<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission file No. 000-28515
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
IN STORE MEDIA SYSTEMS, INC.
----------------------------
(Exact name of small business issuer as specified in its Charter)
NEVADA 84-1249735
- ------------------------ ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15423 EAST BATAVIA DRIVE, AURORA, COLORADO 80011
- ------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
(303) 364-6550
------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference of Part 111 of this Form 10-K, or any
amendment to this Form 10-K. [ X ]
On April 13, 2000, the Registrant had 40,042,200 shares of common
voting stock held by non-affiliates. The aggregate market value of shares of
common stock held by non-affiliates was $53,256,126 on this date. This valuation
is based upon the average closing bid and asking price for shares of common
voting stock of the Registrant on the "Electronic Bulletin Board" of the
National Association of Securities Dealers, Inc. ("NASD") on April 13, 2000.
On April 13, 2000, the issuer had 66,119,773 shares of its no par value
common stock outstanding.
<PAGE>
PART I
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 Unisys 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 December 31, 1999, the Company incurred accumulated
losses in excess of $13,108,616. 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.
<PAGE>
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:
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%)
=============== ========
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 $800 million. Promo Magazine is a monthly trade publication focused
on the retail promotion industry.
Because the in-store coupon can be more easily targeted to a specific
consumer, it should continue to enjoy long-term growth as the manufacturers'
database marketing programs become more sophisticated and retailer loyalty
programs become more entrenched. Retailer loyalty programs are promotional
programs that supermarkets implement to motivate shoppers to shop repeatedly
either at a particular store or a particular chain. The most common retailer
loyalty program is the "frequent shopper card", which provides consumers special
savings at the checkout on repeat purchases. The ISMS Free Money Card is the
Company's version of the frequent shopper card, which can be used to complement
or substitute similar supermarket programs.
2
<PAGE>
PRODUCTS AND SERVICES
The Company has not completed development of any of its products and
services. The Company intends to continue development of its products and
services, subject to the availability of additional funds. We can provide no
assurance or guarantee that we will be able to secure the funds necessary to
complete the development of our products and services and introduce them to
market successfully. The Company's products and services will incorporate
patented technology. The Company's Coupon Exchange Center(TM) system is
protected by a patent issued to and owned by the Company in January 1996, which
includes 37 allowed claims. The proprietary electronic coupon clearing system
(In$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).
3
<PAGE>
o The Company has developed technology in accordance with the
coupon industry's published guidelines for electronic
clearing. In addition, the Company designed the system to
fulfill the manufacturers' objectives of increasing efficiency
and reducing fraud.
o In$taClearing program monitors the checkout transaction,
matches the coupons redeemed to the products purchased,
instructs the supermarket's POS system to provide the discount
to the consumer and then reports the applicable data collected
to the data center within minutes.
COUPON EXCHANGE CENTERS(TM)
The Company's second product introduction will be the Coupon Exchange
Centers. The Coupon Exchange Centers deliver "In$taCa$h(TM)" coupons directly to
the consumer in exchange for unwanted or expired manufacturers' coupons obtained
from newspapers or other sources. Upon purchase of the applicable product, the
consumer may redeem the In$taCa$h(TM) coupons for cash, in the form of a bearer
check for the aggregate value of all In$taCa$h coupons redeemed, which is issued
by the Coupon Exchange Center's coupon scanner/checkwriter(TM) system, at the
checkstand.
From the consumer's perspective, the In$taCash coupon is very similar
to ordinary cents-off coupons distributed in newspaper publications. Instead of
a discount, however, the consumer receives a cash rebate at checkout (in the
form of a negotiable check) equal to the aggregate amount of the rebate value of
all of the In$taCash coupons redeemed. In either case, the face value of the
coupon is established by the manufacturer sponsoring the incentive program. The
average face value discount of a coupon redeemed in the United States is $.67.
Thus, assuming a rebate value of $.67 per coupon, a consumer who redeemed eight
In$taCash coupons at checkout would receive a check for $5.36.
The In$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$h coupons provide brand managers immediate feedback on
the coupons distributed and redeemed.
DATA DRIVEN MARKETING, INC.
The Company has one wholly owned subsidiary, Data Driven Marketing,
Inc. ("DDMI"). DDMI's mission is to take the accumulating transaction data and
combine it with additional demographic household data, which is collected by the
Company. The Company collects data directly through its clearing system, as well
as telephone and written surveys conducted in connection with the issuance of
the Free Money Cards. The Company also collects data indirectly by acquiring
them from third-party sources. This data, which will be continually supplemented
with transaction data from the Coupon Exchange Centers, will provide DDMI a
unique product to the manufacturers - household specific data on consumers'
purchasing history and intentions. In addition, the Company is establishing an
Internet website, 1stnationalcouponbank.com, which will provide customized
access to redemption data for payment and verification, and customized data
withdrawal and analysis.
4
<PAGE>
The Company believes that DDMI and its coupon information website will,
upon introduction, offer the following benefits to users. We are still in the
process of developing our products and systems, and we can provide no assurance
or guarantee that we will develop our products and introduce them to market
successfully.
o After completion of development and introduction of its two
in-store services (In$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.
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
5
<PAGE>
store, the equipment and installation cost is approximately $2.7 million). The
second $200 million committed will be used as a revolving line of credit to
finance the accounts receivables with the manufacturers after the Company
reimburses the retailer. These latter funds essentially will be used to advance
to stores the cash amount of their coupon redemption. Under the engagement
letter, Dougherty Funding will have no obligation to provide such funding until
such time as the Company demonstrates an operational system in a store
environment and completes the production and installation of the subsidiary
components that comprise the system, and satisfies certain other conditions. The
Company must raise additional capital to cover its operating expenses through
the completion of this development phase. Dougherty Funding agreed to provide
such funding on a best efforts basis. Under the terms of its engagement letter
with Dougherty Funding, the Company will be responsible for all expenses and
costs relating to the financing transactions, including (without limitation)
legal fees, closing costs, engineering reports, travel, origination fees and
other expenses paid either to the lender or to other third parties. Dougherty
Funding has no obligation to fund either of the proposed financing transactions
directly. See Item 2. Financial Information under "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
As compensation for its services, Dougherty Funding will receive a
placement agent fee equal to 2% of the funding amount payable at funding of each
advance. Dougherty Funding also will be entitled to a placement agent fee equal
to 1% of the aggregate outstanding financed amount, with respect to the
financing of the manufacture and installation of the equipment comprising the
In$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.
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.
Unisys and the Company are developing an arrangement under which Unisys
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 entered into four memorandums of understanding (the "MOUs") with the
Payment Systems Division of the Unisys Corporation ("Unisys"). 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, Unisys agreed to provide most of
the hardware, software and depot level maintenance for the Company's Coupon
Exchange Center kiosk. Unisys agreed to manufacture the Coupon Exchange Centers
for a price to be determine by volume. Under the terms of the MOUs, Unisys has
provided certain services for which the Company has advanced funds to Unisys, as
described below. By mutual agreement, Unisys 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 Unisys a royalty on
each In$taCa$h coupon redeemed that was dispensed by the Coupon Exchange Center,
subject to an annual minimum. Unisys also will receive additional license fees
per kiosk and additional royalties for each redeemed free standing insert
coupon.
6
<PAGE>
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.
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 $13,108,616. 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.
7
<PAGE>
(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 commitment or arrangement 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. 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 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.
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.
8
<PAGE>
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.
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.
9
<PAGE>
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.
RESEARCH AND DEVELOPMENT ACTIVITIES
Of the $3,225,002 spent from inception to date by the Company on
research and development, $1,923,363, or 60%, 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
$250,873. Such research and development expenses related predominantly to
developing the technology included in the Coupon Exchange System and the coupon
clearing system. The Company anticipates that research and development expenses
will continue to be its most significant expenditures until product
introduction.
COST OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company is unaware of any pending or proposed environmental laws,
rules or regulations, the effect of which would be adverse to its contemplated
operations.
10
<PAGE>
EMPLOYEES
The Company currently has 14 full-time employees. The Company considers
its relations with its employees to be excellent. None of the employees are
represented by a labor union, and the Company has not experienced any work
stoppage. The Company anticipates that it will be required to add a significant
number of new employees when Coupon Exchange Centers and In$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 subsequently
amended. After the effectiveness of its Registration Statement, the Company
became subject to the reporting requirements under the Securities Exchange Act
of 1934. The public may read and copy any material 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
ITEM 2 - PROPERTIES
- -------------------
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.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
To the knowledge of management, during the fiscal year ended December
31, 1999, and to the date of this Annual Report, 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 o0fficer of the Company
in his capacity as such.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the past
quarter. The Company has scheduled its annual meeting for July, 2000 in Aurora,
Colorado.
PART II
ITEM 5 - MARKET FOR 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 bid quotations for
the Company's common stock for the past two fiscal years, as reported by the
National Quotation Bureau monthly reports or "Pink Sheets". Prices reflect
inter-dealer prices, and do not necessarily reflect actual transactions, retail
mark-up, mark-down or commission.
11
<PAGE>
STOCK QUOTATIONS
----------------
HIGH LOW
---- ---
1998
----
Fourth Quarter $2.500 $1.250
1999
----
First Quarter $2.000 $1.250
Second Quarter $2.625 $1.250
Third Quarter $2.500 $1.000
Fourth Quarter $1.937 $1.250
At April 13, 2000, the number of record holders of the Company's common
stock was 286. These numbers do not include an indeterminate number of
stockholders whose shares are held by brokers as "nominees" or in street name.
DIVIDENDS
The Company has not paid any dividends with respect to its common
stock, and it is not anticipated that the Company will pay dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the period commencing on January 1, 1999, through December 31,
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
(before 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 with is predecessor
on October 8, 1998. For a discussion of the conversion of notes, see Note 3 to
the Financial Statements for the year ended December 31, 1999. 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 before the merger in 1998. The shares were issued in
reliance on the exemptions under Section 4(2) and Regulation D promulgated
therein.
The notes and associated warrants were issued and sold by the
predecessor 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 December 31, 1999, the Company issued
shares of its common stock upon conversion of such notes and exercise of such
12
<PAGE>
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 December 31, 1999, the Company
had issued a total of 2,780,852 shares of its common stock to 51 note holders
(1,084,871 shares in 1999 and 1,695,981 in 1998). Following the merger and
through December 31, 1999, 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.
(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.
Each of the investors that purchased securities from the Company in
1999 (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, Richmark Securities
was a broker-dealer registered with the National Association of Securities
Dealers ("NASD").
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth certain historical audited financial
data for In Store Media Systems, Inc., a Nevada corporation, for the fiscal
years ended December 31, 1999, 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, and historical unaudited
financial data for the fiscal year ended December 31, 1995.
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
Unaudited Audited
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and Expenses:
Research and development $ 13 $ 927,927 $ 1,728,466 $ 194,897 $ 250,873
General and administrative 297,083 695,252 840,688 866,858 1,549,301
Depreciation and amortization 6,638 31,672 51,438 61,777 66,229
------------ ------------ ------------ ------------ ------------
Operating Loss (303,734) (1,654,851) (2,620,592) (1,123,532) (1,866,403)
============ ============ ============ ============ ============
Other income (expense):
Interest income -0- 19,039 4,791 28,147 30,422
Litigation settlement -0- -0- (156,250) -0- -0-
Debt conversion costs -0- -0- (257,894) (20,000) (107,250)
Interest expense (1,341) (840,661) (1,551,362) (775,591) (1,242,471)
------------ ------------ ------------ ------------ ------------
Total other income (expense) (1,341) (821,622) (1,960,715) (767,444) (1,319,299)
------------ ------------ ------------ ------------ ------------
Net Loss $ (305,075) $(2,476,473) $(4,581,307) $(1,890,976) $(3,185,702)
============ ============ ============ ============ ============
Basic and diluted net loss per
common share $ (0.01) $ (0.06) $ (0.11) $ (0.04) $ (0.06)
Weighted average common shares
outstanding 40,900,000 41,300,000 40,800,000 49,000,000 57,900,000
BALANCE SHEET DATA:
Cash and cash equivalents $ 47,595 $ 704,740 $ 1,726 $ 316,444 $ 248,325
Working capital (deficit) 54,271 (2,044,309) (4,937,870) (3,680,153) (2,989,244)
Total assets 930,264 2,441,274 1,375,016 1,299,568 876,535
Long term liabilities 64,759 32,626 196,569 249,770 247,880
Shareholders equity (deficit) 173,010 (1,200,288) (4,267,082) (3,227,921) (2,791,628)
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATION
------------
OVERVIEW
The Company is a development stage company engaged in the development
of its system for selecting, distributing and electronically clearing coupons,
certain components of which are patented, as more fully described in ITEM 1
BUSINESS under the heading entitled "Patents, Trademarks and Tradenames." The
Company has generated no revenue from operations and has continually incurred
losses of approximately $13,108,616 since inception through December 31, 1999.
The Company expects to incur additional losses through the end of the 2000
fiscal year.
At December 30, 1999, the Company had negative stockholders' equity of
$2,791,628, which reflects $10,880,738 of paid in capital less accumulated
deficit of $13,108,616. 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 December 31, 1999, the
Company had a working capital deficit of $2,989,244, which is equal to the
amount of $431,039 in current assets less $3,420,283 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 actively pursing several financing opportunities. Some of the
financing alternatives involve an investment directly into the Company, and
others involve an investment into a subsidiary that is created to develop and
operate one of the Company's products as a business unit. The Company is unable
to provide any assurance that such 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.
14
<PAGE>
Management believes that a major capital and corporate restructuring
will be required in order to attract investment capital as well as qualified
management personnel. There currently are no capital funding transactions
pending and no assurances that such opportunities will become available in the
near future, nor that management will be able to keep present operations viable.
Through December 31, 1999, the Company remained burdened with debt
obligations and a continuing lack of working capital. Management currently is
focused on developing a product to create profitable operations and then
recapitalizing the business when it has a demonstrable cash flow model to show
potential investors
FINANCIAL CONDITION
The Company had $876,535 in total assets and approximately $3,668,163
in total liabilities at the end of fiscal year 1999, as compared to $1,299,568
and $4,527,489 at the end of fiscal 1998, respectively. Accounts payable and
accrued expenses at the end of fiscal year 1998 were $587,674 as compared to
$943,037 at December 31, 1998. The Company had a working capital deficit of
$2,989,244 at December 31, 1999, as compared to a working capital deficit of
$3,680,153 at December 31, 1998. The difference primarily is attributed to
reductions in the accounts payable of $355,363, reductions in the notes payable
of $642,353 and reductions in the notes payable (shareholder) of $23,500.
RESULTS OF OPERATIONS
The Company's operational costs at December 31, 1998 historically have
increased or decreased primarily due to the expansion or contraction of the
Company's ongoing research and development efforts. The Company has incurred
operating expenses of $8,235,057 since the inception of the Company's
predecessor in 1992 through December 31, 1999. These expenses include $3,225,002
in research and development expenses and $4,785,663 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.
FISCAL YEAR ENDED DECEMBER 31, 1999, COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998
For the fiscal year ended December 31, 1999, the Company sustained net
operating losses of $3,185,702, as compared to net losses of $1,890,976 for the
fiscal year ended December 31, 1998. The increase in operating losses primarily
was due to an increase in research and development expenses, and increase in
general and administrative expenses, an increase in depreciation and
amortization expenses and an increase in interest expense.
The Company's operating expenses for fiscal 1999 increased by
approximately 66% to $1,866,403, as compared to operating expenses of $1,123,532
for the 1998 fiscal year. Operating expenses consist of research and development
expenses, general and administrative expenses and depreciation and amortization
costs and expenses. The increase in operating expenses in 1999 was due to an
increase in research and development costs, which increased by approximately
$55,976 to $250,873 for the 1999 fiscal year, as compared to research and
development expenses of $194,897 for the 1998 fiscal year. The increase in
research and development expenses was due to an increase expenditures on design
rendering of the products to be produced, the creation of prototypes and the
development of an in-house lab, which is a mock, small-scale supermarket that is
used for testing and development. General and administrative expenses increased
by approximately $682,443 or 79% to $1,549,301 for the 1999 fiscal year, as
compared to general and administrative expenses of $866,858 for the preceding
fiscal year. The increase in general and administrative expenses primarily was
due to the addition of Lawrence Mortimer Executive Marketing and Sales, Michael
Parsons Director of Project Management and Technology and the addition of other
marketing and programming personnel. Depreciation and amortization costs
increased by 7% to $66,229, as compared to depreciation and amortization costs
of $61,777 for the 1998 fiscal year. The increase in depreciation and
amortization costs primarily was due to the purchase of additional computer
equipment and production machinery.
15
<PAGE>
The Company's net non-operating expenses (including non-operating
interest income, litigation settlement expenses and interest expense) increased
by approximately 72% to $1,319,299 for the fiscal year ended December 31, 1999,
as compared to non-operating expenses of $767,444 for the 1998 fiscal year. The
decrease was primarily due to a 60% increase in interest expense, which
represented 94% of the non-operating expenses for 1999 and approximately 101% of
the non-operating expenses for the 1998 fiscal year. The increase in interest
expense was primarily due to value assigned to the extention of the warrant
exercise period related to the Company's debt offerings.
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.
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.
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.
16
<PAGE>
At December 31, 1999, the Company had $3,420,282 in current
liabilities, of which $2,739,371 (including $599,284 of interest accrued
thereon) was in the form of convertible, short-term debentures issued by the
Company and its predecessor in private transactions during the 1998, 1997 and
1996 fiscal years. At December 31, 1999, the Company was in default of its
obligations under the notes issued to investors by the Company and its
predecessor. A principal portion of the notes was converted into shares of the
Company's common stock during the 1998 and 1999 fiscal years. At December 31,
1999, notes in the aggregate principal amount of $2,140,087 remained
outstanding, as compared to notes in the aggregate principal amount of
$2,782,440 that were outstanding on December 31, 1998. The remaining portion of
the Company's current liabilities is primarily comprised of continuing payment
obligations of approximately $490,000 (at December 31, 1999) to Unisys
Corporation. The Company relies on the availability of additional capital to
satisfy all such obligations.
The Company will require additional capital to continue and complete
development of its systems, to market its products and services and to implement
its business strategies. The Company has limited access to additional sources of
equity and debt financing and it can provide no assurance that additional funds
will be available on commercially acceptable terms or in a timely manner to
enable the Company to continue its operations as expected.
The Company's cash position deteriorated since the end of fiscal 1998
through December 31, 1999. At December 31, 1999, the Company had available cash
of $248,325, as compared to available cash of $316,444 at December 31, 1998. At
the current spending rate of approximately $125,000 per month, the Company
expects that such funds will be insufficient to continue operations beyond the
second 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 1998 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 December 31, 1999, the total principal amount payable on all
such previously issued notes decreased by approximately 23% to $2,140,087, as
compared to $2,782,440 payable on notes at December 31, 1998.
The Company is a party to 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. Upon consummation
of this transaction, the Company will acquire a national database containing
information on approximately 73 million households, which the Company expects to
contribute to its wholly owned subsidiary, Data Driven Marketing, Inc. Other
than in connection with the above-described transaction, the Company has no
future commitments for capital expenditures.
During fiscal year ended December 31, 1999, the Company issued
4,733,841 shares of its common stock valued at $3,182,100 to an aggregate of 68
investors. See Notes 3 and 5 to the Financial Statements.
The Company lacks sufficient capital or revenue to continue supporting
the losses generated by its development. The Company, as it is currently
structured has made progress in becoming an attractive investment for new equity
investors players, but the Company has a long way to go to qualify for
conventional bank or venture capital financing. Additional equity capital is
necessary to finance working capital for development. Management is resolved to
continue search for the right financing formula as long as it can quickly put
the Company, or its subsidiaries, on the path to generate positive cash flow.
Due to the current financial condition of the Company and the relative lack of
liquidity in the market for the Company's common stock, no assurance can be made
that the Company will be successful in raising any substantial amount of capital
through the sale of equity securities, or with additional bank debt on favorable
terms in the near future. Never the less, due to such conditions, the Company
may be required to issue common stock to pay executives, consultants and other
employees, which may have a dilative effect on other shareholders of the
Company. Failure of the Company to acquire additional capital in the form of
either debt or equity capital will most likely impair the ability of the Company
to meet its obligations in the near or medium term. (See - Note 1 to Financial
Statements).
17
<PAGE>
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.
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.
18
<PAGE>
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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ---------------------------------------------------------------------
The Company does not own or invest in market risks sensitive
instruments for trading or other purposes.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements listed in the accompanying index to financial
statements are set forth under Part IV, Item 13 to this Report, and are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
To the best knowledge of current management, there were no
disagreements with the Company's current auditor.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Effective on March 8, 2000, due to failing health, our former Chief
Executive Officer, Everett E. Schulze, Jr. was replaced by Donald P. Uhl. Our
executive officers and directors and their ages at the date of this annual
report are as follows:
NAME AGE POSITION
- ---- --- --------
Donald P. Uhl 65 Chief Executive Officer, President and Chairman
Thomas Y. Gorman 42 Chief Financial Officer and Director
Charles Chavez 53 Vice President, Technology
Lawrence Mortimer 51 Senior Vice President of Marketing
Frank J. Pirri 58 Director
Joel Monsky 61 Director
Charles Schulze 28 Director of Purchasing and Director
19
<PAGE>
The following discussion includes biographical information regarding
the Company's officer, directors and significant employees.
DONALD P. UHL, age 65, is the co-founder of the Company and has been
Chief Executive Officer and President since March 2000. From inception of the
Company's predecessor in 1992 until March 2000, he has served as the Executive
Vice President and a director of the Company and its predecessor. 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.
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).
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.
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.
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.
20
<PAGE>
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.
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.
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.
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.
21
<PAGE>
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.
ITEM 11 - 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 $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other name and Restricted Stock
Principal Compensation Fiscal Stock Awards Options/
Position station ($) Year Salary ($) Bonus ($) Other ($) (#) SARs (#) ($) All
-------------------- ---- ---------- --------- --------- --- -------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Everett E. Schulze, Jr. 1999 $ 120,000 -0- -0- -0- -0- -0- -0-
Director (1)(2) 1998 $ 120,000 -0- -0- -0- 1,000,000 -0- -0-
1997 $ 120,000 -0- -0- -0- -0- -0- -0-
Donald P. Uhl 1999 $ 80,000 -0- -0- -0- -0- -0- -0-
President, Chief 1998 $ 80,000 -0- -0- -0- -0- -0- -0-
Executive Officer and 1997 $ 76,000 -0- -0- -0- -0- -0- -0-
Chairman
Thomas Y. Gorman (1) 1999 $ 96,000 $ 15,000 -0- -0- -0- -0- -0-
Chief Financial Officer 1998 $ 48,000 $ 5,000 -0- 37,500 100,000 -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.
(2) Mr. Schulze served as the Company's Chief Executive Officer
and Chairman of the Board at the end of the 1999 fiscal year.
Due to failing health, Mr. Schulze was replaced recently by
Mr. Uhl.
22
<PAGE>
DIRECTOR 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.
ITEM 12 - 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 at
December 31, 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 OF COMMON STOCK PERCENTAGE OF SHARES OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED (1)
------------------------------------ -------------------------------- ------------------------------
<S> <C> <C>
Ronald F. Anderegg 4,886,921 7.4%
1600 South Beacon Boulevard
Grand Havem MI 49417
Charles A. Schulze 20,614,198(2) 31.2%
6756 South Holland Way
Littleton, CO 80128
Donald P. Uhl 3,705,000 5.6%
15423 East Batavia Drive
Aurora, Colorado 80011
Charles Chavez 1,045,875(4) 1.6%
15423 East Batavia Drive
Aurora, Colorado 80011
Frank Pirri 525,000 *
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
26,077,573 (2)(3) 39.4%
All Officers and Directors as a Group
(7 persons)
</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.
23
<PAGE>
(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.
ITEM 13 - 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 $110,167. 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.
24
<PAGE>
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.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
Audited Financial Statements for the fiscal year ended December 31,
1999, including report of independent auditors.
(a) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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 (1)
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 (1)
10.1 Memorandum of Understanding dated January 13, 1997,
with Unisys Corporation (1)(3)
10.1.2 Memorandum of Understanding dated February 25, 1997,
with Unisys Corporation (1)(3)
10.1.3 Memorandum of Understanding dated March 19, 1997,
with Unisys Corporation (1)(3)
10.1.4 Memorandum of Understanding dated April 4, 1997,
with Unisys Corporation (1)(3)
10.2 Employment Agreement dated August 1, 1999, by and
between Registrant and Lawrence Mortimer (1)
10.3 Revised Incentive Bonus Program dated June 7, 1999,
relating to bonus program for Thomas Gorman (1)
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)
23.1 Consent of independent auditors (2)
27.1 Financial Data Schedule (2)
- -----------------
(1) Previously filed with the Commission with the Company's Registration
Statement on Form 10, as amended.
(2) Filed herewith.
(3) Portions ommitted pursuant to a confidential treatment request to be filed
separately with the Commission.
(b) REPORTS ON FORM 8-K.
There were no Reports on Form 8-K of the Securities and Exchange
Commission filed during the quarter ended December 31, 1999.
25
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE PERIOD FROM INCEPTION TO DECEMBER 31, 1999
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND
1999 AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH DECEMBER
31, 1999:
Report of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 1998 and 1999 F-3
Statement of Operations for Years Ended December 31, 1997,
1998 and 1999, and for the Period from December 30, 1992
(Inception) Through December 31, 1999 F-5
Statement of Changes in Stockholders' Equity (Deficit)
For the Period from December 30, 1992 (Inception) Through
December 31, 1999 F-6
Statement of Cash Flows For Years Ended December 31, 1997,
1998 and 1999, and for the Period from December 30, 1992
(Inception) Through December 31, 1999 F-10
Notes to Financial Statements F-12
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, 1998 and 1999, and the
related statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999, and for the period from December 30, 1992 (inception) through December
31, 1999. 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, 1998 and 1999 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999,
and for the period from December 30, 1992 (inception) through December 31,
1999, 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, 1999 of
$2,791,628. 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
February 18, 2000, except
for Note 9 as to which
date is March 29, 2000
F-2
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
ASSETS
1998 1999
---- ----
Current assets:
Cash and cash equivalents $ 316,444 $ 248,325
Accounts receivable - Continuum (Notes 5 and 7) 100,000 -
Note receivable - related party (Note 2) 58,588 63,860
Inventory 121,075 117,295
Other current assets 1,459 1,559
--------- ---------
Total current assets 597,566 431,039
Property and equipment, at cost:
Manufacturing equipment 333,166 341,277
Office furniture and equipment 89,462 123,016
Leasehold improvements 55,228 55,228
--------- ---------
477,856 519,521
Less accumulated depreciation and amortization (144,230) (206,304)
--------- ---------
Net property and equipment 333,626 313,217
Other assets:
Advances and note receivable - related parties
(Note 2) 280,344 45,085
Debt issuance costs, net of accumulated amortization 14,172 -
Deposits (Note 7) 30,970 29,159
Patent costs, net of accumulated amortization of
$13,394 (1998) and $18,089 (1999) 42,890 58,035
--------- ---------
Net other assets 368,376 132,279
--------- ---------
$1,299,568 $ 876,535
========== ==========
See accompanying notes.
F-3
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1999
---- ----
Current liabilities:
Accounts payable (Note 7) $ 943,037 $ 587,674
Interest payable 430,468 599,284
Notes payable (Note 3) 2,782,440 2,140,087
Notes payable-shareholder (Note 3) 113,500 90,000
Obligations under capital leases (Note 7) 8,274 3,238
--------- ---------
Total current liabilities 4,277,719 3,420,283
Long-term liabilities:
Obligations under capital leases (Note 7) 249,770 -
Debenture payable - related party (Note 7) - 247,880
--------- ---------
Total long-term liabilities 249,770 247,880
Commitments and contingencies (Notes 5 and 7)
Stockholders' equity (deficit) (Notes 3 and 5):
Preferred stock, no par value; 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 100,000,000 shares
authorized, 59,094,686 (1998) and 63,828,527
(1999) shares issued 590,947 638,285
Additional paid-in capital 6,072,796 10,242,453
Stock subscriptions received 75,000 -
Treasury stock, at cost; 2,687,500 (1998) and
9,374,742 (1999) shares (43,750) (563,750)
Deficit accumulated during the development stage (9,922,914) (13,108,616)
---------- ----------
Total stockholders' equity (deficit) (3,227,921) (2,791,628)
---------- -----------
$1,299,568 $ 876,535
========== ==========
See accompanying notes.
F-4
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1997, 1998 and 1999
and for the Period from December 30, 1992 (inception) through December 31, 1999
Cumulative
amounts from
1997 1998 1999 inception
---- ---- ---- -----------
Costs and expenses:
Research and development $ 1,728,466 $ 194,897 $ 250,873 $ 3,225,002
General and administrative 840,688 866,858 1,549,301 4,785,663
Depreciation and amortization 51,438 61,777 66,229 224,392
----------- --------- --------- ----------
Operating loss (2,620,592) (1,123,532)(1,866,403) (8,235,057)
Other income (expense):
Interest income 4,791 28,147 30,422 82,399
Litigation settlement (Note 7) (156,250) - - (156,250)
Debt conversion costs (Note 3) (257,894) (20,000) (107,250) (385,144)
Interest expense (1,551,362) (775,591)(1,242,471) (4,414,564)
----------- --------- --------- ----------
Total other income (expense) (1,960,715) (767,444)(1,319,299) (4,873,559)
----------- --------- --------- ----------
Net loss (Note 4) $(4,581,307)$(1,890,976)$(3,185,70)$(13,108,616)
=========== =========== ========== ============
Basic and diluted net loss per common
share (Note 6) $ (.11) $ (.04) $ (.06) $ (.31)
======= ======= ======= ======
Weighted average common shares
outstanding (Note 6) 40,800,000 49,000,000 57,900,000 42,800,000
=========== =========== ========== ==========
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, 1999
<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 ($.01 per share)
(Note 5) 297,000 2,970 - - - - 2,970
Exercise of warrants in 1996
($.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
</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, 1999
(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>
Settlement reached to
repurchase 2,687,500
shares of common stock of
the Company in 1996 ($.02
per share)(Note 5) - - - - (43,750) - (43,750)
Sale of common stock for
cash and settlement of
accounts payable in 1997
($.05 per share) 585,000 5,850 24,941 - - - 30,791
Issuance of warrants in
connection with debt
offering in 1997 (Note 3) - - 361,201 - - - 361,201
Purchase of common stock by
conversion of note
principal in 1997
($.27 per share)(Note 3) 1,416,146 14,161 608,755 - - - 622,916
Purchase of common stock
by conversion of note
interest in 1997
($.27per share)(Note 3) 108,241 1,082 27,782 - - - 28,864
Additional purchases of
common stock for cash
in connection with note
conversions in 1997
($.27 per share)(Note 3) 1,765,278 17,653 453,088 - - - 470,741
Net loss for the period
from inception through
December 31, 1997 - - - - - (8,031,938) (8,031,938)
---------- -------- ---------- -------- -------- ---------- -----------
Balance, December 31, 1997 45,393,666 453,937 3,354,669 - (43,750) (8,031,938) (4,267,082)
Issuance of warrants in
connection with
debt offering (Note 3) - - 157,996 - - - 157,996
Issuance of common stock
in exchange for services
($.17 per share) 937,500 9,375 150,625 - - - 160,000
Sale of common stock for
cash in 1998 ($.13 per
share) 2,250,000 22,500 277,500 - - - 300,000
</TABLE>
(Continued on following page)
See accompanying notes.
F-7
<PAGE>
<TABLE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) For the
Period from December 30, 1992 (inception) through December 31, 1999
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional during the
Common stock paid-in Stock Treasury development
Shares Amount capital subscription stock stage Total
------ ------ ----------- ------------ -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of warrants by
conversion of note interest
($.14 per share( (Note 3) 56,260 562 3,188 - - - 3,750
Additional purchases of common
stock for cash in connection
with note conversions
($.27 per share)(Note 3) 427,500 4,275 109,725 - - - 114,000
Purchase of common stock by
conversion of note principal
and interest ($.52 per share)
(Note 3) 3,266,250 32,663 1,680,506 - - - 1,713,169
Exercise of warrants by
conversion of note principal
and interest ($.52 per share)
(Note 3) 736,543 7,365 369,612 - - - 376,977
Cash received in connection with
subsequent 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) - - - 29,245
Settlement of accounts payable
by the issuance of common
stock ($1.08 per share) 26,977 270 28,975 - - - 29,245
Net loss for the year ended
December 31, 1998 - - - - - (1,890,976) (1,890,976)
---------- -------- ---------- ------- -------- ----------- -----------
59,094,686 590,947 6,072,796 75,000 (43,750) (9,922,914 (3,227,921)
Purchase of common stock by
conversion of note principal
and interest ($.73 per share)
(Note 3) 543,750 5,438 393,551 - - - 398,989
Exercise of warrants by
conversion of note principal
and interest ($.53 per share)
(Note 3) 541,121 5,411 283,638 (75,000) - - 214,049
</TABLE>
(Continued on following page)
See accompanying notes.
F-8
<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, 1999
(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>
Sale of common stock for
cash and in exchange for
stock offering services
($1.00 per share)(Note 5) 3,456,360 34,563 2,444,139 - - - 2,478,702
Exercise of warrants 116,250 1,162 17,838 - - - 19,000
Issuance of common stock
for employee compensation
$.90 per share) 50,000 500 44,500 - - - 45,000
Purchase of 6,687,242
treasury shares ($.08
per share) (Note 7) - - - - (520,000) - (520,000)
Issuance of common stock
in settlement of account
payable ($1.00 per share) 26,360 264 26,096 - - - 26,360
Extension of exercise period
of warrants issued in
connection with debt
offerings - - 959,895 - - - 959,895
Net loss for the year
ended December 31, 1999 - - - - - (3,185,702) (3,185,702)
---------- -------- ---------- ------- --------- ----------- -----------
Balance, December 31, 1999 63,828,527 $638,285 $10,242,453 $ - $(563,750) $(13,108,616)$(2,791,628)
========== ======== =========== ======= ========== ============ ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Cumulative
amounts
from
1997 1998 1999 inception
---- ---- ---- ---------
Cash flows from operating
activities:
Net loss $(4,581,307) $(1,890,976) $(3,185,702) $(13,108,616)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amorti-
zation 51,438 61,777 66,229 224,392
Common stock issued
for services, patents,
payables and extension
of warrants - 189,245 1,075,494 1,333,200
Amortization of debt
issuance costs 677,961 291,120 72,568 1,718,508
Reduction in note
receivable - related
party charged to
research and development - - 244,311 244,311
Changes in assets and
liabilities:
Accounts receivable
and notes receivable 302,500 (4,838) 94,728 (63,860)
Inventory 52,454 30,079 3,780 (117,295)
Accounts payable 1,024,079 (299,818) (355,363) 587,674
Interest payable 189,674 300,822 168,816 709,174
Other (1,000) (430) (100) (1,559)
--------- -------- -------- --------
Total adjustments 2,297,106 567,957 1,370,463 4,634,545
---------- -------- --------- ---------
Net cash used in
operations (2,284,201) (1,323,019) (1,815,239) (8,474,071)
Cash flows from investing
activities:
Purchase of property
and equipment (49,995) (3,084) (41,665) (257,554)
Decrease in advances -
related party (25,280) (21,242) (9,052) (289,396)
Patent costs (7,647) (5,220) (19,300) (76,123)
Lease deposits (24,183) - 1,811 (29,159)
---------- -------- --------- ---------
Net cash used in
investing activities (107,105) (29,546) (68,206) (652,232)
Cash flows from financing
activities:
Proceeds from sale of
common stock 745,860 1,051,069 2,397,751 5,310,647
Purchase of treasury
stock - - (520,000) (520,000)
Proceeds from common
stock subscriptions - 75,000 - -
Proceeds from (repayments
of) stockholder loans 102,500 11,000 (23,500) 90,000
Repayments of capital
leases (31,179) (13,283) (6,926) (10,849)
Proceeds from notes
payable 962,500 597,500 - 4,690,000
Repayments of notes
payable (91,389) (54,003) (31,999) (185,170)
Net cash provided by
financing activities 1,688,292 1,667,283 1,815,326 9,374,628
---------- -------- --------- ---------
Net increase (decrease)
in cash (703,014) 314,718 (68,119) 248,325
Cash and cash equivalents
at beginning of period 704,740 1,726 316,444 -
---------- -------- --------- ---------
Cash and cash equivalents
at end of period $ 1,726 $ 316,444 $ 248,325 $ 248,325
========== ========== ========= =========
(Continued on following page)
See accompanying notes.
F-10
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999 and for the
Period from January 1, 1993 (inception) through December 31, 1999
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1997 1998 1999 inception
---- ---- ---- ----------
Cash paid during period for
interest $ 479,979 $ 430,491 $ 87,484 $ 1,187,946
Supplemental disclosure of non-cash financing activities:
Cumulative
amounts
from
1997 1998 1999 inception
---- ---- ---- ----------
Common stock issued for:
Services, patents and
payables $ - $ 189,245 $ 71,360 $ 329,066
Conversion of notes payable 377,639 1,376,750 368,750 2,123,139
Conversion of interest 29,813 80,077 44,239 154,129
Cancellation of notes payable - - 300,000 300,000
------- --------- -------- ---------
$407,452 $1,646,072 $784,349 $2,906,334
======== ========== ======== ==========
Warrants issued in debt offer:
Additional paid-in capital $ 361,201 $ 157,996 $ 959,895 $ 2,620,007
Expensed as interest (361,201) (157,996) (959,895) (2,620,007)
Capital leases recorded:
Purchase of fixed assets $ 251,803 $ - $ - $ 261,967
Obligations under capital
lease (251,803) - - (261,967)
See accompanying notes.
F-11
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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, 1999.
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 ($13,108,616 since
inception) and a stockholders' deficit at December 31, 1999 of $2,791,628.
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 raised approximately $2,400,000 in
additional equity funding in 1999 which provided additional liquidity for the
Company for current operations. Subsequent to year end, the Company is
offering for sale up to $3,500,000 of Series A preferred stock (see Note 9).
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-12
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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-13
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
1. Organization and summary of significant accounting policies (continued)
Advertising costs:
The Company expenses the costs of advertising as incurred. Advertising
expense was $10,817, $13,843 and $136,371 for the years ended December 31,
1997, 1998 and 1999, 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,
1999 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). The Company acquired 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. During
1999, the Company forgave the loan in exchange for a patent. The balance of
the loan and accrued interest of $244,311 has been recorded as research and
development expense. Through December 31, 1999, the Company has advanced
$45,085 to a company owned by the President. The advance is due on demand.
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-14
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
3. Notes payable
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 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 to interest expense 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 interest expense during 1997, 1998 and 1999.
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 conversion provisions in the note have been reflected as debt
conversion costs amounting to $257,894. 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-15
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
3. Notes payable (continued)
During 1998 and 1999, the Company offered its note holders the opportunity to
convert their note principal, accrued interest and warrants into shares of
common stock. The note holders purchased 3,266,250 and 543,750 shares of
common stock in consideration for $1,006,250 and $141,250 in note principal,
$116,062 and $22,989 of accrued interest and cash of $735,750 and $148,750
less offering costs of $144,893 and $0, respectively. In connection with the
revised terms of the note conversion offer, the Company recognized debt
conversion costs of $0 and $86,000 for the years ended December 31, 1998 and
1999, respectively.
During 1998 and 1999, the Company offered its note holders the opportunity to
exercise their warrants using note principal and interest. The note holders
purchased 736,543 and 541,121 shares of common stock in consideration for
$370,500 and $227,500 in note principal, $59,827 and $40,299 of accrued
interest less offering costs of $53,350 and $0, respectively. In connection
with the warrant exercise offer in 1998 and 1999, the Company issued a net of
41,983 and 48,207 new warrants valued at $20,000 and $21,250, respectively,
and reflected as debt conversion costs.
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, 1998 and 1999 consisted of the
following:
1998 1999
9% Notes payable, interest payable quarterly,
principal past due, unsecured, in default at
December 31, 1999 $12,490,836 $ 2,090,087
10% Notes payable, interest payable quarterly,
principal past due, unsecured 350,000 50,000
Unamortized discount (58,396) -
----------- ---------
$ 2,782,440 $2,140,087
=========== ==========
Notes payable - shareholder at December 31, 1998 and 1999 consisted of the
following:
1998 1999
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% $ 113,500 $ 90,000
========= ========
F-16
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
4. Income taxes
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $6,083,000, 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:
2010 $ 339,700
2011 1,110,000
2012 2,054,000
2013 520,000
2014 2,059,300
---------
$6,083,000
==========
At December 31, 1998 and 1999, total deferred tax assets and valuation
allowance are as follows:
1998 1999
Net operating loss carryforwards $1,500,000 $2,269,000
Capitalized pre-operating costs 1,361,000 1,361,000
Research and development tax credits 220,000 220,000
---------- ----------
Total 3,081,000 3,850,000
Less valuation allowance (3,081,000) (3,850,000)
---------- ----------
$ - $ -
========== ==========
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.
F-17
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
5. Stockholders' equity (continued)
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 owned 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.
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.
F-18
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
5. Stockholders' equity (continued)
As settlement of the Company's lawsuit against HealthStar, Inc. and Thomas
Stateman (HealthStar/Stateman (see Note 7)), in 1996 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.
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).
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 December 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). Offering
costs of $457,658 were incurred for the 29.36 units. In addition, 520,000
shares of common stock and 520,000 warrants were issued as commissions.
F-19
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
5. Stockholders' equity (continued)
Stock warrants:
The following is a summary of stock warrant activity:
Exercise Number of
price shares
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
Issued in 1999 $1.00, $1.25 and $1.33 3,612,961
Exchanged in 1999 $.067, $.667 and $1.33 (1,135,313)
Exercised in 1999 $.067and $.667 (105,000)
-----------
Balance at December 31, 1999 12,112,060
===========
During 1999, the Company extended the exercise period of the remaining A, B
and C warrants issued in 1996 in connection with the private placement of
promissory notes for an additional 90 to 120 days. For accounting purposes
the extension is treated as an issuance of warrants and therefore were
valued at $959,895 and were treated as additional paid-in capital and
interest expense.
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, 1999.
No compensation was recorded under this award. No compensation costs would
have been recorded if such cost were computed under the provision of
Statement of Financial Accounting Standards No.123, Accounting for Stock -
Based Compensation.
F-20
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
5. Stockholders' equity (continued)
The following is a summary of stock option activity:
Weighted
average
Option price per exercised Number of
share price shares
Balance December 31, 1998 $ 1.00 $1.00 2,000,000
Granted $ 1.00 $1.00 1,000,000
Exercised $ - $ - -
------ ----- ---------
Balance December 31, 1998 $ 1.00 $1.00 3,000,000
=========
The following is additional information with respect to those options and
warrants outstanding at December 31, 1999:
Weighted
average Weighted
remaining average
contractural life in exercise Number of
Price per share share price shares
Options $1.00 3.5 $1.00 3,000,000
Warrants $.053 - $1.33 .25 $0.70 12,112,060
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-21
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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, 1999, the
Company has paid Unisys $943,716 and has recorded a payable of $490,688 at
December 31, 1999. The Company will owe an estimated $1,100,000 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 in 1997. 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 1997. 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
entitled 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 gave 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 $520,000 in cash which included extension
payments of $20,000.
F-22
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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, 1997, 1998 and 1999 amounted to $34,417, $37,560 and
$37,860, 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.
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.
The current minimum annual commitments under the operating and capital leases
are as follows:
Operating
Year ended December 31, Capital leases leases Total
2000 $ 3,431 $ 6,840 $ 10,271
2001 - 3,285 3,285
------- ------- --------
Total minimum lease payments 3,431 $10,125 $ 13,556
======= ========
Amount representing interest 193
-------
Present value of future minimum payments 3,238
Current portion of lease obligations 3,238
-------
Obligations under capital leases due
after one year $ -
=======
F-23
<PAGE>
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
7. Commitments and contingencies (continued)
Property recorded under capital leases include the following amounts:
1998 1999
Manufacturing equipment $ 301,157 $ -
Office furniture and equipment 37,688 13,320
Accumulated amortization (89,071) (4,129)
--------- -------
Net capitalized leased property $ 249,774 $ 9,191
========= =======
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
During January 2000, the Company sold .5 unit in a private placement
resulting in proceeds to the Company of $50,000. The .5 unit consisted of
50,000 shares of common stock and warrants to purchase 50,000 shares of
common stock exercisable during the first year at $1.25 per share and at
$1.50 per share during the second year.
During January and February 2000, the Company issued 2,128,121 shares of
common stock upon the exercise of warrants resulting in proceeds of $50,311.
The exercise price of certain of the warrants was reduced pursuant to a
settlement with a consultant subsequent to year end.
During March 2000, the Company borrowed $50,000 from an individual secured by
100,000 shares of common stock owned by an officer of the Company. The loan
is due on April 15, 2000.
On March 29, 2000, the board of directors authorized the sale of up to 14
shares of its Series A preferred stock for $250,000 per share. The maximum
proceeds is $3,500,000 if all shares are sold. The board of directors has
designated the Series A preferred stock as having a liquidation preference of
$250,000, accruing cumulative dividends at the rate of 8% per annum of the
liquidation preference, and is convertible into common stock at the rate of
$.385 per common share.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report on Form
10K-SB to be signed on its behalf by the undersigned, thereunto duly authorized.
IN STORE MEDIA SYSTEMS, INC.
Date: April 14, 2000 By: /s/ DONALD P. UHL
----------------------------------------------
Donald P. Uhl
President, Chief Executive Officer, and
Chairman of the Board
By: /s/ THOMAS Y. GORMAN
----------------------------------------------
Thomas Y. Gorman, Chief Financial Officer and
Director (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this amended report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
IN STORE MEDIA SYSTEMS, INC.
Date: April 14, 2000 By: /s/ DONALD P. UHL
----------------------------------------------
Donald P. Uhl, Director
IN STORE MEDIA SYSTEMS, INC.
Date: April 14, 2000 By: /s/ LAWRENCE MORTIMER
----------------------------------------------
Lawrence Mortimer, Director
IN STORE MEDIA SYSTEMS, INC.
Date: April 14, 2000 By: /s/ THOMAS Y. GORMAN
----------------------------------------------
Thomas Y. Gorman, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS, WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy statement has been sent to security holders.
A proxy statement will be sent to stockholders subsequent to filing this Form
10-K and will be furnished to the Securities and Exchange Commission on the date
such information is sent to stockholders.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 248,325
<SECURITIES> 0
<RECEIVABLES> 63,860
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 431,039
<PP&E> 591,521
<DEPRECIATION> (206,304)
<TOTAL-ASSETS> 876,535
<CURRENT-LIABILITIES> 3,420,283
<BONDS> 0
0
0
<COMMON> 638,285
<OTHER-SE> (3,429,913)
<TOTAL-LIABILITY-AND-EQUITY> 876,535
<SALES> 0
<TOTAL-REVENUES> 30,422
<CGS> 0
<TOTAL-COSTS> 1,866,403
<OTHER-EXPENSES> 107,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,242,471
<INCOME-PRETAX> (3,185,702)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,185,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,185,702)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
