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 June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from to
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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
July 25, 2001 is 66,925,512 shares, $.001 par value.
IN STORE MEDIA SYSTEMS, INC.
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
------- ---------------------
Balance Sheet - December 31, 2000 and June 30, 2001 (unaudited) 2 and 3
Statement of Operations - For the Three Months Ended June 30,
2000 and 2001 (unaudited) 4
Statement of Operations - For the Six Months Ended June 30,
2000 and 2001 and for the period from December 30, 1992
(inception) through June 30, 2001 (unaudited) 5
Statement of Stockholders' Equity - For the Six Months Ended
June 30, 2001 (unaudited) 6
Statement of Cash Flows - For the Six Months Ended June 30,
2000 and 2001 and for the period from December 30, 1992
(inception) through June 30, 2001 (unaudited) 7
Notes to Unaudited Financial Statements 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION 16
-------- -----------------
1
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2000 and June 30, 2001
(Unaudited)
ASSETS
------
2000 2001
---------- ----------
Current assets:
Cash and cash equivalents $ 191,039 $ 165,820
Inventory 5,925 5,525
Other current assets 44,270 35,622
---------- ----------
Total current assets 241,234 206,967
Property and equipment, at cost:
Manufacturing equipment 79,076 --
Office furniture and equipment 128,614 239,861
Leasehold improvements 55,228 55,228
---------- ----------
262,918 295,089
Less accumulated depreciation and amortization (150,853) (115,898)
---------- ----------
Net property and equipment 112,065 179,191
Other assets:
Advances and note receivable - related parties 46,658 48,008
Debt issuance costs 10,000 10,000
Patent costs, net of accumulated amortization of
$23,926 (2000) and $27,430 (2001) 86,754 84,698
---------- ----------
Net other assets 143,412 142,706
---------- ----------
$ 496,711 $ 528,864
========== ==========
See accompanying notes.
2
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2000 and June 30, 2001
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
2000 2001
------------- -------------
Current liabilities:
Accounts payable $ 597,330 $ 735,220
Interest payable 610,780 263,088
Accrued wages 48,665 44,635
Notes payable (Note 2) 1,679,976 600,000
Notes payable-shareholder 251,000 --
Short-term notes payable 354,874 5,104
------------- -------------
Total current liabilities 3,542,625 1,648,047
Stockholders' deficit (Notes 2 and 4):
Preferred stock, no par value; 50,000,000 shares
authorized, 3 shares issued and outstanding
liquidation preference $750,000 750,000 750,000
Common stock, $.001 par value; 150,000,000 shares
authorized, 67,631,621 (2000) and 75,662,047
(2001) shares issued 67,631 75,662
Additional paid-in capital 13,076,110 17,920,460
Stock subscriptions received -- 348,767
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development stage (16,375,905) (19,650,322)
------------- -------------
Total stockholders' deficit (3,045,914) (1,119,183)
------------- -------------
$ 496,711 $ 528,864
============= =============
See accompanying notes.
3
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 2001
(UNAUDITED)
2000 2001
------------- -------------
Revenues:
Coupon handling fees and other $ -- $ 5,659
Costs and expenses:
Research and development 6,171 2,844
General and administrative 304,041 650,151
Depreciation and amortization 16,738 10,775
------------- -------------
Total costs and expenses (326,950) (663,770)
------------- -------------
Operating loss (326,950) (658,111)
Other income (expense):
Interest income 3,289 1,876
Restructuring costs -- (26,121)
Debt conversion costs -- (98,896)
Interest expense 711 727,211
------------- -------------
Total other income (expense) 4,000 604,070
------------- -------------
Net (loss) income (Note 3) (322,950) (54,041)
Preferred stock dividends -- --
------------- -------------
Net (loss) income applicable to common
stockholders $ (322,950) $ (54,041)
============= =============
Basic and diluted net loss per common share $ (.01) *
============= =============
Weighted average common shares outstanding 56,633,000 65,300,000
============= =============
* less than $.01 per share
See accompanying notes.
4
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH JUNE 30, 2001
(UNAUDITED)
Cumulative
amounts from
2000 2001 inception
------------- ------------- -------------
Revenues:
Coupon handling fees and other $ -- $ 5,995 $ 5,995
Costs and expenses:
Research and development 6,171 55,844 3,331,196
General and administrative 749,112 1,378,826 7,869,210
Depreciation and amortization 33,477 21,504 314,836
------------- ------------- -------------
Total costs and expenses (788,760) (1,456,174) (11,515,242)
------------- ------------- -------------
Operating loss (788,760) (1,450,179) (11,509,247)
Other income (expense):
Interest income 4,431 4,128 94,088
Litigation settlement -- -- (156,250)
Restructuring costs -- (26,121) (222,632)
Debt conversion costs -- (599,444) (1,276,274)
Interest expense (129,235) (1,176,745) (5,799,348)
------------- ------------- -------------
Total other income (expense) (124,804) (1,798,182) (7,360,416)
------------- ------------- -------------
Net loss (Note 3) (913,564) (3,248,361) (18,869,663)
Preferred stock dividends -- 26,056 30,659
------------- ------------- -------------
Net loss applicable to common stockholders $ (913,564) $ (3,274,417) $(18,900,322)
============= ============= =============
Basic and diluted net loss per common share $ (.02) $ (.05) $ (.40)
============= ============= =============
Weighted average common shares outstanding 55,919,000 62,800,000 47,500,000
============= ============= =============
See accompanying notes.
5
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Preferred stock Common stock
--------------------- ----------------------------
Shares Amount Shares Amount
------ ------------- ------------ ------------
Balance, December 31, 2000 3 $ 750,000 67,631,621 $ 67,631
Sale of common stock for cash ($.27 per share)
(Note 4) -- -- 5,080,271 5,081
Preferred stock dividends -- -- -- --
Intrinsic value of stock options granted to
officers of the Company (Note 4) -- -- -- --
Conversion of notes payable into common
stock (Note 2) -- -- 2,490,000 2,490
Conversion of short-term note payable into common
stock (Note 2) -- -- 310,155 310
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) -- -- -- --
Sales of common stock for cash ($.75 per share)
(Note 4) -- -- 2,292,000 2,292
Net retirement of stock and cash paid upon merger
with E. Schulze Corp. (Note 4) -- -- (2,292,000) (2,292)
Stock issued to consultants for services -- -- 150,000 150
Stock subscriptions received for the sale of 404,000
shares of stock -- -- -- --
Funds received relating to exercise of warrants -- -- -- --
(Note 2)
Net loss for the six months ended
June 30, 2001 -- -- -- --
------ ------------- ------------ ------------
Balance, June 30, 2001 3 $ 750,000 75,662,047 $ 75,662
====== ============= ============ ============
(CONTINUED)
Deficit
accumulated
Additional Stock during the
paid-in sub- Treasury development
capital scriptions stock stage Total
------------- --------- ----------- ------------- -------------
Balance, December 31, 2000 $ 13,076,110 $ -- $ (563,750) $(16,375,905) $ (3,045,914)
Sale of common stock for cash ($.27 per share)
(Note 4) 1,494,919 -- -- -- 1,500,000
Preferred stock dividends -- -- -- (26,056) (26,056)
Intrinsic value of stock options granted to
officers of the Company (Note 4) 300,176 -- -- -- 300,176
Conversion of notes payable into common
stock (Note 2) 1,698,202 -- -- -- 1,700,692
Conversion of short-term note payable into common
stock (Note 2) 251,241 -- -- -- 251,551
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) 949,962 -- -- -- 949,962
Sales of common stock for cash ($.75 per share)
(Note 4) 1,716,708 -- -- -- 1,719,000
Net retirement of stock and cash paid upon merger
with E. Schulze Corp. (Note 4) (1,716,708) -- -- -- (1,719,000)
Stock issued to consultants for services 149,850 -- -- -- 150,000
Stock subscriptions received for the sale of 404,000
shares of stock -- 303,000 -- -- 303,000
Funds received relating to exercise of warrants -- 45,767 -- -- 45,767
(Note 2)
Net loss for the six months ended
June 30, 2001 -- -- -- (3,248,361) (3,248,361)
------------- --------- ----------- ------------- -------------
Balance, June 30, 2001 $ 17,920,460 $348,767 $ (563,750) $(19,650,322) $ (1,119,183)
============= ========= =========== ============= =============
See accompanying notes.
6
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
AND FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH JUNE 30, 2001
(UNAUDITED)
Cumulative
amounts
from
2000 2001 inception
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (913,564) $ (3,248,361) $(18,869,663)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 33,477 21,504 314,836
Restructuring charges -- 26,121 222,632
Common stock issued for services, patents and
payables 49,500 1,999,582 4,188,601
Amortization of debt issuance costs (23,804) -- 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 (3,193) -- (63,860)
Inventory -- 400 (109,905)
Other assets -- 8,648 (35,622)
Accounts payable (26,714) 137,890 735,220
Interest payable 152,647 187,631 1,113,622
Other 21,878 (4,030) 44,635
------------- ------------- -------------
Total adjustments 203,791 2,377,746 8,214,982
------------- ------------- -------------
Net cash used in operations (709,773) (870,615) (10,654,681)
Cash flows from investing activities:
Purchase of property and equipment (357) (111,246) (378,274)
Proceeds from sale of property and equipment -- -- 125,000
Advances - related party (1,046) (1,350) (292,319)
Patent costs (17,795) (1,449) (112,128)
Lease deposits -- -- (27,880)
------------- ------------- -------------
Net cash used in investing activities (19,198) (114,045) (685,601)
Cash flows from financing activities:
Proceeds from sale of common stock 55,493 1,848,767 7,209,414
Purchase of treasury stock -- -- (520,000)
Proceeds from sale of preferred stock 475,000 -- 750,000
Preferred stock dividends -- (26,056) (30,659)
Debt issuance costs (10,000) -- (10,000)
Proceeds from (repayments of) stockholder loans 1,000 (251,000) --
Repayments of capital leases -- -- (14,087)
Proceeds from notes payable 50,000 -- 5,044,874
Repayments of notes payable -- (612,270) (923,440)
------------- ------------- -------------
Net cash provided by financing activities 571,493 959,441 11,506,102
------------- ------------- -------------
Net increase (decrease) in cash (157,478) (25,219) 165,820
Cash and cash equivalents at beginning of period 248,325 191,039 --
------------- ------------- -------------
Cash and cash equivalents at end of period $ 90,847 $ 165,820 $ 165,820
============= ============= =============
See accompanying notes.
7
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2001, and the results of operations and cash flows
for the periods ended June 30, 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
($18,869,663 since inception) and a stockholders' deficit at June 30, 2001
of $1,119,183. 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 proceeds of $1,500,000 in equity and an additional $552,000 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 June 30, 2001, the Company generated
operating revenue of $5,659. For the six months ended June 30, 2001, the
Company had operating revenue of $5,995.
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.
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.
8
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2001
2. Notes payable (continued)
-------------------------
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.
On May 15, 2001, the Company borrowed $125,493 from a shareholder/director
bearing interest at 8% per annum, convertible into 310,155 shares of the
Company's common stock. On June 7, 2001, the shareholder/director elected
to convert the note payable and any accrued interest into 310,155 shares of
the Company's common stock.
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. The warrants were
subsequently extended to August 15, 2001. As of June 30, 2001, $45,767 has
been received for the exercise of warrants to purchase 197,311 common
shares.
For accounting purposes, the Company is treating these extensions as stock
appreciation rights and has recorded a decrease in interest expense of
$78,648 in the quarter ended June 30, 2000 related to the warrants which
have been extended. During the quarter ended June 30, 2001, the price of
the Company's stock declined and therefore, the value assigned to the
warrant extensions declined by $881,930. This combined with the first
quarter expense of $1,831,892 results in an increase in interest expense
for the six months ended June 30, 2001 of $949,962.
During the quarter ended June 30, 2001, holders of $125,000 of notes
payable elected to convert their notes and accrued interest into common
stock or use the notes payable balance and interest to exercise their
warrants. The Company has recorded an expense of $98,896 as debt conversion
costs in recognition of the beneficial conversion terms offered. For the
six months ended June 30, 2001, holders of $817,476 of notes payable
converted to common stock or exercised their warrants and the Company
recorded a total of $599,444 of debt conversion costs associated with the
conversions. Additionally, as of June 30, 2001, holders of $212,500 of
notes payable outstanding elected to extend their notes until October 31,
2001.
9
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2001
3. Income taxes
------------
No provision for income taxes is required at June 30, 2001 because, in
management's estimation the Company will not recognize any taxable income
through December 31, 2001.
4. Stockholders' equity
--------------------
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 plus an additional
$500,000 in equity, upon the attainment of certain specified goals, in
exchange for 5,080,271 shares of common stock. An additional $552,000 of
equity, representing an additional 1,519,729 shares of common stock is
being held in escrow pending the Company attaining certain milestones.
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.
Acquisition of Schulze Corp.:
In May 2001, the Company acquired the entire outstanding capital stock of
The E. Schulze Corporation, a Colorado corporation (the "Schulze Corp."),
in exchange for an aggregate of $1,719,000 in cash (the "Cash Amount") and
17,852,196 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 was merged 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. became a wholly-owned subsidiary of the Company.
10
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2001
4. Stockholders' equity (continued)
--------------------------------
The Company generated the cash necessary to pay the Cash Amount through the
sale to certain investors of 2,292,000 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".
11
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. As a result of the below-described commencement of the
Company's pilot program in March 2001. The Company generated initial revenues
from operations of $5,995 during the six months ended June 30, 2001.
Additionally, the Company has incurred losses of $18,869,663 since inception
through June 30, 2001.
At June 30, 2001, the Company had a stockholders' deficit of 1,119,183, which
reflects 18,381,139 of paid in capital (net of amount attributable to treasury
stock) less accumulated deficit of 19,650,322. 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 June 30, 2001, the
Company had a working capital deficit of $1,441,080.
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 generated operating revenue
for the first time since its inception. In order to initiate and fund the
commercial introduction of these systems, the Company entered into a private
equity funding agreement in January 2001. Under the terms of the agreement, 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's completion of
certain milestones, including the commencement 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
launch 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 after the
completion of the pilot program. The Company and In Store Capital LLC, are
parties to an agreement under which In Store Capital LLC, agreed to secure a
credit facility to finance the cost of manufacturing the Company's systems for
distributing and clearing coupons, subject to the satisfaction of certain terms
and conditions by the Company. Messrs. Mozer and Bushman, two of the Company's
directors, and certain of their affiliates, are principals and executive
officers of In Store Capital LLC. If the Company obtains such financing, the
Company believes it will have the funds necessary to implement its plan of
operation over the next 12 months. The Company is unable to provide any
assurance that it will be able to complete the conditions necessary to receive
the above-described escrowed funds or raise the additional funds necessary to
finance anticipated manufacturing costs and otherwise to implement its business
plan and strategy, as presently contemplated.
At the beginning of the second quarter of fiscal 2001, the Company's total debt
obligations, including accrued interest, were $1,412,016. During the three
months ended June 30, 2001, the Company repaid the principal and related accrued
interest under certain promissory notes in the aggregate amount of $375,107.
Additionally, the Company has continued its efforts to eliminate all remaining
debt obligations through the conversion of notes that remain outstanding and the
exercise of related warrants, and through the exchange of these notes for the
Company's restricted common stock. During the three months ended June 30, 2001,
principal and accrued interest totaling $179,229 under certain notes were
converted. The converted amounts were used to exercise related warrants, which
resulted in the issuance of 375,000 shares of the Company's restricted common
stock. Notes evidencing debt obligations in the aggregate principal amount of
$212,500 were extended to October 31, 2001.
12
Through June 30, 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 along with the conversion of notes and accrued
interest relieved some of the financial burden relating to the debt obligations
and made available the funds necessary 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 the
above-described means (of conversion or exchange), the Company may be required
to secure additional working capital to continue its pilot program and
operations as planned, and may be forced to curtail or discontinue its
operations.
FINANCIAL CONDITION
- -------------------
The Company had $528,864 in total assets and $1,648,047 in total liabilities at
June 30, 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 $1,042,943 at June 30, 2001. The Company had
a working capital deficit of $1,441,080 at June 30, 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
$2,028,438.
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
$11,515,242 from inception through June 30, 2001. These expenses include
$3,331,196 in research and development expenses and $7,869,210 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
commences 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. No assurance can be made that the Company will be able to raise the
funds necessary to implement its business plan and strategy as presently
contemplated, and if such additional funds do not become available, the Company
may be forced to curtail or discontinue its operations.
QUARTER ENDED JUNE 30, 2001, COMPARED TO QUARTER ENDED JUNE 30, 2000
- --------------------------------------------------------------------
For the three months ended June 30, 2001, the Company sustained net operating
losses of $54,041, as compared to net losses of $322,950 for the three months
ended June 30, 2000. The decrease in operating losses primarily was due to a
decrease in interest expense, which resulted from the valuation of stock
warrants and options at June 30, 2001 as compared to the valuation at March 31,
2001. For the quarter ended June 30, 2001, the Company recognized a decrease in
the valuation of these options and warrants totaling $881,930. Warrants to
purchase common stock issued in connection with notes payable periodically have
been extended since their initial expiration dates. For accounting purposes, the
Company is treating these extensions as stock appreciation rights and the amount
charged to interest expense increases or decreases as the Company's stock price
fluctuates.
The Company's operating expenses for the quarter ended June 30, 2001 increased
by approximately 103% to $663,770, as compared to operating expenses of $326,950
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 decreased by 54% to $2,844 for the quarter ended June 30,
13
2001, as compared to research and development costs of $6,171 for the same
period last year. General and administrative expenses increased by $346,110 or
114% to $650,151 for the 2001 fiscal quarter as compared to general and
administrative expenses of $304,041 for the same period last year. The increase
in general and administrative expenses primarily was due to increases of
$150,000 in stock based compensation to consultants, $26,771 in
advertising/promotion expenses and $147,631 of management consulting fees
related to the Company's project management requirements.
The Company's net non-operating income (including non-operating interest income
and interest expense) increased to $604,070 for the quarter ended June 30, 2001
as compared to non-operating income of $4,000 for the quarter ended June 30,
2000. The increase was primarily due to decreases in interest expense relating
to the valuation of stock options and warrants offset by increases in debt
conversion costs. Debt conversion costs for the quarter ended June 30, 2001
increased by 100% to $98,896 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 June 30, 2001 decreased by
$726,500 which represented 120% of the non-operating income for the quarter.
This was due primarily to a decrease 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
on exemptions from the registration and qualification requirements under federal
and state securities laws.
At June 30, 2001, the Company had $1,648,047 in current liabilities, of which
$863,088 (including $263,088 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 June 30,
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 $554,673
(including accrued interest of $167,173). A portion of the notes was converted
into shares of the Company's common stock during the 1998, 1999, 2000, and 2001
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 $212,500 of notes have been extended to
October 31, 2001. At June 30, 2001, notes in the aggregate principal amount of
$600,000 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 June 30, 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.
14
Since the end of fiscal year 2000 through June 30, 2001, the Company's cash
position has declined. At June 30, 2001, the Company had available cash of
$165,820, 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
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 the remaining escrowed funds of $552,000 would be released to the Company.
We anticipate this would allow the Company the ability to continue the rollout
of its systems, generate revenues and fund its operation through December 31,
2001. Additionally, if successful, the Company believes it would be in a
stronger position to secure additional 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.
15
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 proceeds
of $1,500,000 in equity in exchange for 5,080,271 shares of common stock and an
additional $552,000 of equity, representing an additional 1,519,729 shares of
common stock is being held in escrow pending the Company attaining certain
milestones. The shares were sold to Mr. Derrick Bushman and 33 other purchasers
who qualified as "accredited" investors under Rule 501 of Regulation D under the
Securities Act of 1933, as amended ("Securities Act"). The shares were sold in
reliance on the exemptions from registration available under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. No fee was paid in
connection with the sale of these shares.
In January 2001, the Company granted to Mr. Donald Uhl, the Company's Chairman
and CEO, options to purchase 700,000 shares of the Company's common stock. The
options are exercisable immediately at $0.30 per share. The options were granted
as consideration for Mr. Uhl's past contributions and his continued employment
with the Company. The options were granted in reliance on the exemptions
available under Rule 701 of Regulation C promulgated by the Securities and
Exchange Commission under the Securities Act.
At various times during the three months ended June 30, 2001, the Company issued
to 6 holders of certain notes an aggregate of 375,000 shares of common stock
upon the exercise of certain warrants that were previously issued in connection
with the issuance of the above-referenced notes. All such holders were unrelated
parties and qualified as "accredited" investors under Rule 501 of Regulation D
under the Securities Act. As consideration for the issuance of the 375,000
shares, the Company received aggregate consideration of $179,229 in the form of
debt cancellation. The holders of the notes applied all principal and accrued
interest payable under the notes in the amount of $179,229 to exercise the
related warrants. The shares were issued in private transactions in reliance on
the exemptions from registration available under Section 4(2) of the Securities
Act and Regulation D under the Securities Act. No fee was paid in connection
with these transactions.
In May 2001, the Company issued to eleven individual investors 17,852,196 shares
of the Company's common stock in connection with the acquisition of The E.
Schulze Corporation, as more fully described under Item 6(b) below. The bulk of
the shares were issued to Melissa Schulze, the wife of the Company's deceased
Chairman and CEO, Everette E. Schulze, and Mr. Schulze's six children. Each of
Messrs. Donald Uhl and Michael Mozer received 1,000,000 shares of the Company's
common stock in the transaction. As consideration for the shares issued and cash
paid in the transaction, the Company received the entire capital stock of The E.
Schulze Corporation. The shares issued by the Company were issued in a private
transaction in reliance on the exemption from registration available under
Section 4(2) of the Securities Act. The Company paid no underwriting fee in
connection with these transactions.
16
Item 3. Defaults Upon Senior Securities
At July 25, 2001, the Company was in default on its notes payable to investors
in the form of convertible short-term debentures totaling $554,673 including
accrued interest of $167,173.
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 $1,719,000 in cash (the
"Cash Amount") and 17,852,196 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
merged 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. became a wholly-owned subsidiary of the Company.
Each stockholder of the Schulze Corp. received 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
of common stock that were 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
2,292,000 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 their respective shares of The Schulze Corp., which were exchanged in the
merger.
17
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: August 7, 2001 IN STORE MEDIA SYSTEMS, INC.
(Registrant)
By: /s/ Donald P. Uhl
-------------------------
Donald P. Uhl, President
and Chief Executive Officer
18