UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: __________
IN STORE MEDIA SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 84-1249735
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
15423 East Batavia Drive, Aurora, Colorado 80011
- -------------------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
(303) 364-6550
- -------------------------------------------------------------------------------
(Registrant's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's classes of common stock, as of
May 14, 2001 is 73,450,326 shares, $.01 par value.
IN STORE MEDIA SYSTEMS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Balance Sheet - December 31, 2000 and March 31, 2001
(unaudited) 2 and 3
Statement of Operations - For the Three Months Ended
March 31, 2000 and 2001 and for the period from December
30, 1992 (inception) through March 31, 2001 (unaudited) 4
Statement of Stockholders' Equity - For the Three Months
Ended March 31, 2001 (unaudited) 5
Statement of Cash Flows - For the Three Months Ended
March 31, 2000 and 2001 and for the period from December
30, 1992 (inception) through March 31, 2001 (unaudited) 6
Notes to Unaudited Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION 14
1
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2000 and March 31, 2001
(Unaudited)
ASSETS
2000 2001
---- ----
Current assets:
Cash and cash equivalents $ 191,039 $ 124,245
Inventory 5,925 5,525
Other current assets 44,270 31,654
---------- ----------
Total current assets 241,234 161,424
Property and equipment, at cost:
Manufacturing equipment 79,076 79,076
Office furniture and equipment 128,614 183,430
Leasehold improvements 55,228 55,228
---------- ----------
262,918 317,734
Less accumulated depreciation and amortization (150,853) (159,853)
---------- ----------
Net property and equipment 112,065 157,881
Other assets:
Advances and note receivable -
related parties 46,658 47,433
Debt issuance costs, net of accumulated
amortization 10,000 10,000
Patent costs, net of accumulated amortization
of $23,926 (2000) and $25,656 (2001) 86,754 85,211
---------- ----------
Net other assets 143,412 142,644
---------- ----------
$ 496,711 $ 461,949
========== ==========
See accompanying notes.
2
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2000 and March 31, 2001
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2000 2001
---- ----
Current liabilities:
Accounts payable $ 597,330 $ 751,646
Interest payable 610,780 404,347
Accrued wages 48,665 32,000
Notes payable (Note 2) 1,679,976 987,500
Notes payable-shareholder 251,000 -
Short-term notes payable 354,874 20,169
------------ ------------
Total current liabilities 3,542,625 2,195,662
Stockholders' equity (deficit) (Notes 2, 4, 5 and 6):
Preferred stock, no par value; 50,000,000
shares authorized, 3 shares issued and out-
standing liquidation preference $750,000 750,000 750,000
Common stock, $.01 par value; 150,000,000
shares authorized, 67,631,621 (2000) and
73,450,326 (2001) shares issued 67,631 73,450
Additional paid-in capital 13,076,110 17,602,868
Stock subscriptions received - -
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development
stage (16,375,905) (19,596,281)
------------ ------------
Total stockholders' equity (deficit) (3,045,914) (1,733,713)
------------ ------------
$ 496,711 $ 461,949
============ ============
See accompanying notes.
3
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2000 and 2001
and for the Period from December 30, 1992 (inception) through March 31, 2001
(Unaudited)
Cumulative
amounts from
2000 2001 inception
---- ---- ---------
Revenues:
Coupon handling fees and othe $ - $ 336 $ 336
Costs and expenses:
Research and development - 53,000 3,328,352
General and administrative 445,071 728,675 7,219,059
Depreciation and amortization 16,739 10,729 304,061
------------- ------------- -------------
Total costs and expenses (461,810) (792,404) (10,851,472)
------------- ------------- -------------
Operating loss (461,810) (792,068) (10,851,136)
Other income (expense):
Interest income 1,142 2,252 92,212
Litigation settlement - - (156,250)
Restructuring costs - - (196,511)
Debt conversion costs - (500,548) (1,177,378)
Interest expense (129,946) (1,903,956) (6,526,559)
------------- ------------- -------------
Total other income
(expense) (128,804) (2,402,252) (7,964,486)
------------- ------------- -------------
Net loss (Note 3) (590,614) (3,194,320) (18,815,622)
Preferred stock dividends - 26,056 30,659
------------- ------------- -------------
Net loss applicable to common
stockholders $ (590,614) $ (3,220,376) $(18,846,281)
============= ============= =============
Basic and diluted net loss
per common share $ (.01) $ (.05) $ (.41)
============= ============= =============
Weighted average common
shares outstanding 55,200,000 62,400,000 45,900,000
============= ============= =============
See accompanying notes.
4
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months Ended March 31, 2001
(Unaudited)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ ----------
Balance, December 31, 2000 3 $750,000 67,631,621 $67,631 $13,076,110
Sale of common stock for cash ($.27 per share)
(Note 4) - - 3,703,705 3,704 996,296
Preferred stock dividends - - - - -
Intrinsic value of stock options granted to
officers of the Company (Note 5) - - - - 280,123
Conversion of notes payable into common
stock (Note 2) - - 2,115,000 2,115 1,418,447
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) - - - - 1,831,892
Net loss for the three months ended
March 31, 2001 - - - - -
--- -------- ---------- ------- -----------
Balance, March 31, 2001 3 $750,000 73,450,326 $73,450 $17,602,868
=== ======== ========== ======= ===========
Deficit
accumulated
during the
Treasury development
stock stage Total
-------- ----------- -----
Balance, December 31, 2000 $(563,750) $(16,375,905) $(3,045,914)
Sale of common stock for cash ($.27 per share)
(Note 4) - - 1,000,000
Preferred stock dividends - (26,056) (26,056)
Intrinsic value of stock options granted to
officers of the Company (Note 5) - - 280,123
Conversion of notes payable into common
stock (Note 2) - - 1,420,562
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) - - 1,831,892
Net loss for the three months ended
March 31, 2001 - (3,194,320) (3,194,320)
--------- ------------ -----------
Balance, March 31, 2001 $(563,750) $(19,596,281) $(1,733,713)
========= ============ ===========
See accompanying notes.
5
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2001
and for the Period from December 30, 1992 (inception) through March 31, 2001
(Unaudited)
Cumulative
amounts
from
2000 2001 inception
---- ---- ----------
Net loss $ (590,614) $ (3,194,320) $(18,815,622)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 16,739 10,729 304,061
Restructuring charges - - 196,511
Common stock issued for services,
patents and payables 49,500 2,612,563 4,801,582
Amortization of debt issuance
costs - - 1,560,512
Reduction in note receivable -
related party charged to research
and development - - 244,311
Changes in assets and liabilities:
Accounts receivable and notes
receivable - - (63,860)
Inventory - 400 (109,905)
Other assets - 12,616 (31,654)
Accounts payable 18,143 154,316 751,646
Interest payable 74,997 21,105 947,096
Other 49,251 (16,665) 32,000
------------- ------------- -------------
Total adjustments 208,630 2,795,064 8,632,300
------------- ------------- -------------
Net cash used in operations (381,984) (399,256) (10,183,322)
Purchase of property and equipment (1,623) (54,815) (321,843)
Proceeds from sale of property and
equipment - - 125,000
Advances - related party (287) (775) (291,744)
Patent costs (8,553) (187) (110,866)
Lease deposits - - (27,880)
Debt issuance costs - - (10,000)
------------- ------------- -------------
Net cash used in investing
activities (10,463) (55,777) (637,333)
Proceeds from sale of common stock 109,187 1,000,000 6,360,647
Purchase of treasury stock - - (520,000)
Proceeds from sale of preferred
stock - - 750,000
Preferred stock dividends - (26,056) (30,659)
Proceeds from (repayments of)
stockholder loans - (251,000) -
Repayments of capital leases - - (14,087)
Proceeds from notes payable 50,000 - 5,044,874
Repayments of notes payable - (334,705) (645,875)
------------- ------------- -------------
Net cash provided by financing
activities 159,187 388,239 10,944,900
------------- ------------- -------------
Net increase (decrease) in cash (233,260) (66,794) 124,245
Cash and cash equivalents at
beginning of period 248,325 191,039 -
------------- ------------- -------------
Cash and cash equivalents at
end of period $ 15,065 $ 124,245 $ 124,245
============= ============= =============
See accompanying notes.
6
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
1. Basis of presentation
The accompanying financial statements have been prepared by the Company,
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of March 31, 2001, and the results of operations and cash flows
for the periods ended March 31, 2000 and 2001.
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 ($18,815,622 since
inception) and a stockholders' deficit at March 31, 2001 of $1,733,713. 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. In January 2001, the Company
completed a private equity funding agreement that provided the Company with
$2,052,000 of equity, enabling the Company to begin the commercial
introduction of its proprietary electronic coupon clearing system. In
connection with this funding agreement, the Company received initial proceeds
of $1,000,000 in equity and an additional $1,052,000 of equity is being held
in escrow pending the Company attaining certain milestones.
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.
In March 2001, the Company launched the initial pilot program of its
proprietary electronic coupon clearing system. In connection with this pilot
program, the Company has commenced the generation of operating revenue. For
the quarter ended March 31, 2001, the Company generated operating revenue of
$336.
2. Notes payable
On September 5, 2000, the Company borrowed $30,000 from an officer of the
Company. Interest on the note accrued monthly at 9.5% per annum. The note and
accrued interest was due on October 31, 2000, or upon receipt of new equity
funds in excess of $100,000. During February 2001, the note plus all accrued
interest was paid in full.
7
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
2. Notes payable (continued)
On November 8, 2000, the Company borrowed $180,000 from a partnership in
which the Company's president is the general partner bearing interest at
9.50% per annum. During February 2001, the note plus all accrued interest was
paid in full.
On November 20, 2000, the Company borrowed $160,000 from an unrelated company
bearing interest at 9.50% per annum. During February 2001, the note plus all
accrued interest was paid in full.
On December 20, 2000, the Company borrowed $160,000 from an unrelated
individual bearing interest at 9.50% per annum. During February 2001, the
note plus all accrued interest was paid in full.
From October 1997 through February 1998, the Company borrowed a total of
$188,500 from a shareholder related to the Company's former president bearing
interest at the default rate of 18%. During February 2001, these notes plus
all accrued interest were paid in full.
In connection with the notes payable issued in 1996, 1997 and 1998, the
Company issued warrants to purchase the Company stock exercisable for a
three-year period. As these warrants have neared their initial expiration
dates, the Company has extended these warrants first for 120 days and then
for successive 90 day periods. In March 2001, the Company issued a letter to
all warrant holders, whose notes were previously converted to the Company's
common stock, informing them that the Company would no longer be extending
the warrants beyond their current extension dates. All warrant holders
wishing to exercise these warrants were required to do so by April 3, 2001,
otherwise, these warrants would expire. As of March 31, 2001, no warrants had
been exercised.
For accounting purposes, the Company is treating these extensions as stock
appreciation rights and has recorded interest expense of $54,844 in the
quarter ended March 31, 2000 related to the warrants which have been
extended. During the quarter ended March 31, 2001, the price of the Company's
stock increased. As a result, the value assigned to the warrant extensions
was increased by $1,831,892 for the three months ended March 31, 2001.
During the quarter ended March 31, 2001, holders of $692,476 of notes payable
elected to convert their notes and accrued interest into common stock or use
the notes payable balance and interest to exercise their warrants. The
Company has recorded an expense of $500,548 as debt conversion costs in
recognition of the beneficial conversion terms offered. Additionally, as of
March 31, 2001, holders of $287,500 of notes payable elected to extend their
notes until October 31, 2001.
3. Income taxes
No provision for income taxes is required at March 31, 2001 because, in
management's estimation the Company will not recognize any taxable income
through December 31, 2001.
8
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
4. Private placement
In January 2001, the Company completed a private equity funding agreement
that provided the Company with $2,052,000 of equity, enabling the Company to
begin the commercial introduction of its proprietary electronic coupon
clearing system. In connection with this funding agreement, the Company
received initial proceeds of $1,000,000 in equity in exchange for 3,703,705
shares of common stock and an additional $1,052,000 of equity, representing
an additional 2,896,295 shares of common stock is being held in escrow
pending the Company attaining certain milestones.
5. Stock options
In January 2001, the Company issued to its president, options to purchase
700,000 shares of the Company's common stock exercisable at $.30 per share,
for a five-year period and are fully vested. In connection with the issuance
of these options, the Company has recorded compensation expense of $249,340.
In January 2001, the Company's Board of Directors approved the sale of 25,000
shares of the Company's restricted common stock to each outside director for
each year of service provided to the Company at a price of $.25 per share.
The cost of the shares will be paid by a note from each director and be
collateralized by the stock. This resolution is subject to final approval of
the Company's shareholders and will be voted upon at the 2001 Annual
Shareholders' Meeting.
6. Subsequent events
In April 2001, warrant holders exercised warrants representing 97,545 shares
of the Company's common stock for $39,116.
On March 30, 2001, the Company reached an agreement to acquire the entire
outstanding capital stock of The E. Schulze Corporation, a Colorado
corporation (the "Schulze Corp."), in exchange for an aggregate of $1,800,000
in cash (the "Cash Amount") and 17,144,196 shares of the Company's common
stock (the "Company Common Stock"). Under the terms of an Agreement and Plan
of Merger dated March 30, 2001, between the Company, the Schulze Corp. and
the stockholders of the Schulze Corp., a newly-formed subsidiary of the
Company will merge with and into the Schulze Corp. in a tax-free
reorganization under the Internal Revenue Code. As a result, at the effective
time of the merger, the Schulze Corp. will become a wholly-owned subsidiary
of the Company.
The Company generated the cash necessary to pay the Cash Amount through the
sale to certain investors of 3,000,000 new shares (the "New Shares") at a
price per share of $.75. The purchasers of the New Shares included a director
of the Company and certain principals and affiliates of the director and a
company related to a director of the Company.
Prior to the acquisition, the Schulze Corp. was the largest holder of the
Company's Common Stock. The assets of the Schulze Corp. consist of 20,144,196
shares of common stock and rights to a certain patented technology commonly
known as the "Canpactor".
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company is a development stage company engaged in the development of its
system for distributing and electronically clearing coupons, certain components
of which are patented. The Company generated initial revenues from operations
during the quarter ended March 31, 2001 totaling $336. Additionally, the Company
has incurred losses of $18,815,622 since inception through March 31, 2001.
At March 31, 2001, the Company had a stockholders' deficit of $1,733,713, which
reflects $17,862,568 of paid in capital (net of amount attributable to treasury
stock) less accumulated deficit of $19,596,281. The accumulated deficit amount
is primarily the result of the amount of interest expense incurred in connection
with short-term convertible notes and debentures by the Company and its
predecessor in private transactions in 1996, 1997, 1998, 1999, and 2000,
research and development, general and administrative expenses and the valuation
of stock options and warrants incurred since inception. At March 31, 2001, the
Company had a working capital deficit of $2,034,238.
In March 2001, the Company launched the initial pilot program of its proprietary
electronic coupon clearing system in four retail supermarkets in South Carolina.
In connection with this pilot program, the Company has commenced the generation
of operating revenue. In order to initiate and fund the commercial introduction
of these systems, the Company was successful in completing a private equity
funding agreement in January 2001. Under the terms of this agreement, the
Company was provided $2,052,000 of equity. The Company received initial proceeds
of $1,000,000 in equity with an additional $1,052,000 of equity being held in
escrow pending the Company attaining certain milestones including the beginning
of the pilot program and the initial signing of long-term contracts with
retailers. In April 2001, the Company received $500,000 of these escrowed funds
as a result of the successful launching of its pilot program in March 2001. In
addition to the equity proceeds, the Company will require supplementary
financing to fund the equipment and accounts receivable financing required for
the rollout of its systems beyond the pilot program. The Company is in the
process of seeking such supplemental financing through a related party company
that would be the sole debt-financing arm of the Company. If successful, the
Company would have the funds necessary to implement its plan of operation over
the next 12 months and beyond. The Company is unable to provide any assurance
that such fund raising efforts will be achievable.
In February 2001, the Company repaid outstanding notes payable and related
accrued interest totaling $621,047. Additionally, the Company is seeking to
eliminate all remaining debt obligations through the conversion of these notes
and related exercise of warrants and through the buyout of these notes in
exchange for the Company's restricted common stock. During the quarter ended
March 31, 2001 notes and accrued interest totaling $907,514 have been converted
and which amounts were applied towards the exercise of warrants resulting in the
issuance of 2,115,000 shares of the Company's restricted common stock. Notes
totaling $287,500 have been extended to October 31, 2001.
Through March 31, 2001 the Company remained burdened with debt obligations and a
continuing lack of working capital. The completion of the private equity funding
agreement in January 2001 relieved some of the burden relating to the debt
obligations and provided the necessary funding to commence the pilot program of
the Company's proprietary electronic coupon clearing system. If the Company is
unsuccessful in eliminating all remaining debt obligations either through
conversion or buyout, the Company may require the securing ofadditional working
capital to continue its pilot program and operations as planned. Otherwise, it
may be forced to curtail or discontinue its operations.
10
Financial Condition
The Company had $461,949 in total assets and $2,195,662 in total liabilities at
March 31, 2001, as compared to $496,711 and $3,542,625 at the end of fiscal
2000, respectively. Accounts payable and accrued expenses at the end of fiscal
year 2000 were $1,256,775 as compared to $1,187,993 at March 31, 2001. The
Company had a working capital deficit of $2,034,238 at March 31, 2001, as
compared to a working capital deficit of $3,301,391 at December 31, 2000. This
difference primarily is attributed to reductions in notes payable and accrued
interest of $1,484,614.
Results of Operations
The Company's operational costs historically have increased or decreased
primarily due to the expansion or contraction of the Company's ongoing research
and development efforts. The Company has incurred operating expenses of
$10,851,472 from inception through March 31, 2001. These expenses include
$3,328,352 in research and development expenses and $7,219,059 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
pilot program of its proprietary electronic coupon clearing system, expands its
efforts to complete the development of its systems, products and services, and
plans to commence manufacturing and installation of its equipment. The Company
also expects operational costs to increase as it expands its marketing and
promotional efforts in connection with the introduction of its products and
services.
QUARTER Ended MARCH 31, 2001, Compared To QUARTER Ended MARCH 31, 2000
For the quarter ended March 31, 2001, the Company sustained net operating losses
of $3,194,320, as compared to net losses of $590,614 for the quarter ended March
31, 2000. The increase in operating losses primarily was due to an increase in
interest expense, which resulted from the valuation of stock warrants and
options at March 31, 2001 as compared to the valuation at December 31, 2000. For
the quarter ended March 31, 2001, the Company recognized an increase in the
valuation of these options and warrants totaling $1,831,892
The Company's operating expenses for the quarter ended March 31, 2001 increased
by approximately 72% to $792,404, as compared to operating expenses of $461,810
for the same period last year. The increase in operating expenses in 2001 was
due to increases in general and administrative expenses. Research and
development costs increased by 100% to $53,000 for the quarter ended March 31,
2001, as compared to no research and development costs for the same period last
year. This increase was due to additional prototype development work that was
necessary in order to enable the Company to launch its pilot program. General
and administrative expenses increased by $283,604 or 64% to $728,675 for the
2001 fiscal quarter as compared to general and administrative expenses of
$445,071 for the same period last year. The increase in general and
administrative expenses primarily was due to increases of $280,123 in stock
based compensation to employees, $158,026 of management consulting fees related
to the Company's project management requirements and offset by decreases in
wages and benefits of $135,835.
The Company's net non-operating expense (including non-operating interest income
and interest expense) increased to $2,402,252 for the quarter ended March 31,
11
2001 as compared to non-operating expenses of $128,804 for the quarter ended
March 31, 2000. The increase was primarily due to increases in debt conversion
costs and interest expense. Debt conversion costs for the quarter ended March
31, 2001 increased by 100% to $500,548 as compared to the same period last year.
This was due to increases in the number of notes and accrued interest converted
to common stock. Interest expense for the quarter ended March 31, 2001 increased
to $1,903,956 as compared to $129,946 at March 31, 2000. This was due primarily
to an increase in the valuation of the warrants issued in connection with the
Company's debt offerings.
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.
At March 31, 2001, the Company had $2,195,662 in current liabilities, of which
$1,412,016 (including $404,347 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 March 31,
2001, the Company was in default of its obligations under the notes issued to
investors by the Company and its predecessor in the amount of $918,534
(including accrued interest of $268,534). A portion of the notes was converted
into shares of the Company's common stock during the 1998, 1999, and 2000 fiscal
years. In October 2000, the Company issued a letter to all note holders
providing them the option of extending their notes and accrued interest for one
additional year or converting their notes and accrued interest for shares of the
Company's common stock. Approximately $287,500 of notes have been extended to
October 31, 2001. At March 31, 2001, notes in the aggregate principal amount of
$987,500 remained outstanding, as compared to notes in the aggregate principal
amount of $1,679,976 that were outstanding on December 31, 2000. The remaining
portion of the Company's current liabilities is primarily comprised of
continuing payment obligations of $490,688 (at March 31, 2001 and December 31,
2000) to Unisys Corporation. The Company relies on the availability of
additional capital to satisfy all such obligations.
The Company will require additional capital to continue and complete development
of its systems, to market its products and services and to implement its
business strategies.
The Company has limited access to additional sources of equity and debt
financing and it can provide no assurance that additional funds will be
available on commercially acceptable terms or in a timely manner to enable the
Company to continue its operations as expected.
Since the end of fiscal year 2000 through March 31, 2001, the Company's cash
position has declined. At March 31, 2001, the Company had available cash of
$124,245, as compared to available cash of $191,039 at December 31, 2000.
With the completion of the private equity funding agreement in January 2001 and
the attainment of the first of two milestones required by the agreement, the
Company anticipates it has sufficient funds to continue its operations through
12
August 31, 2001. At that time, the Company would have to either generate
sufficient cash flow from its anticipated rollout of its proprietary electronic
coupon clearing systems or raise additional funds to continue its operation as
planned.
In January 2001, the Company completed a funding arrangement with a private
equity group resulting in the Company receiving equity proceeds of $2,052,000.
The Company received initial proceeds of $1,000,000 in equity with an additional
$1,052,000 of equity being held in escrow pending the Company attaining certain
milestones by June 30, 2001. In April 2001, the Company received $500,000 of
these escrowed funds as a result of its attainment of the first of two
milestones completed in March 2001. With these funds, the Company is able to
continue the commercial introduction of its proprietary electronic coupon
clearing systems in its pilot programs. Additionally if the Company is
successful in securing long-term contracts with a minimum number of customers,
then all remaining escrowed funds would be released to the Company. This would
allow the Company the ability to continue the rollout of its systems, generate
revenues and fund its operation beyond December 31, 2001. Additionally, if
successful, the Company would be in a much stronger position to secure addition
capital if the need should arise. Failure to attain these milestones would
require the Company to acquire additional capital in the form of either debt or
equity. If the Company were unable to secure this additional capital, if needed,
it would most likely impair the ability of the Company to meet its obligations
in the near or medium term.
Item 3.
Quantitative and Qualitative Disclosure About Market Risk.
The Company does not own financial instruments that are subject to market risk.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and use of proceeds
In January 2001, the Company completed a private equity funding agreement that
provided the Company with $2,052,000 of equity, enabling the Company to begin
the commercial introduction of its proprietary electronic coupon clearing
system. In connection with this funding agreement, the Company received initial
proceeds of $1,000,000 in equity in exchange for 3,703,705 shares of common
stock and an additional $1,052,000 of equity, representing an additional
2,896,295 shares of common stock is being held in escrow pending the Company
attaining certain milestones.
Item 3. Defaults Upon Senior Securities
As of May 14, 2001, the Company was in default on its notes payable to investors
in the form of convertible short-term debentures totaling $918,534 including
accrued interest of 268,534.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Form 8-K filed March 30, 2001
Item 6(b). Acquisition or disposition of assets
Effective March 30, 2001, the Company reached an agreement to acquire the entire
outstanding capital stock of The E. Schulze Corporation, a Colorado corporation
(the "Schulze Corp."), in exchange for an aggregate of $1,800,000 in cash (the
"Cash Amount") and 17,144,196 shares of the Company's common stock, par value
$0.001 (the "Company Common Stock"). Under the terms of an Agreement and Plan of
Merger dated March 30, 2001, between the Company, the Schulze Corp. and the
stockholders of the Schulze Corp., a newly-formed subsidiary of the Company will
merge with and into the Schulze Corp. in a tax-free reorganization under the
Internal Revenue Code. As a result, at the effective time of the merger, the
Schulze Corp. will become a wholly-owned subsidiary of the Company.
Each stockholder of the Schulze Corp. will receive cash consideration and/or
shares of the Company's Common Stock in exchange for their respective shares of
the capital stock of the Schulze Corp., based on a price per share of $0.60. The
parties negotiated the purchase price in an arms length transaction. The shares
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of common stock to be issued to the stockholders of the Schulze Corp. in the
merger are subject to certain restrictions and conditions on transfer, as
specified in the Agreement and Plan of Merger. The Company generated the cash
necessary to pay the Cash Amount through the sale to certain investors of
3,000,000 new shares (the "New Shares") at a price per share of $0.75. The
purchasers of the New Shares included Mr. Derrick Bushman, a director of the
Company and certain principals and affiliates of Mr. Bushman and the Bushman
Group, LLC, a stockholder of the Company.
Before the acquisition, the Schulze Corp. was the largest holder of the
Company's Common Stock. The assets of the Schulze Corp. consist of 20,144,196
shares of common stock and rights to a certain patented technology commonly
known as the "Canpactor".
The stockholders of the Schulze Corp. included certain relatives (the
"Stockholder Relatives") of the Company's former President and CEO, Mr. Everett
E. Schulze, who passed away in December 2000. Mr. Donald P. Uhl, the Company's
Chief Executive Officer and Chairman, and Mr. Mike Moser, a director of the
Company, also were stockholders of the Schulze Corp. and received consideration
for the exchanged stock in the merger.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2001 IN STORE MEDIA SYSTEMS, INC.
(Registrant)
By: /s/ Donald P. Uhl
Donald P. Uhl, President
and Chief Executive Officer
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