of their property is subject.
SECTION 4.11 TAXES. Parent and its subsidiaries have (i) duly filed with the
appropriate governmental authorities all Tax Returns required to be filed by
them for all periods ending on or prior to the Effective Time, and such Tax
Returns are true, correct and complete in all material respects, and (ii) duly
paid in full or made adequate provision for the payment of all Taxes for all
periods ending at or prior to the Effective Time. The liabilities and reserves
for Taxes reflected in the Parent balance sheet as of December 31, 1996
contained in Parent's Financial Statements attached hereto as Exhibit C are
adequate to cover all Taxes for all periods ending on or prior to the Effective
Time and there are no material liens for Taxes upon any property or assets of
Parent or any subsidiary thereof, except for liens for Taxes not yet due. There
are no unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the Internal Revenue Service (the "IRS")
or any other governmental taxing authority with respect to Taxes of the Parent
or any of its subsidiaries. Neither Parent nor any of its corporate subsidiaries
has, with regard to any assets or property held, acquired or to be acquired by
any of them, filed a consent to the application of Section 341(f) of the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, excise, property, sales, withholding, social
security, occupation, use, service, service use, license, payroll, franchise,
transfer and recording taxes, fees and charges, imposed by the United States, or
any state, local or foreign government or subdivision or agency thereof when
computed on a separate, consolidated, unitary, combined or any other basis; and
such term shall include any interest, fines, penalties or additional amounts
attributable or imposed or with respect to any such taxes, charges, fees, levies
or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean
any return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes.
SECTION 4.12 EMPLOYEE BENEFIT PLAN; ERISA. At the date hereof, Parent and its
subsidiaries do not maintain or contribute to any material domestic employee
benefit plans, programs, arrangements or practices (such plans, programs,
arrangements or practices of Parent and its subsidiaries being referred to as
the "Parent Plans"), including employee benefit plans within the meaning set
forth in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or other similar material arrangements for the provision of
benefits (excluding any "Multiemployer Plan" within the meaning of Section 3(37)
of ERISA or a "Multiple Employer Plan" within the meaning of Section 413(c) of
the Code). Neither Parent nor its subsidiaries has any obligation to create any
such plan.
SECTION 4.13 INVESTMENT COMPANY ACT. Parent and each of its subsidiaries either
(a) is not an "investment company", a company "controlled" by, or an "affiliated
company" with respect
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to, an "investment company", within the meaning of the Investment Company Act of
1940 (the "Investment Company Act") or (b) satisfies all conditions for an
exemption from the Investment Company Act, and, accordingly, neither Parent nor
any of its subsidiaries is required to be registered under the Investment
Company Act.
SECTION 4.14 LABOR CONTROVERSIES. There are no significant controversies pending
or, to the knowledge of Parent, threatened between Parent or its subsidiaries
and their employees, to the knowledge of Parent, there are no material
organizational efforts presently being made involving any of the presently
unorganized employees of Parent and its subsidiaries. Parent and its
subsidiaries have, to the knowledge of Parent, complied in all material respects
with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, and the payment of
social security and similar taxes, and no person has, to the knowledge of
Parent, asserted that Parent or any of its subsidiaries is liable in any
material amount for any arrears of wages or any taxes or penalties for failure
to comply with any of the foregoing.
SECTION 4.15 CERTAIN AGREEMENTS. Parent is not a party to any oral or written
(a) consulting or similar agreement with any present or former director, officer
or employee or any entity controlled by any such person, (b) agreement with any
executive officer or other key employee of the Parent the benefits of which are
contingent, or the terms of which axe materially altered, upon the occurrence of
a transaction involving the Parent of the nature contemplated by this Agreement,
(c) agreement with respect to any executive officer or other key employee of the
Parent providing any term of employment or compensation guarantee or (d)
agreement or plan, including any stock option plan, stock appreciation right
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of the
transactions contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted. The Company is qualified to do business and is in good standing
in each jurisdiction in which the properties owned, leased or operated by it or
the nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified and in good standing will not, when
taken together with all other such failures, have a material adverse effect on
the business, operations, properties, assets, condition (financial or other),
results of operations or prospects of the Company, taken as a whole. True,
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accurate and complete copies of the Company's Articles of Incorporation and
By-laws, in each case as in effect on the date hereof, including all amendments
thereto have heretofore been delivered to Parent.
SECTION 5.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Company Common Stock. As of the dare hereof, 58,675,000 shares of
Company Common Stock are issued and outstanding. All of the issued and
outstanding shares of Company Common Stock are validly issued and are fully
paid, nonassessable.
(b) Except as set forth in Schedule 5.2(b) hereof, as of the date
hereof there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement, obligating the Company or any subsidiary of the
Company to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of the Company or obligating the Company
to grant, extend or enter into any such agreement or commitment. Except as set
forth in Schedule 5.2(b) hereof, there are no voting trusts, proxies or other
agreements or understandings to which the Company is a party or is bound with
respect to the voting of any shares of capital stock of the Company.
SECTION 5.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into
this Agreement and, subject to the Company Stockholders' Approval, to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement, and the consummation by the Company of the transactions contemplated
hereby, have been duly authorized by the Company's Board of Directors and no
other corporate proceedings on the part of the Company are necessary to
authorize the execution and delivery of this Agreement and the consummation by
the Company of the transactions contemplated hereby, except for the Company
Stockholders' Approval. This Agreement has been duly and validly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by Parent, constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
that such enforcement may be subject to (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (b) general equitable principles.
(b) The execution and delivery of this Agreement by the Company does
not, and the consummation by the Company of the transactions contemplated hereby
will not, violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the
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properties or assets of the Company under any of the terms, conditions or
provisions of (i) the charter or by-laws of the Company, (ii) subject to the
receipt of the Company Stockholders' Approval, any statue, law, ordinance, rule,
regulation, judgment, decree, order, injunction, writ, permit or license of any
court or governmental authority applicable to the Company or any of its
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company is now a
party or by which the Company or any of its properties or assets may be bound or
affected, excluding form the foregoing clauses (ii) and (iii) such violations,
conflicts, breaches, defaults, terminations, accelerations or creation of liens,
security interest, charges or encumbrances that would not, in the aggregate,
have a material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospect of the
Company, taken as a whole.
(c) Except for the making of the Merger Filings with the Secretaries of
State of the State of Colorado and Nevada in connection with the Merger, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, have a material adverse effect on the business, operations,
properties assets, condition (financial or other), results of operations or
prospects of the Company, taken as a whole.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO INFORMATION. Parent and its subsidiaries shall afford to
the Company and its accountant, counsel, financial advisors and other
representatives (the "Company Representatives") full access during normal
business hours throughout the period prior to the Effective Time to all of their
respective properties, books, contract, commitments and record (including, but
not limited to, Tax Returns) provided that no investigation pursuant to this
Section 6.1 shall affect any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
Merger. Parent and its subsidiaries shall hold and shall use their best efforts
to cause the Parent Representatives to hold, and the Company and its
subsidiaries shall hold in strict confidence all non-public documents and
information furnished to Parent or to the Company, as the case may be, in
connection with the transactions contemplated by this Agreement. In the event
that this Agreement is terminated in accordance with its terms, each party shall
promptly redeliver to the other all non-public written material provided
pursuant to this Section 6.1 and shall not retain any copies, extracts or other
reproductions in whole or in part of such written materials.
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SECTION 6.2 COMPANY STOCKHOLDERS' APPROVAL. The Company shall promptly submit
this Agreement and the transactions contemplated hereby for the approval of its
stockholders at a meeting of stockholders or pursuant to written consent and,
subject to the fiduciary duties of the Board of Directors of the Company under
applicable law, shall use its best efforts to obtain stockholder approval and
adoption (the "Company Stockholders' Approval") of this Agreement and the
transactions contemplated hereby. Such meeting shall be held as soon as
practicable following the date hereof, but not later than the Closing Date.
Subject to the fiduciary duties of the Board of Directors of the Company under
applicable law, the Company shall, through its Board of Directors, recommend to
its stockholders approval of the transaction contemplated by this Agreement.
SECTION 6.3 EXPENSES. All costs and expenses incurred in connection with this
Agreement, and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
SECTION 6.4 AGREEMENT TO COOPERATE. Subject to the terms and conditions herein
provided, each of the parties hereto shall use all reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary or appropriate
waivers, consents and approvals and to effect all necessary registrations,
filings and submissions and to lift any injunction or other legal bar to the
Merger (and, in such case, to proceed with the Merger as expeditiously as
possible), subject, however, to the requisite votes of the stockholders of the
Company.
SECTION 6.5 PUBLIC STATEMENTS. The parties shall consult with each other prior
to issuing any press release or any written public statement with respect to
this Agreement or the transactions contemplated hereby and shall not issue any
such press release or written public statement prior to such consultation.
SECTION 6.6 COMPANY PRINCIPAL SHAREHOLDER AGREEMENT. At the Closing, the Company
shall deliver a Principal Shareholder Agreement in the form of Exhibit D hereto
executed by each of Everett B. Schulze, Jr. and Donald P. Uhl (the "Company
Principal Shareholder Agreement"). The Company Principal Shareholder Agreement
shall provide that each of American International Investments, Inc. and Donald
P. Uhl do not presently intend, and agrees not to, sell any shares of Parent
Common Stock for a period of one year after the Effective Date.
ARTICLE VII
CONDITIONS
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
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(a) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the stockholders of the
Company under applicable law;
(b) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger shall
have been issued and remain in effect (each party agreeing to use its reasonable
efforts to have any such injunction, order or decree lifted);
(c) No action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United Stares which would prevent the consummation of the Merger;
and
(d) All governmental consents, orders end approvals legally required
for the consummation of the Merger and the transactions contemplated hereby
shall have been obtained and be in effect at the Effective Time, and all
consents, orders and approvals legally required for the consummation of the
Merger and the transactions contemplated hereby shall have become Final Orders.
SECTION 7.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. Unless
waived by the Company, the obligation of the Company to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of the following
additional conditions:
(a) Parent shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of Parent contained in
this Agreement shall be true and correct in all material respects on and as of
(i) the date made and (ii) the Closing Date, and the Company shall have received
a certificate of the Chairman of the Board and Chief Executive Officer, the
President or a Vice President of Parent to that effect;
(b) The Company shall have received an opinion from counsel to the
Parent, dated the Closing Date, substantially in the form set forth in Exhibit E
hereto;
(c) Since the date hereof, (i) there shall have been no changes that
constitute, and (ii) no event or events shall have occurred which have resulted
in or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of Parent and its subsidiaries, taken as a whole (exclusive of changes
or events resulting from regulatory, business or economic conditions of general
applicability);
(d) The merger shall have been approved by shareholders of In Store and
Parent and shareholders holding not more than 5% of Company Common Stock shall
have requested or receive dissenter's rights pursuant to applicable state law;
and
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(e) Effective as of the Effective Time, Parent shall grant to Everett
B. Schulze, Jr. ("Schulze") options to acquire 1,000,000 shares of Parent Common
Stock at an exercise price of $1.00 per share subject to the following vesting
provisions:
Number of Options Vesting Requirement
----------------- -------------------
250,000 Complete substantial equipment financing
250,000 Completion of seven (7) kiosks
500,000 Installation of 1,000 kiosks in retail stores
In the event that Schulze's employment is terminated for "Cause" (as defined in
the applicable employment agreement) prior to the vesting of any options, such
options shall immediately terminate and expire. Upon any termination not for
Cause, all options shall immediately vest and become exercisable for a period of
five years.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF PARENT TO RETEST THE MERGER. Unless
waived by Parent, the obligations of Parent to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the additional
following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects on and as
of (i) the date made and (ii) the Closing Date, and Parent shall have received a
Certificate of the President an Chief Executive Officer or of a Vice President
of the Company to that effect;
(b) Since the date hereof, (i) there shall have been no changes that
constitute, and (ii) no event or events shall have occurred which have resulted
in or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of the Company, taken as a whole (exclusive of changes or events
resulting from regulatory, business or economic conditions of general
applicability); and
(c) All governmental consents, orders, and approvals legally required
for the consummation of the Merger and the transactions contemplated hereby
shall have been obtained and be in effect at the Closing Date.
15
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval by the stockholders of the
Company or Parent:
(a) by mutual consent of Parent and the Company; or
(b) unilaterally by Parent or the Company if the other fails to perform
any covenant in material respect in this Agreement, and does not cure the
failure in all material respects within 30 business days after the terminating
party delivers written notice of the alleged failure or if may condition to the
obligations of that party is not satisfied (other than by reason of a breach by
that party of its obligations hereunder), and it reasonably appears that the
condition cannot be satisfied prior to September 30, 1998.
SECTION 8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Parent or the Company, as provided in Section 8.1, this Agreement
shall forthwith become void and there shall be no further obligation on the part
of either the Company, Parent, or their respective officers or directors.
Nothing in this Section 8.2 shall relieve any party from liability for any
breach of this Agreement.
SECTION 8.3 AMENDMENT. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto and in compliance with
applicable law.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, the parties hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions, contained herein. Any agreement on the part of a party hereto to any
such extension or WAIVER shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE XX
GENERAL PROVISIONS
SECTION 9.1 Survival at Representations and Warranties. All representations and
warranties in this Agreement shall survive the Merger for a period of one (1)
year.
SECTION 9.2 Brokers. The Company represents and warrants that no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
Parent represents and warrants that no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
16
<PAGE>
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent.
SECTION 9.3 Novices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, mailed by registered
or certified mail (return receipt requested) or sent via facsimile to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Parent, to: Crescent Gold Corporation
c/o M. Richard Cutler, Esq.
610 Newport Center Drive, Suite 800
Newport Beach, California 92660
(b) If to the Company, to: In Store Media Systems, Inc.
15423 E. Batavia Drive
Aurora, Colorado 80011
Attention: Mr. Donald P. Uhl
with a copy to; Jeffers, Wilson, Shaff & Falk, LLP
8881 Von Ka4rman, Suite 1400
Irvine, California 92612
Attention: Christopher A. Wilson, Esq,
SECTION 9.4 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.5 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof;
(b) shall not be assigned by operation of law or otherwise; and (c) shall be
governed in all respects, including validity, interpretation and effect, by the
laws of the State of Colorado (without giving effect to the provisions thereof
relating to conflicts of law).
SECTION 9.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 9.7 Parties in Interest. This Agreement shall be binding upon and limit
solely to the benefit of each party hereto, nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
17
<PAGE>
In WITNESS WHEREOF, Parent and the Company have caused this Agreement
to be signed by their representative officers thereunto duly authorized as of
the date first written above.
IN STORE MEDIA SYSTEMS, INC.
A Colorado corporation
By:/S/ Everett E. Schulze, Jr.
---------------------------
Name: Everett E. Schulze, Jr.
Title:: Chief Executive Officer and President
By:/S/ Donald P. Uhl
----------------------------
Name: Donald P. Uhl
Title: Secretary
Crescent Gold Corporation,
A Nevada corporation
By: /S/ A. R. Stull
---------------------------
Name:
Title: President and Secretary
(SIGNATURE PAGE TO
MERGER AGREEMENT AND PLAN OF REORGANIZATION)
18
<PAGE>
EXHIBIT A-2
NEVADA ARTICLES OF MERGER
<PAGE>
EXHIBIT B
CERTIFICATE OF AMENDMENT
<PAGE>
EXHIBIT C
PARENT'S FINANCIAL STATEMENTS
<PAGE>
EXHIBIT D
COMPANY PRINCIPAL SHAREHOLDER AGREEMENT
<PAGE>
EXHIBIT A-l
COLORADO ARTICLES OF MERGER
<PAGE>
EXHIBIT E
PARENT LEGAL OPINION
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
+---------------------+
|CUSIP NO. 453234 10 6|
+---------------------+
NUMBER SHARES
+--------+ +--------+
| | | |
+--------+ +--------+
ISMSI
IN STORE MEDIA SYSTEMS, INC.
AUTHORIZED COMMON STOCK: 100,000,000 SHARES
NO PAR VALUE
THIS CERTIFIES THAT
SPECIMEN COPY
IS THE RECORD HOLDER OF
**Shares of IN STORE MEDIA SYSTEMS, INC. Common Stock**
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
the duly authorized officers.
Dated:
[IN STORE MEDIA SYSTEMS, INC.]
CORPORATE SEAL HERE]
/S/ Donald P. Uhl /S/ Everett E. Schulze, Jr.
- ------------------------ ---------------------------
Secretary President
<PAGE>
NOTICE: Signature must be guaranteed by a firm which is a member of a
registered national stock exchange, or by a bank (other than a saving
bank), or a trust company. The following abbreviations, when used in
the inscription on the face of this certificate, shall be construed as
though they were written out in full according to applicable laws or
regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ..........Custodian...........
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act...........................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
+-------------------------------------+
| |
+-------------------------------------+
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _____________________
__________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
"CONFIDENTIAL TREATMENT"
MEMORANDUM OF UNDERSTANDING
Dated: January 13, 1997
GENERAL:
This memorandum of understanding defines a business relationship in which Unisys
Payment Systems Division (PSD) and In Store Media Systems Inc. (ISMSI) will each
participate in the development of software/middleware, hardware, manufacturing,
installation and operation and support of Coupon Exchange Center (CEC) systems
worldwide. This proposal, if acceptable, will be replaced by a formal, written
business agreement.
This proposal is based upon what ISMSI believes to be reasonable assumptions and
once the CEC's are in place. gives PSD an opportunity to realize an ongoing and
potentially large revenue stream for PSD's efforts.
ISMSI and PSD, for participation in the relationship, will each receive revenues
as described in this document. ISMSI, for its participation, will receive all
revenues whatsoever generated through this business venture less the fees and
royalties due Unisys as described in Exhibit A.
The respective parties bring the following strengths to the business
relationship:
<TABLE>
<CAPTION>
UNISYS ISMSI
<S> <C>
Kiosk middleware development expertise Patent protection on CEC system
Kiosk Hardware development expertise Marketing staff to effectively market the CEC's
Kiosk Manufacturing expertise Marketing knowledge and expertise in couponing
Hardware regulatory compliance expertise and other related fields
Networking expertise Marketing staff to properly promote. market and
Database Design and Implementation expertise sell coupons and related advertising media
Global support infrastructure media through the CEC's.
Unisys name recognition Day to day general servicing of the CEC's
Windows NT Expertise Point of sale system interface expertise
Transaction Processing expertise Coupon reader technology
Coupon shredder technology
CEC design
Manufacturing capacity
</TABLE>
MARKETING RIGHTS:
Product(s) designed by Unisys solely for ISMSI specifications would only be used
by ISMSI unless agreed by ISMSI.
DEVELOPMENT RIGHTS:
PSD is the sole provider of the middleware product to ISMSI unless agreed
otherwise by PSD.
INITIAL MIDDLEWARE PRODUCT:
Phase 1 of this business relationship will be the development of an initial
working product, Beta Test, and installation of the initial 25 CEC's to verify
proof of concept. Subsequent phases are to be defined.
<PAGE>
"CONFIDENTIAL TREATMENT"
Unisys agrees to provide, at cost, resources and expertise to complete its
portion of the Phase 1 deliverable(s) at defined in Exhibit B. A rough estimate
of the costs for the initial working product and 2-4 Beta Test sites in the US
are estimated at [*...*], with any over-run capped at 10%. This preliminary
estimate will be finalized at the sign-off of the requirements definition, which
is expected to be received by Unisys in mid January. It is further agreed that
over-runs above 10% may be negotiated depending on circumstance.
ISMSI agrees to provide resources and expertise to complete its portion of the
Phase 1 deliverable(s) as defined in Exhibit B. In addition. ISMSI will provide
monthly the funds to cover PSD cost for the Phase 1 deliverables as defined in
Exhibit B.
MIDDLEWARE SOFTWARE SUPPORT:
PSD agrees to provide the local field geography teams hot line, bug fixes,
patches, and assistance required to support the Middleware product developed by
PSD. In addition. PSD will provide minor middleware enhancements to keep the
product current. PSD will fund the aforementioned support and enhancements via
royalty revenues paid to PSD by ISMSI. This effort will be capped at 12% of such
revenues.
FUTURE MIDDLEWARE PRODUCT:
New standard middleware products, non-standard middleware products, or custom
middleware products will be developed and funded based on a mutually agreed
business case.
INITIAL HARDWARE PRODUCT:
PSD will provide ISMSI a proposal/hardware specification regarding the
utilization of Unisys hardware technology within the CEC's/Kiosks by February 1,
1997, for consideration of both parties to be integrated into the solution.
FIELD MAINTENANCE SUPPORT:
Unisys will provide ISMSI a proposal regarding field hardware maintenance of the
CEC/Kiosk at the request of ISMSI.
DEFAULT:
If either party should be in default with respect to the business plans and/or
deliverables, and the other party elects to dissolve this business relationship.
the other party will so notify, in writing, the party in default. The defaulting
party shall have 60 days to cure such default or provide a mutually acceptable
plan to cure.
TERMINATION FOR DEFAULT:
In the event the default(s) is not cured, or a mutually acceptable plan to cure
is not received within the specified time, then the non-defaulting party shall
have the right to terminate this agreement. [*...*]
<PAGE>
"CONFIDENTIAL TREATMENT"
TERM OF AGREEMENT:
The initial term of this agreement is for a period of 5 years. This agreement
will automatically be extended for an additional 12 months at the end of the
initial term, and annually thereafter unless terminated in writing by either
party 90 days prior to expiration date.
DEFINITIONS:
In$taCa$h Coupon: Any coupon distributed throughout the system that gives the
shopper an "on the spot" rebate.
Free Standing Insert Coupon: Any non-In$taCa$h Coupon.
Electronic Coupon: Any "paperless" coupon distributed throughout the system.
Redeemed Coupon: Any In$taCa$h Coupon, Free Standing Insert Coupon or Electronic
Coupon read, shredded, or processed by the system and billed to the
Manufacturer.
Customer Service Station: A workstation to be utilized by the consumer, having a
minimum configuration of a PC, display, card reader, scanner/shredder, printer,
and necessary software/middleware.
CEC: A Kiosk containing 1-3 Customer Service Stations, any necessary peripherals
for the integrated solution, including the point of sale coupon shredder and
check writers, Kiosk server, networking and software/middleware.
POD: A geographic marketing area containing a host computer linking 1-25 Kiosks.
EXPRESSION OF INTENT:
This document is only an expression of the general terms which might form the
basis for a definitive agreement to be entered into between the parties. This
document should, in no way, be construed as a binding agreement between the
parties. If a definitive agreement incorporating the terms of this document is
not completed. for whatever reason, neither party shall have any liability to
the other. The exception to this being purchase orders provided between the
companies to cover the development costs while the final agreement is being
finalized.
The target date for a signed contract is February 15, 1997.
AGREED:
/s/ Michael R. Thomas /s/ Everett Schulze, Jr.
- ------------------------- ---------------------------
Michael R. Thomas 1/15/97 Everett Schulze, Jr.
V.P. and General Manager President/CEO
Payment Systems Division In Store Media Systems, Inc.
Unisys Corporation
<PAGE>
"CONFIDENTIAL TREATMENT"
EXHIBIT A
---------
Royalty and Fee Structure
Number of Kiosks 1-250 251-720 751-2000 2001 & Up
- ---------------- ----- ------- -------- ---------
Annual License Fee per Kiosk
With Kiosks Having:
One Customer Service Station
Two Customer Service Stations
Three Customer Service Stations [*...*]
Royalty: Per Redeemed In$taCa$h
Coupon
Royalty: per Redeemed Free Standing
Insert Coupon
<PAGE>
"CONFIDENTIAL TREATMENT"
Based on Unisys's understanding of the proposed CEC system, the following
is the proposed preliminary division of responsibility. This is dependent on an
agreed requirements definition and a final division of responsibility.
<TABLE>
PHASE 1 DELIVERABLES
<CAPTION>
DEVELOPMENT
- ------------------------------------------------------------------------------------------------------------------------
AREA UNISYS (INCLUDED IN PRELIMINARY QUOTE) ISMSI
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POD All database control excluding reports and user interface Database reports and user interface
Kiosk Host All software excluding Point of Sale monitor Point of Sale monitor
All hardware development
Regulatory Compliance
Checkout line All software in Kiosk Host controlling the checkout line All hardware development
Maintenance routines Regulatory Compliance
Customer Kiosk hardware drivers (Active X) Customer Station display program
Station Maintenance program All hardware development
Regulatory Compliance
Process All software and specifications under source safe revision ISMSI software delivered to Unisys
</TABLE>
<TABLE>
BETA TEST - (2-4 BETA TEST SITES EACH WITH A CEC KIOSK HOST AND 3 OR MORE CUSTOMER
STATIONS)
<CAPTION>
UNISYS (2 INCLUDED IN PRELIMINARY QUOTE) ISMSI
- --------------------------------------------------------------------------------------------
<S> <C>
Install Software at site Site Preparation
Install POD software Install ISMSI software
Install hardware at site
Support software on site. Support software and hardware on site
Train store personnel
Early customer documentation
</TABLE>
<PAGE>
"CONFIDENTIAL TREATMENT"
<TABLE>
ROLLOUT OF 25 LOCATIONS
- -------------------------------------------------------------------------------------------------------------------------
UNISYS (NOT INCLUDED IN PRELIMINARY QUOTE) ISMSI
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Remote support of 23 more sites - travel if required Site Preparation of 23 more sites
Customer/Support Field Manual Documentation Install 23 more sites providing remove HW & SW Support -
Travel if required
Customer/Support training
User documentation
</TABLE>
<TABLE>
ON-GOING SUPPORT
- -------------------------------------------------------------------------------------------------------------------------
UNISYS (NOT INCLUDED IN PRELIMINARY QUOTE) ISMSI
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Second Level Phone support Installations - hardware and software
Software Support for all software developed by Unisys Software Support for all software developed by ISMSI
Software distribution update installations
On-site routine maintenance
First Level phone maintenance
"Minor" enhancements within support allocation On-site repair/swap out and spares inventory
"Major" enhancements quoted as requested POD staff training
Depot Maintenance of ISMSI hardware
Fly and Fix Hardware support
Depot hardware repair center training
</TABLE>
<PAGE>
"CONFIDENTIAL TREATMENT"
The following is a preliminary set of Milestone interdependencies required to
support Unisys development activities in concert with the aboe defined
responsibilities:
PHASE 1 MILESTONES
<TABLE>
<CAPTION>
WHO WHAT WHEN
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ISMSI ISMSI provides final phase 1 requirements definition (functional specification revision 2?) [*...*]
UNISYS Unisys to evaluate final requirements and verify schedules and finalize quotation [*...*]
JOINT Rex Fowler to visit Plymouth for creation of POD SQL database schema and review of [*...*]
functional specification and architecture.
UNISYS Unisys provides specifications for key software interfaces [*...*]
ISMSI [*...*] [*...*]
UNISYS [*...*] [*...*]
UNISYS [*...*] [*...*]
UNISYS [*...*] [*...*]
JOINT Phase 1 Development complete, integration with ISMSI components [*...*]
JOINT Beta Test [*...*]
</TABLE>
<PAGE>
"CONFIDENTIAL TREATMENT"
Based on Unisys's understanding of the proposed CEC system, the following is the
proposed preliminary division of responsibility. this is dependent on an agreed
hardware specification and a final decision of responsibility expected to be
approved by 3/31/97.
PHASE 1 DELIVERABLES
<TABLE>
<CAPTION>
DEVELOPMENT
AREA UNISYS (INCLUDED IN PRELIMINARY QUOTE) ISMSI [*...*]
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer Station Customer Station Hardware Design. Shredder/scanner hardware
Manufacture and Certifications design and manufacture
CEC Packaging design and manufacture
Integration and final test of
the Customer Stations and
Scanner/shredder.
CS / CW Hardware design Packaging design, integration,
and manufacture.
</TABLE>
<TABLE>
<CAPTION>
BETA TEST - (2-4 BETA TEST SITES EACH WITH A CEC KIOSK HOST AND 3 OR MORE CUSTOMER STATIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
UNISYS (4 INCLUDED IN PRELIMINARY QUOTE) ISMSI [*...*]
<S> <C> <C>
Site preparation
Support install Customer Stations at site Install hardware at site and wire store Support install of CEC and CS/CW's
at site
Support Customer Station hardware on site Support software and hardware on site Support CEC and CS/CW hardware
Train store personnel on site
Early customer documentation
</TABLE>
<TABLE>
ROLLOUT OF 25 LOCATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
UNISYS (NOT INCLUDED IN PRELIMINARY QUOTE) ISMSI [*...*]
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufacture and deliver to [*...*] 25 3X Manufacture and deliver to ISMSI 25
Customer stations for integration. Deliver complete CEC and CS/CW
spare parts. configurations.
Remote support of 23 more sites - travel if Site preparation of 23 more sites Remote support of 23 more sites -
required travel if required
Customer/Support Field Manual Documentation Install 23 more sites providing remote Customer/Support Field Manual
HW & SW Support - Travel if required Documentation
Customer/Support training
User documentation
</TABLE>
<PAGE>
"CONFIDENTIAL TREATMENT"
The following is a preliminary set of Milestone interdependencies required to
support Unisys development activities in concert with the above defined
responsibilities.
<TABLE>
PHASE 1 MILESTONES
<CAPTION>
WHO WHAT WHEN
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
JOINT DESIGN REVIEW AT [*...*] [*...*]
ISMSI COMPONENT HARDWARE FOR SOFTWARE DEVELOPMENT [*...*]
JOINT DESIGN REVIEW AT PLYMOUTH [*...*]
ISMSI APPROVE HARDWARE MOU [*...*]
[*...*] [*...*] STARTS TOP + BOTTOM ROUGH DRAWINGS [*...*]
UNISYS LOWER SECTION FIRST FRAMES MADE [*...*]
UNISYS PROTOTYPE FRAME TO [*...*] [*...*]
ISMSI HARDWARE SPECIFICATION APPROVED [*...*]
[*...*] START TOOLING, AND UPPER SECTION DETAILED DRAWINGS [*...*]
UNISYS FIRM DESIGN FOR [*...*] [*...*]
UNISYS FRONTAL FIT COMPONENTS DESIGNED [*...*]
[*...*] UPPER SECTION SKELETON [*...*]
JOINT BEGIN INTEGRATION AT [*...*] [*...*]
[*...*] ENCLOSED UNITS (2) AT PLYMOUTH FOR CERTIFICATION [*...*]
UNISYS CERTIFICATION TESTING COMPLETE [*...*]
JOINT FIRST 7 UNITS BUILT [*...*]
JOINT START BETA TEST [*...*]
</TABLE>
<PAGE>
"CONFIDENTIAL TREATMENT"
<TABLE>
ON-GOING SUPPORT
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
UNISYS (NOT INCLUDED IN PRELIMINARY QUOTE) ISMSI [*...*]
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Second Level Phone Support Installations - hardware and software Second Level Phone Support
On-site repair/swap out and spares inventory
Enhancements quoted as requested POD staff training Enhancements quoted as requested
Depot Maintenance of ISMSI hardware Depot Maintenance of ISMSI hardware
Fly and Fix Hardware support Fly and Fix
Depot hardwae repair center training
</TABLE>
"CONFIDENTIAL TREATMENT"
MEMORANDUM OF UNDERSTANDING
CEC HARDWARE
Dated: February 25, 1997
GENERAL
This memorandum of understanding covers Unisys, Payment Systems Division (PSD)
participation in the development and manufacture of an initial proof of concept
volume of certain Customer Service Station hardware components of the Coupon
Exchange Center systems (CEC). This memorandum is an addition to the initial
agreement dated January 13, 1996, and does not supersede any of the terms stated
therein.
SCOPE OF WORK
1. Unisys will develop specialized / customized rack-mounted Customer Service
Stations for ISMSI.
2. Unisys will assemble, test and deliver fully integrated rack mounted
Customer Service Stations and Store Host Servers to [*...*]
3. [*...*] will assemble and test Unisys components and [*...*]
components into a finished CEC with TVs and marquee and deliver to customer
4. ISMSI wilt be responsible for scanner/shredder development and manufacture.
checkout lane unit development and manufacture, CEO system installation and
support.
ADVANTAGES OF UNISYS CUSTOMER STATION DESIGN AND MANUFACTURE
Unisys brings the following strengths to the relationship with respect to
hardware development:
High Quality SEI Level 2 And ISO 9000 Engineering And Manufacturing
Processes
Electrical And Mechanical Engineering Expertise
Design For Initial And Continuing Low Cost Manufacture
Design For UL / CSA / FCC Certifications
Change Control Processes For New Features, New Hardware And Fixes
Product Information And Records Management
Supply Line Management
Supplier Quality Control
Quality Control Processes
Distribution And Logistics
Parts Acquisition Cost Management- Volume Buys
On-Going Hardware/Software Uplevels
Field Engineering Support Structures - Spares/Safety/Fixes
MARKETING RIGHTS
Product(s) designed by Unisys solely for ISMSI specifications would only be used
by ISMSI unless agreed by ISMSI.
DEVELOPMENT RIGHTS
PSD is the sole provider of the agreed upon Customer Service Center components
to ISMSI unless agreed otherwise by PSD.
<PAGE>
"CONFIDENTIAL TREATMENT"
INITIAL HARDWARE PRODUCT
[*...*]
PRICING
PSD will provide ISMSI a CEC 3X Customer Service Station module and spare parts
at an agreed price, see estimate in Addendum 3. Price will be fixed for one year
with changes negotiated annually.
BPO, PURCHASE ORDERS
ISMSI will provide PSD with a Blanket Purchase Order (BPO) for 12 months of
production. At the start at each quarter ISMSI will issue firm Purchase Orders
for the next quarter's production (90 days in advance).
LEAD-TIME
Standard lead-time for product and parts will be 60 days after ISMSI approval
for shipment.
SHIPMENTS
All products will be shipped F.O.B. plant of manufacture, in accordance with the
delivery schedule specified on the corresponding Purchase Order. Freight and
distribution from Unisys to [*...*] and to final customer will be ISMSI's
responsibility.
WARRANTY
Unisys PSD will provide a 12 month warranty from date of shipment on products
and parts.
HARDWARE SUPPORT
Unisys PSD will provide 12 months hardware support (hardware design fixes) from
date of product shipment. Ongoing support will be provided at a rate to be
negotiated. Enhancements will be quoted separately.
DEFAULT
It either party should be in default with respect to the business plans and/or
deliverables and the other party elects to dissolve this business relationship
the other party will so notify in writing, the party in default. The defaulting
party shall have 80 days to cure such default or provide a mutually acceptable
plan to cure.
TERMINATION FOR DEFAULT
In the event the default(s) is not cured or a mutually acceptable plan to cure
is not received within the specified time, then the non-defaulting party shall
have the right to terminate this agreement. [*...*]
TERM OF THE AGREEMENT
The initial term of this agreement is for a period of 5 years. This agreement
will automatically be extended for an additional 12 months at the end of the
initial team and annually thereafter unless terminated in writing by either
party 90 days prior to the expiration date.
DEFINITIONS
2
<PAGE>
"CONFIDENTIAL TREATMENT"
CUSTOMER SERVICE STATION: A workstation to be utilized by the consumer, having a
minimum configuration of a PC, display, cord reader, scanner/shredder, printer,
and necessary software/middleware.
CEC: A Kiosk containing 1-3 Customer Service Stations, any necessary peripherals
for the integrated solution. including the point of sale coupon shredder and
check writers, Kiosk server, networking and software/middleware.
EXPRESSION OF INTENT
This document as only an expression of the general terms which might form the
basis for a definitive agreement to be entered into between the parties. This
document should in no way be construed as a binding agreement between the
parties. It a definitive agreement incorporating the terms of this document is
not completed for whatever reason neither party shall have any liability to the
other. The exception to this being purchase orders provided between the
companies to cover the development costs while the final agreement is being
finalized.
The target date for a signed contract is March 31, 1997.
AGREED
/s/ Michael R. Thomas /s/ Everett Schulze, Jr.
- ----------------------------- ------------------------------
Michael R. Thomas Everett Schulze, Jr.
V.P. and General Manager President/CEO
Payment Systems Division In Store Media Systems, Inc.
Unisys Corporation
3
<PAGE>
"CONFIDENTIAL TREATMENT"
ADDENDUM 1
UNISYS TASKS
[*...*]
4
<PAGE>
"CONFIDENTIAL TREATMENT"
ADDENDUM 2
STAFFING / BUDGET / SCHEDULE
STAFFING AND BUDGET
o STAFF OF 9 FOR 9 MONTHS
o MECHANICAL ENGINEERS
o MECHANICAL DESIGNERS
o ELECTRICAL ENGINEERS
o ELECTRICAL TECHNICIANS
o PROJECT MANAGER
o PRODUCT INFORMATION AND RECORDS
o REGULATORY APPROVALS
o DEVELOPMENT BUDGET = [*...*]
MATERIALS AND BUDGET
o BUILD 7 CEC 3X CUSTOMER SERVICE STATIONS
o -1 DENVER
o -1 [*...*]
o -2 PLYMOUTH
o -3 BETA UNITS....(1 FROM PLYMOUTH = 4)
o [*...*]
SCHEDULE
o DESIGN REVIEW AT [*...*] [*...*]
o COMPONENT HARDWARE FOR SOFTWARE DEVELOPMENT [*...*]
o DESIGN REVIEW AT PLYMOUTH [*...*]
o PROTOTYPE FRAME TO [*...*] [*...*]
o FIRM DESIGN FOR [*...*] [*...*]
o BEGIN INTEGRATION AT [*...*] [*...*]
o START BETA TEST [*...*]
5
<PAGE>
"CONFIDENTIAL TREATMENT"
ADDENDUM 3
CEC 3X Customer Service Station Cost Estimate
ASSUMPTIONS:
[*...*]
<TABLE>
<CAPTION>
ISMS COST UNISYS QUOTE DELTA %
<S> <C> <C> <C> <C>
UNISYS CUSTOMER SERVICE STATION (3X)
ISMS BOM Material
PC and Peripherals
Security switches
P_______ devices
______ PWBA
Power Supplies
UPS
____ Screen Displays
CD Player
Multiport serial card
Barcode/Magnetic reader [*...*]
Coupon Printer
Scaner/Check Writer POS Card
Plus added Hardware require
Shredded Paper bin & sensors
Coupon Stock Reserve & sensors
Shredder waste chute
Printe Cable / Power Supply
AC __________ / harness
Framers & Mounting Hardware
Miscellaneous Controls and Harness
Plus Labor
Plus Overhead
Subtotal Unisys CSS (3X)
ADDITIONAL HARDWARE TO BE PROVIDED BY ISMSI AND [*...*]
ISMS Shredder / Reader (CSC)
Shredder (estimate)
Scanner
[*...*] Structure
[*...*] components
20" monitors
Marquee [*...*]
ISMS CS/CW Checkout lane
Shredder (estimate)
Scanner
Display
6511 Card
Check printer
Frame and _______
CEC Total
</TABLE>
"CONFIDENTIAL TREATMENT"
MEMORANDUM OF UNDERSTANDING
CS/CW ELECTRICAL DESIGN
Dated: March 19, 1997
GENERAL
This memorandum of understanding covers Unisys, Payment Systems Division (PSD)
provision to ISMSI of Electrical Design Services for the Coupon Scanner / Check
Printer (CS/CW) hardware components at the Coupon Exchange Center systems (CEC).
This memorandum is an addition to the initial agreement dated January 13. 1996,
and does not supersede any of the terms stated therein.
SCOPE OF WORK
1. Unisys PSD will design, integrate and test the electrical components of the
CS/CW to specifications provided by ISMSI.
2. This quote assumes the use of a commercially available keyboard and
encoder. Any custom design would be by separate quote.
3. ISMSI will be responsible for the overall CS/CW design, function and
operation with [*...*] providing the mechanical packaging. This
quote does not cover certification by Unisys of the CS/CW function and
operation, such a service could be quoted separately.
4. Manufacture of the CS/CW will be the responsibility of ISMSI.
5. This quote does not include any NRE cost for customization of other vendors
products e.g. [*...*] 511 or Thermal Check Printer. This is considered to
be ISMSI's responsibility.
MARKETING RIGHTS
Product(s) designed by Unisys solely for ISMSI specifications would only be used
by ISMSI unless agreed by ISMSI.
INITIAL HARDWARE PRODUCT
The CS/CW consists of a Keyboard / Display Unit, Coupon Scanner / Shredder Unit,
Check Printer Unit, Controller PWBA with associated Power Supplies and
Harnesses.
PRICING
Not applicable
BPO, PURCHASE ORDERS
Not applicable
LEAD-TIME
Not applicable
SHIPMENTS
Not applicable
WARRANTY
Not applicable
HARDWARE SUPPORT
Unisys PSD will provide 12 months hardware support (hardware design fixes) from
date of product shipment. Ongoing support will be provided at a rate to be
negotiated. Enhancements will be quoted separately.
DEFAULT
<PAGE>
"CONFIDENTIAL TREATMENT"
If either party should be in default with respect to the business plans and/or
deliverables and the other party elects to dissolve this business relationship
the other party will so notify in writing, the party in default. The defaulting
party shall have 60 days to cure such default or provide a mutually acceptable
plan to cure.
TERMINATION FOR DEFAULT
In the event the default(s) is not cured or a mutually acceptable plan to cure
is not received within the specified time, then the non-defaulting party shall
have the right to terminate this agreement. [*...*]
TERM OF THE AGREEMENT
The initial term of this agreement is for a period of 5 years. This agreement
will automatically be extended for an additional 12 months at the end of the
initial term and annually thereafter unless terminated in writing by either
party 90 days prior to the expiration date.
DEFINITIONS
CS/CW: Coupon Shredder / Check Writer, a point of sale device having the
characteristics of a coupon scanner and shredder, check writer. It also has an
operator keyboard and display.
EXPRESSION OF INTENT
This document is only an expression of the general terms which might form the
basis for a definitive agreement to be entered into between the parties. This
document should in no way be construed as a binding agreement between the
parties. If a definitive agreement incorporating the terms of this document is
not completed for whatever reason neither party shall have any liability to the
other. The exception to this being purchase orders provided between the
companies to cover the development costs while the final agreement is being
finalized.
The target date for a signed contract is March 31, 1997.
AGREED
/s/ Michael R. Thomas /s/ Everett Schulze, Jr.
- ----------------------------- --------------------------------
Michael R. Thomas Everett Schulze, Jr.
V.P. and General Manager President/CEO
Payment Systems Division In Store Media Systems, Inc.
Unisys Corporation
<PAGE>
"CONFIDENTIAL TREATMENT"
ADDENDUM 1
UNISYS TASKS
The CS/CW estimate is based on the following:
1 DEVELOP HARNESSES FOR CS / CW COMPONENTS
2 CHECK PRINTER SELECTION AND TEST
3 INTEGRATION OF ELECTRICAL COMPONENTS
4 ELECTRICAL PACKAGING AND DOCUMENTATION
5 SELECTION AND TEST OF KEYBOARD
6 POWER DISTRIBUTION
7 REGULATORY CERTIFICATION (UL, CSA, FCC, CE ETC.)
<PAGE>
"CONFIDENTIAL TREATMENT"
ADDENDUM 2
STAFFING / BUDGET / SCHEDULE
STAFFING AND BUDGET
o 12 WORK MONTHS EFFORT
o ELECTRICAL ENGINEERS
o ELECTRICAL TECHNICIAN
o ELECTRICAL DESIGN SERVICES
o RECORDS AND PRODUCT INFORMATION
o REGULATORY COMPLIANCE'S
o PROJECT MATERIALS AND TRAVEL
o DEVELOPMENT BUDGET = [*...*]
SCHEDULE
o DESIGN REVIEW AT PLYMOUTH [*...*]
o SHREDDER CONTROL PWBA/CABLE [*...*]
o KEYBOARD INFORMATION [*...*]
o MODULE PLACEMENT DISTANCES TO UNISYS FOR CABLE LENGTHS [*...*]
o SHREDDER MOUNTING INFORMATION TO [*...*] [*...*]
o SHIP SHREDDER PWBA/CABLES TO [*...*] [*...*]
o BEGIN INTEGRATION AT [*...*] [*...*]
o START BETA TEST [*...*]
<PAGE>
"CONFIDENTIAL TREATMENT"
4100 Plymouth Road 313-451-4000
Plymouth MI 48170-1892
UNISYS
April 22, 1997
Mr. Donald Uhl
Executive Vice President
In Store Media Systems, Inc.
15423 E. Batavia Drive
Aurora, CO 80011
Dear Don:
As you recall, Bruce was to convert the Data Center Proposal into a
MOU. Attached for your files is the MOU. It remains unchanged in
content from the original Scope of Work document.
Could you have Everett sign the MOU and return a copy.
Sincerely,
/s/ Gary Wallen
Gary Wallen
Controller
Payment Systems Division
Enclosure
"CONFIDENTIAL TREATMENT"
MEMORANDUM OF UNDERSTANDING
ADDENDUM
Dated: April 4, 1997
GENERAL
This memorandum of understanding defines an addendum to the original MOU dated
January 13, 1997. This proposal covers the incremental effort to provide
Datacenter capabilities to the ISMSI solution. The original proposal covered a
simple Store Host to POD data transfer, no provision was made for. Datacenter
functionality or database replication (automatic and selective). The scope of
work is detailed in Exhibit A attached.
MARKETING RIGHTS
Product(s) designed by Unisys solely for ISMS specifications would only be used
by ISMSI unless agreed by ISMSI.
DEVELOPMENT RIGHTS
PSD is the sole provider of the middleware product to ISMSI unless agreed
otherwise by PSD.
INITIAL MIDDLEWARE PRODUCT
Unisys agrees to provide, at cost, resources and expertise to complete its
portion of the deliverable(s) as defined in Exhibit A. A rough estimate of the
costs for the initial working product and 2-4 Beta Test sites in the US are
estimated at [*...*], with any over-run capped at 10%. This preliminary
estimate will be finalized at the sign-off of the requirements definition,
expected to be received mid May. It is further agreed that over-runs above 10%
may be negotiated depending on circumstance.
ISMSI agrees to provide, at cost, resources and expertise to complete its
portion of the Phase 1 deliverable(s) as defined in Exhibit A. In addition,
ISMSI will provide monthly the funds to cover PSD's cost for the Phase 1
deliverables as defined in Exhibit A.
MIDDLEWARE SOFTWARE SUPPORT
PSD agrees to provide the local field geography teams, hot line, bug fixes,
patches and assistance required to support the Middleware product developed by
PSD. In addition, PSD will provide minor Middleware enhancements to keep the
product current. This support and enhancements will be provided by PSD up to a
limit of 12% of PSD royalty revenues paid to PSD by ISMSI.
FUTURE MIDDLEWARE PRODUCT
New standard Middleware products, non-standard Middleware products, or custom
Middleware products will be developed and funded based on a mutually agreed
business case.
DEFAULT
If either party should be in default with respect to the business plans and/or
deliverables, and the other party elects to dissolve this business relationship,
the other party will so notify, in writing, the party in default. The defaulting
party shall have 60 days to cure such default or provide a mutually acceptable
plan to cure.
TERMINATION FOR DEFAULT
In the event the default(s) is not cured or a mutually acceptable plan to cure
is not received within the specified time, then the non-defaulting party shall
have the right to terminate this agreement. [*...*]
TERM OR AGREEMENT
<PAGE>
"CONFIDENTIAL TREATMENT"
The initial term of this agreement is for a period of 5 years. This agreement
will automatically be extended for an additional 12 months at the end of the
initial term and annually thereafter unless terminated in writing by either
party 90 days prior to the expiration date.
DEFINITIONS
In$taCa$h Coupon:. Any coupon distributed throughout the system that gives the
shopper an "on the spot" rebate.
Free Standing Insert Coupon: Any non-In$taCa$h Coupon.
Electronic Coupon: Any "paperless" coupon distributed throughout the system.
Redeemed Coupon: Any In$taCa$h Coupon, Free Standing Insert Coupon or Electronic
Coupon read, shredded, or processed by the system and billed to the
Manufacturer.
Customer Service Station: A workstation to be utilized by the consumer, having a
minimum configuration of a PC, display, card reader, scanner/shredder, printer,
and necessary software/middleware.
CEC: A Kiosk containing 1-3 Customer Service Stations any necessary peripherals
far the integrated solution, including the point of sale coupon shredder and
check writers, Kiosk server, networking and software/middleware.
POD: A geographic marketing area containing a host computer linking 1-25 Kiosks.
Datacenter: ISMSI's central dataprocessing center linking multiple PODs.
EXPRESSION OF INTENT
This document is only an expression of the general terms which might form the
basis far a definitive agreement to be entered into between the parties. This
document should in no way be construed as a binding agreement between the
parties. If a definitive agreement incorporating the terms of this document is
not completed, for whatever reason, neither party shall have any liability to
the other. The exception to this being purchase orders provided between the
companies to cover the development costs while the final agreement is being
finalized.
AGREED:
/s/ Michael R. Thomas /s/ Everett Schulze, Jr.
- ----------------------------- -----------------------------
Michael R. Thomas Everett Schulz, Jr.
V.P. and General Manager President/CEO
Payment Systems Division In Store Media Systems, Inc.
Unisys Corporation
<PAGE>
"CONFIDENTIAL TREATMENT"
EXHIBIT A
SCOPE OF WORK
[*...*]
<PAGE>
"CONFIDENTIAL TREATMENT"
The original proposal covered software development for the following system:
[schematic of computer network here]
<PAGE>
"CONFIDENTIAL TREATMENT"
Datacenter design considerations and expansion beyond 25 stores leads to the
following architecture
[schematic of datacenter design]
<PAGE>
"CONFIDENTIAL TREATMENT"
DEVELOPMENT TASKS
[*...*]
<PAGE>
"CONFIDENTIAL TREATMENT"
[*...*]
<PAGE>
"CONFIDENTIAL TREATMENT"
8 SCHEDULE
--------
DURATION DESCRIPTION
- --------------------------- --------------------------
[*...*] TOI in Plymouth
[*...*] 1 Study
[*...*] 2 Design
[*...*] 3 Development
[*...*] 4 Testing
[*...*] 5 Integration
[*...*] 6 Installation
7 Support
9 PRICE
-----
The cost to provide the Datacenter solution as detailed above is [*...*].
This includes development H/W and S/W. and travel / living costs for the
integration phase.
NOTE: The development H/W costs include single and multichannel analogue modems.
EMPLOYMENT AGREEMENT
Effective Date August 1, 1999
Employee Lawrence P. Mortimer ("LPM")
Employer In Store Media Systems, Inc. ("ISMSI")
DUTIES & RESPONSIBILITIES ISMSI is employing LPM in a senior executive
capacity and on a full time basis, to market its products and services. LPM's
title shall be Senior Vice President, Marketing and Sales he shall report
directly to the President of ISMSI.
TERM The term of this Agreement is three (3) years, beginning at the Effective
Date, unless modified by mutual agreement and in writing.
COMPENSATION
A. Salary. Unless modified by mutual agreement and in writing, LPM
shall receive a gross salary of $14,583.33 per month during the
first year of this Agreement and $16,666.66 per month in the second
and third years of the Agreement. The salary shall be paid twice
per month, on or before the first and fifteenth day of each month.
B. Stock. In addition to salary, LPN shall be awarded 50,000 shares of
the Company's restricted common stock.
C. Options. In addition to the salary, and stock received, LPM will be
granted Options to purchase one million (1,000,000) shares of ISMSI
common stock at an exercise price of $1.00 per share. LPM shall
receive 333,333 of the Options upon completing one year of
employment from the Effective Date and a like number for completing
each of the two following years of employment under this Agreement.
The Options may be exercised in whole or in part (but not less than
100 shares) at any time while LPM is an employee of ISMSI. If LPM
is no longer an employee of ISMSI, the Options must be exercised
within 90 days of the stock underlying the Options becoming
unrestricted ("Free Trading") after which time, the Options shall
expire. The Options are not transferable except to the surviving
spouse of LPM.
In the event of a dissolution or liquidation of ISMSI, or a merger
or consolidation in which ISMSI is not the surviving corporation,
the Options shall terminate subject to the right of the Board of
Directors of ISMSI to accelerate the time within which the Options
may be exercised, and except to the extent that another corporation
may and does, assume and continue the Options or substitute its own
Options.
D. LPM shall receive $25,000 upon completing a move of his primary
household to Colorado. LPM shall also be reimbursed for reasonable
costs, of two house-hunting trips for LPM and spouse, moving his
household goods, and normal closing costs if and when LPM purchases
a home.
E. Commissions. LPM shall receive commissions in an amount and manner
to be determined. The commission schedule, when determined, shall
be attached to this Agreement as Exhibit "A".
F. Other Compensation. LPM shall be included in any other incentive
plan that may be made available to senior executives of ISMSI. Such
plans are still in development.
BENEFITS During the Term of this Agreement LPM shall receive the same benefits
(e.g. life and health insurance, vacations, holidays, sick leave, disability,
401K and profit sharing as is offered and provided to other senior executive
employees of ISMSI.
TERMINATION FOR CAUSE ISMSI may terminate LPM for any of the following reasons:
(a) grossly negligent conduct or non-performance of duties and responsibilities;
(b) theft, misrepresentation, or fraud against ISMSI; (c) misconduct, including
but not limited to sexual harassment or substance abuse, or (d) felony criminal
conviction.
REPRESENTATIONS AND WARRANTIES OF LPM LPM represents and warrants that he is
free to enter into this Agreement and to, perform the duties required, and that
there are no employment contracts, restrictive covenants or other restrictions
preventing full time employment and the execution and delivery of the duties and
responsibilities of this employment.
CONFIDENTIALITY LPM agrees that he will not, during this Agreement and for a
period of two years after its termination, disclose to any firm, corporation, or
other entity, except as required by law, any nonpublic information
("Confidential Information") concerning the business, clients or affairs of
ISMSI for any reason or purpose whatsoever nor shall he make use of any of the
Confidential Information for their own purposes or for the benefit of any
person, firm, corporation, or other entity except ISMSI. Confidential
Information shall exclude information of any kind which either (a) is or becomes
generally available to
<PAGE>
the public other than as a direct result of a disclosure by LPM, (b) was known
to LPM on a non-confidential basis prior to its disclosure, or (c) becomes
available to LPM on a non-confidential basis from a source other than ISMSI,
which it is entitled to disclose. LPM also agrees to sign the Employee
Confidentiality Agreement signed by all new employees of ISMSI.
NON-COMPETITION For a period of two (2) years if LPM voluntarily terminates the
employment relationship, LPM agrees not to solicit ISMSI's accounts and/or
clients or to engage in any conduct which is in direct competition with the
business of ISMSI as defined by ISMSI at the termination of the employment
relationship, without the express written consent of ISMSI.
ADDITIONAL PROVISIONS All notices and communications regarding this Agreement
shall be in writing. The Agreement is not assignable unless by mutual consent.
This Agreement sets forth the entire agreement and understanding between LPM and
ISMSI regarding employment. This Agreement shall be governed, construed and
enforced in accordance with the laws of Colorado.
In Store Media Systems, Inc.
7/29/99
/s/ Lawrence P. Mortimer /s/ Everett E. Schulze, Jr.
- ------------------------------- ------------------------------------
Lawrence P. Mortimer Everett E. Schulze, Jr.
1524 Falcon Drive
Wheaton, Illinois 60187 President/CEO
To Tom German
>From Everett Schulze and Don Uhl
Pages Two
Date 6/7/99
Re REVISION TO INCENTIVE BONUS PROGRAM
Dear Tom,
Pursuant to our conversations, attached is the revision to your incentive bonus
program. It replaces all previous agreements and understandings.
TOM GORMAN'S BONUS PROGRAM
<TABLE>
<CAPTION>
EVENT BONUS
- -------------------------------- ---------------------------------------------------------------------
<S> <C>
Signing Bonus $2,000 and 50,000 shares of common stock
At 1st Anniversary of $2,000 and the vesting of an option to purchase 50,000 shares of
employment restricted Common Stock at $1/share
At $2,500,000, equity cash $13,000, and the vesting of the option to purchase 50,000 shares of
proceeds restricted Common Stock $1/share (When the financing in equity cash
proceeds - Cumulative from employment date and excluding conversions
and exercise of warrants - is closed)
Successful Completion of $15,000 and the vesting of an option to purchase 100,000 shares of
beta test, or field trial restricted Common Stock at $1/share
Installation of 75 stores with $15,000 and the vesting of an option to purchase 100,000 shares of
the In$taClearing electronic restricted Common Stock at $1/share
coupon clearing program
Installation of 4 Coupon $15,000 and the vesting of an option to purchase 100,000 shares of
Exchange Centers at stores restricted Common Stock at $1/share
Monthly EBITDA exceeding $15,000 and the vesting of an option to purchase 100,000 shares of
$1,000,000 restricted Common Stock at $1/share
Installation of the 1,000th $15,000 and the vesting of an option to purchase 100,000 shares of
store with the In$taclearing restricted Common Stock at $1/share
electronic coupon clearing
program
Installation of the 100th $15,000 and the vesting of an option to purchase 100,000 shares of
Coupon Exchange Center restricted Common Stock at $1/share
at stores
Monthly sales exceeding $15,000 and the vesting of an option to purchase 100,000 shares of
$10,000,000 restricted Common Stock at $1/share
Monthly EBITDA exceeding $15,000 and the vesting of an option to purchase 100,000 shares of
$3,000,000 restricted Common Stock at $1/share
Stock closing at or above $15,000 and the vesting of an option to purchase 100,000 shares of
$10 per share for two restricted Common Stock at $1/share
consecutive trading days
</TABLE>
<PAGE>
Revision of Tom Gorman's Bonus Program
07/01/99
Page 2 of 2
After the initial signing bonus, this incentive bonus program grants Tom Gorman
the opportunity to earn through the achievement of the above mentioned
milestones, $150,000 and an option to purchase 1,000,000 shares of restricted
common stock at $1.00 per share.
The number of shares are subject to any and all proportionate changes to the
rest of the common shareholders, i.e. reverse or forward splits, anti-dilution
provisions, etc., if any.
If the Company accepts a tender offer, or merges in a manner which results in
the Company's existing shareholders receiving tangible consideration valued at
more than $1.00 per share ("Event"), then:
I) If Tom Gorman is retained with at least his salary and benefits at the
time of the Event, then he shall retain this bonus program.
II) If Tom Gorman is not retained, then he shall automatically receive all of
the unattained increments of the bonus program in his choice of the
following manners:
a) The balance of the cash and options as specified in this bonus program,
or
b) The balance of the cash and the net cash value of the options at which
time the options are cancelled.
Thank you for your hard work and continuing efforts to make In Store Media
Systems, Inc. a success. Tom, please sign to confirm your acceptance.
/s/ Everett E. Schulze, Jr. /s/ Donald P. Uhl
- ----------------------------- -----------------------------
Everett E. Schulze, Jr. Donald P. Uhl
/s/ Thomas Y. Gorman, Jr.
- ----------------------------
Thomas Y. Gorman, Jr.
