UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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: 000-28515
---------
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, par
value $.001 per share, as of November 19, 2002 is 77,878,072 shares.
IN STORE MEDIA SYSTEMS, INC.
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
Balance Sheet - December 31, 2001 and September 30, 2002 (unaudited) 2 and 3
Statement of Operations - For the Three Months Ended September 30,
2001 and 2002 (unaudited) 4
Statement of Operations - For the Nine Months Ended September 30,
2001 and 2002 and for the Period from December 30, 1992 (inception)
through September 30, 2002 (unaudited) 5
Statement of Changes In Stockholders' Equity (Deficit)- For the
Nine Months Ended September 30, 2002 (unaudited) 6
Statement of Cash Flows - For the Nine Months Ended September
30, 2001 and 2002 and for the Period from December 30, 1992
(inception) through September 30, 2002 (unaudited) 7
Notes to Unaudited Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II. OTHER INFORMATION 17
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
1
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and September 30, 2002
(Unaudited)
ASSETS
------
2001 2002
---------- ----------
Current assets (Note 8):
Cash and cash equivalents $ 21,457 $ 17,936
Accounts receivable 3,224 --
Inventory 5,525 5,425
Prepaid Insurance -- 1,806
Other current assets 60,283 29
---------- ----------
Total current assets 90,489 25,196
Property and equipment, at cost (Note 8):
Office furniture and equipment 243,024 256,972
Leasehold improvements 55,228 55,228
---------- ----------
298,252 312,200
Less accumulated depreciation and amortization (133,898) (159,370)
---------- ----------
Net property and equipment 164,354 152,830
Other assets:
Debt issuance costs, net of accumulated amortization 356,667 249,167
Patent costs, net of accumulated amortization of
$31,436 (2001) and $37,704 (2002) (Note 8) 98,186 98,062
---------- ----------
Net other assets 454,853 347,229
---------- ----------
$ 709,696 $ 525,255
========== ==========
See accompanying notes.
2
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and September 30, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
2001 2002
------------- -------------
Current liabilities:
Accounts payable $ 823,869 $ 1,039,493
Interest payable 243,993 192,944
Accrued expenses 98,698 254,974
Notes payable (Note 2) 487,500 287,500
Notes payable-related party (Note 2) -- 10,000
Short-term notes payable (Note 2) 33,996 150,097
------------- -------------
Total current liabilities 1,688,056 1,935,008
Stockholders' equity (deficit) (Notes 2, 4, 5, 6, and 7):
Preferred stock, no par value; 50,000,000 shares
authorized, 2 shares issued and outstanding
liquidation preference $520,000 500,000 500,000
Common stock, $.001 par value; 150,000,000 shares
authorized, 80,378,240 (2001) and 85,252,814
(2002) shares issued 80,378 85,253
Additional paid-in capital 19,740,240 21,209,560
Stock subscriptions received 350,000 425,000
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development stage (21,085,228) (23,065,816)
------------- -------------
Total stockholders' equity (deficit) (978,360) (1,409,753)
------------- -------------
$ 709,696 $ 525,255
============= =============
See accompanying notes.
3
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Unaudited)
2001 2002
------------- -------------
Revenues:
Coupon handling fees and other $ 5,732 $ --
Costs and expenses:
Research and development (14,389) --
General and administrative 950,518 566,973
Depreciation and amortization 10,988 11,152
------------- -------------
Total costs and expenses 947,117 578,125
------------- -------------
Operating loss (941,385) (578,125)
Other income (expense):
Interest income 10,896 --
Debt conversion costs (Note 2) (32,068) --
Interest expense 455,083 (63,354)
------------- -------------
Total other income (expense) 433,911 (63,354)
------------- -------------
Net loss (Note 3) (507,474) (641,479)
Preferred stock dividends 29,999 10,000
------------- -------------
Net loss applicable to common
stockholders $ (537,473) $ (651,479)
============= =============
Basic and diluted net loss per common
share $ (.01) $ (.01)
============= =============
Weighted average common shares
outstanding 69,435,000 74,600,000
============= =============
See accompanying notes.
4
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
and for the Period from December 30, 1992 (inception) through September 30, 2002
(Unaudited)
Cumulative
amounts from
2001 2002 inception
------------- ------------- -------------
Revenues:
Coupon handling fees and other $ 11,727 $ 1,158 $ 19,664
Costs and expenses:
Research and development 41,455 -- 3,318,423
General and administrative 2,329,344 1,694,848 11,322,028
Depreciation and amortization 32,492 33,268 370,109
------------- ------------- -------------
Total costs and expenses 2,403,291 1,728,116 15,010,560
------------- ------------- -------------
Operating loss (2,391,564) (1,726,958) (14,990,896)
Other income (expense):
Interest income 15,024 20 105,872
Litigation settlement -- -- (156,250)
Restructuring costs (26,121) -- (222,632)
Debt conversion costs (Note 2) (631,512) (128,856) (1,437,198)
Interest expense (721,662) (94,794) (5,524,054)
------------- ------------- -------------
Total other income (expense) (1,364,271) (223,630) (7,234,262)
------------- ------------- -------------
Net loss (Note 3) (3,755,835) (1,950,588) (22,225,158)
Preferred stock dividends 56,055 30,000 90,658
------------- ------------- -------------
Net loss applicable to common stockholders $ (3,811,890) $ (1,980,588) $(22,315,816)
============= ============= =============
Basic and diluted net loss per common share $ (.06) $ (.03) $ (.44)
============= ============= =============
Weighted average common shares outstanding 65,049,000 72,700,000 50,400,000
============= ============= =============
See accompanying notes.
5
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Preferred stock Common stock Additional
------------------- ------------------------- paid-in
Shares Amount Shares Amount capital
------ ----------- ------------ ---------- -------------
Balance, December 31, 2001 2 $ 500,000 80,378,240 $ 80,378 $ 19,740,240
Sale of common stock for cash ($.36 per share),
net of offering costs of $40,665 (Note 4) -- -- 2,261,716 2,262 779,924
Preferred stock dividends -- -- -- -- --
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- -- 12,600
Value of stock options granted to
consultants (Note 6) -- -- -- -- 44,880
Cancellation of common stock issued to consultants -- -- (100,000) (100) 100
Conversion of notes payable into common
stock (Note 2) -- -- 837,712 838 438,694
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) -- -- -- -- (74,108)
Stock subscription received for the purchase
of 2,752,315 shares of common stock (Notes 4 and 5) -- -- -- -- --
Sale of common stock to three individuals (Note 5) -- -- 1,451,146 1,451 233,549
Sale of common stock to individuals net of offering
costs of $3,789 (Note 5) -- -- 424,000 424 33,681
Net loss for the nine months ended
September 30, 2002 -- -- -- -- --
------ ----------- ------------ ---------- -------------
Balance, September 30, 2002 2 $ 500,000 85,252,814 $ 85,253 $ 21,209,560
====== =========== ============ ========== =============
(CONTINUED)
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
------------- ------------- ------------- -------------
Balance, December 31, 2001 $ 350,000 $ (563,750) $(21,085,228) $ (978,360)
Sale of common stock for cash ($.36 per share),
net of offering costs of $40,665 (Note 4) (175,000) -- -- 607,186
Preferred stock dividends -- -- (30,000) (30,000)
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- 12,600
Value of stock options granted to
consultants (Note 6) -- -- -- 44,880
Cancellation of common stock issued to consultants -- -- -- --
Conversion of notes payable into common
stock (Note 2) -- -- -- 439,532
Extension of exercise period of warrants issued
in connection with debt offering (Note 2) -- -- -- (74,108)
Stock subscription received for the purchase
of 2,752,315 shares of common stock (Notes 4 and 5) 370,000 -- -- 370,000
Sale of common stock to three individuals (Note 5) (120,000) -- -- 115,000
Sale of common stock to individuals net of offering
costs of $3,789 (Note 5) -- -- -- 34,105
Net loss for the nine months ended
September 30, 2002 -- -- (1,950,588) (1,950,588)
------------- ------------- ------------- -------------
Balance, September 30, 2002 $ 425,000 $ (563,750) $(23,065,816) $ (1,409,753)
============= ============= ============= =============
See accompanying notes.
6
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002 and for the
Period from December 30, 1992 (inception) through September 30, 2002
(Unaudited)
Cumulative
amounts
from
2001 2002 inception
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (3,755,835) $ (1,950,588) $(22,225,158)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 32,492 33,268 370,109
Restructuring charges -- -- 222,632
Common stock issued for services, patents and
payables 2,340,550 112,228 4,411,733
Amortization of debt issuance costs -- 107,500 1,837,403
Reduction in note receivable - related party
charged to research and development -- -- 244,311
Changes in assets and liabilities:
Accounts receivable and notes receivable -- 3,224 (63,860)
Inventory 400 100 (109,805)
Other assets 21,819 58,448 (1,835)
Accounts payable 228,670 215,624 1,039,493
Interest payable 203,394 59,628 951,099
Other 4,303 158,592 257,290
------------- ------------- -------------
Total adjustments 2,831,628 748,612 9,158,570
------------- ------------- -------------
Net cash used in operations (924,207) (1,201,976) (13,066,588)
Cash flows from investing activities:
Purchase of property and equipment (32,124) (17,792) (399,230)
Proceeds from sale of property and equipment -- -- 125,000
Advances - related party -- -- (244,311)
Patent costs (9,722) (6,144) (135,764)
Lease deposits -- -- (27,880)
Debt issuance costs -- -- (10,000)
------------- ------------- -------------
Net cash used in investing activities (41,846) (23,936) (692,185)
Cash flows from financing activities:
Proceeds from sale of common stock and subscriptions 1,928,377 1,056,290 9,204,534
Purchase of treasury stock -- -- (520,000)
Proceeds from sale of preferred stock -- -- 750,000
Preferred stock dividends (56,055) (20,000) (80,658)
Proceeds from (repayments of) stockholder loans (251,000) 70,000 70,000
Repayments of capital leases -- -- (14,087)
Proceeds from notes payable 125,493 150,097 5,370,864
Repayments of notes payable (649,770) (33,996) (1,003,944)
------------- ------------- -------------
Net cash provided by financing activities 1,097,045 1,222,391 13,776,709
------------- ------------- -------------
Net increase (decrease) in cash 130,992 (3,521) 17,936
Cash and cash equivalents at beginning of period 191,039 21,457 --
------------- ------------- -------------
Cash and cash equivalents at end of period $ 322,031 $ 17,936 $ 17,936
============= ============= =============
See accompanying notes.
7
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. Basis of presentation
---------------------
The accompanying unaudited financial statements have been prepared by the
Company. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the financial position as of
September 30, 2002, and the results of operations and cash flows for the
periods ended September 30, 2001 and 2002.
Basis of presentation and management's plans:
On November 12, 2002, the Company filed for reorganization under Chapter 11
of the United States Bankruptcy Code. This action was precipitated by the
unilateral cancellation of a patent and license agreement the Company had
with a third party, Let's Go Shopping, Inc. ("LGS"). As a result of the
action by LGS, the Company has been deprived of previously arranged equity
capital and the benefit of operating revenues and profits from the operation
of its coupon booklet program. These actions have damaged the Company and
its ability to proceed with its current business plan. The ability of the
Company to execute its business plan is contingent upon the successful
resolution of its contractual dispute with LGS in conjunction with and as
part of its filing of a plan of reorganization with the Bankruptcy Court.
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 ($22,225,158
since inception) and a stockholders' deficit at September 30, 2002 of
$1,409,753. The Company's continued existence is dependent on its ability to
obtain the additional funding necessary to continue the marketing of the
electronic coupon clearing and distribution systems.
During the quarter ended September 30, 2002, the Company sold common stock
to three individuals generating total proceeds of $235,000 (of which
$120,000 was received in June, 2002) and an additional $100,000 was received
during the quarter and is reflected as stock subscriptions received. The
Company sold additional common stock to other individuals for proceeds of
$34,105 (net of offering costs of $3,789).
During November, 2002, a shareholder of the Company provided a secured line
of credit of $100,000 to the Company (See Note 8).
8
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. Basis of presentation (continued)
---------------------------------
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.
Should the Company be unsuccessful in resolving its contractual dispute with
LGS, certain of its assets will have little liquidation value including
inventory ($5,425), equipment ($111,442 net book value) and debt issuance
costs ($249,167), all of which have been pledged as collateral on a line of
credit (see Note 8).
2. Notes payable
-------------
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. A majority of these warrants were classified as "A", "B",
and "C" warrants. The balance of the warrants did not have a specific
classification. 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 holders of the A, B, and C warrants, 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 related A, B, and C warrants that were not exercised during 2001,
expired on December 31, 2001. The exercise period for the remaining warrants
was extended to June 30, 2002. As of June 30, 2002, no such warrants had
been exercised and the warrants expired.
For accounting purposes, the Company treated these extensions as stock
appreciation rights and recorded a decrease in interest expense of $881,930
during the quarter ended June 30, 2001 related to the warrants, which had
been extended. During the quarters ended June 30, 2002 and September 30,
2002, no adjustments were required as the related warrants have all since
expired. During the quarter ended June 30, 2002, the Company recorded
interest expense of $12,176 as a result of the valuation of stock options
issued in connection with the issuance of a note payable to an accredited
investor totaling $100,000. This combined with the first quarter decrease in
interest expense of $86,284, relating to the valuation of warrants, results
in a decrease in interest expense for the nine months ended September 30,
2002 of $74,108.
9
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
2. Notes payable (continued)
-------------------------
In March 2002, the Company offered its noteholders the option of extending
their notes through October 31, 2002 or electing to convert their notes and
accrued interest into shares of the Company's restricted common stock. Under
the extension feature, each noteholder has the option of extending their
note and accrued interest to October 31, 2002. In consideration for
extending their note, each noteholder would receive options to purchase
shares of the Company's restricted common stock exercisable at $1.00 per
share for each dollar owed the noteholder as of March 1, 2002 including all
accrued interest. Under the conversion feature, each noteholder has the
option of converting their note and accrued interest into shares of the
Company's restricted common stock at $.45 per share. In consideration for
converting their note, each noteholder would receive options to purchase
shares of the Company's restricted common stock (one option for each share
of common stock) at prices ranging from $.50 - $.75 per share. All options
expire on December 31, 2002. During the nine months ended September 30,
2002, notes totaling $75,000 have been extended and notes totaling $310,676,
including accrued interest of $110,676 have been converted into 837,712
shares of the Company's common stock. The Company has recorded an expense of
$128,856 as debt conversion costs in recognition of the beneficial
conversion terms offered.
In February 2002, the Company borrowed $70,000 from an officer/director of
the Company bearing interest at 8% per annum, convertible into shares of the
Company's common stock at a price of $.432 per share. This note matured on
March 16, 2002 and was subsequently extended to May 15, 2002. In June 2002,
this same individual surrendered his rights under the note agreement and
with the approval of the Company's board of directors, applied these funds
towards the purchase of 200,459 shares of the Company's common stock at a
price of $.349 per share. These shares were purchased under the same terms
and conditions as those within the Company's offering of the 2002 Units
discussed in Note 4. During the quarter, the Company borrowed $10,000 from a
director, $13,847 from a former director and $36,250 from two vendors.
3. Income taxes
------------
No provision for income taxes is required at September 30, 2002, because, in
management's estimation the Company will not recognize any taxable income
through December 31, 2002.
10
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
4. Private placement
-----------------
In February 2002, the board of directors of the Company authorized the
offering of up to $700,000 of 2002 Units to accredited investors of the
Company. Each "2002 Unit" is comprised of (i) one share of the Company's
common stock at a price equal to 90% of the average closing price over the
five trading days immediately preceding the purchase of the Unit, (ii) an
option to purchase an additional share of the Company's common stock at an
exercise price of $.50 per share for a period of five months following the
date of the purchase of the Unit, and (iii) a pro-rata royalty payment equal
to a maximum of one half of one cent ($.005) per redeemed coupon under the
Let's Go Shopping coupon booklet program payable until such time as the
initial investment has been fully realized by the investor. In June 2002,
the board of directors authorized an increase in this offering of an
additional $122,850 of the 2002 Units. Through September 30, 2002, the
Company sold 2,146,221 of its 2002 Units generating total proceeds of
$782,186 (net of offering costs of $40,665) including $175,000 reflected as
stock subscriptions received. Additionally, in connection with this
offering, the Company issued, to a selling agent, 115,495 shares of the
Company's common stock (issued in July 2002) and options to purchase 115,495
shares of the Company's common stock at an exercise price of $.50 per share.
5. Sale of common stock
--------------------
In January 2002, the Company raised $150,000 of additional equity from ISC
enabling the Company to continue the marketing of its Let's Go Shopping
coupon booklet program. Under the term of the agreement, ISC subscribed for
347,222 shares of the Company's common stock. Additionally, ISC shall
receive a royalty equal to one half of one cent ($.005) for each coupon
processed by the Company through the Let's Go Shopping coupon booklet
program. This royalty payment shall continue until that time when ISC shall
have received royalty payments totaling $300,000.
During the quarter ended September 30, 2002, the Company sold 950,000 shares
of common stock to an individual for proceeds of $60,000. The Company sold
additional common stock to other individuals for proceeds of $34,105 (net of
offering costs of $3,789).
The Company also sold 501,146 shares of common stock to two directors of the
Company for proceeds of $175,000. The directors received options to purchase
501,146 shares of common stock exercisable at $.35 per share until November
15, 2002 and a future royalty of $.00175 per coupon issued under the Let's
Go Shopping coupon booklet program until the amount paid for the stock is
repaid.
During the quarter, an officer of the Company subscribed for 2,000,000
shares of common stock generating proceeds of $100,000 to the Company and is
recorded as subscriptions received.
11
IN STORE MEDIA SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
6. Stock options
-------------
In February 2002 and in conjunction with the hiring of Michael T. Mozer as
the Company's Chairman, President, and Chief Executive Officer effective
January 1, 2002, the Company's board of directors approved the issuance of
options to Mr. Mozer to purchase 200,000 shares of the Company's common
stock exercisable at $.42 per share. These options were granted pursuant to
the Company's 2000 Omnibus Equity Incentive Plan.
During the nine months ended September 30, 2002, the Company issued options
to a consultant to purchase 225,000 shares of the Company's common stock
exercisable at prices ranging from $.12 to $.41 per share.
For the nine months ended September 30, 2002, the Company recognized
compensation expense of $12,600 and $44,880 for the options issued to Mr.
Mozer and the consultant, respectively. Compensation expense resulted from
the difference between the exercise price and the market price of the
Company's common stock at the time the options were granted to Mr. Mozer and
based on the Black-Scholes model for the options issued to the consultant.
7. Registration of company equity incentive plan
---------------------------------------------
In February 2002, the Company completed a Registration Statement on Form S-8
with the Securities and Exchange Commission registering options to purchase
8,866,875 shares of the Company's common stock that were authorized to be
issued under the Company's 2000 Omnibus Equity Incentive Plan. As of
September 30, 2002, the Company had granted options to purchase a total of
3,066,875 shares of the Company's common stock to various employees and
directors of the Company. As of September 30, 2002, options to purchase
926,875 shares of the Company's common stock had expired and none of these
stock options had been exercised.
8. Subsequent event
----------------
During November 2002, a shareholder of the Company provided a secured line
of credit of $100,000 to the Company. The funds are available only for
specific expenses approved by the lender. The loan is due on June 21, 2003
including interest at 18%, and in connection therewith, the lender was
granted an option to purchase 1,000,000 shares of the Company's common stock
exercisable for accrued interest on the loan by the maturity date of the
note. The agreement provides the lender the option to exercise the option
provided above in lieu of the receipt of interest on the note. The loan is
collaterialized by a collateral assignment of all litigation claims against
Let's Go Shopping, all patents currently held by the Company and all other
assets of the Company not subject to a prior lien.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------------------------------------------------------------------------------
OF OPERATIONS
- -------------
These discussions may contain forward-looking statements. A forward-looking
statement may contain words or phrases such as "will continue to be," "will be,"
"continue to," "expect to," "anticipates that," "to be," or "can impact."
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those projected in forward-looking statements.
OVERVIEW
- --------
The Company has identified the accounting policies described below as critical
to its business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout this section where such
policies affect the Company's reported and expected financial results. The
preparation of this Quarterly Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities of the
Company, revenues and expenses of the Company during the reporting period and
contingent assets and liabilities as of the date of the Company's financial
statements. There can be no assurance that the actual results will not differ
from those estimates.
The Company has relied upon the issuance of shares of its common stock, options
to purchase its common stock and warrants to purchase its common stock to fund
much of the Company's operations. The following describes the methods used to
record various stock related transactions.
Stock issued for services is valued at the market price of the Company's stock
at the date of grant.
Compensation related to the issuance of stock options to employees and directors
is recorded at the intrinsic value of the options, which is the market price of
the Company's common stock less the exercise price of the option at the grant
date. Compensation related to the issuance of options to consultants for the
purchase of the Company's common stock is recorded at the market price of the
Company's common stock at the measurement date. The measurement date is
generally the date the options are fully vested.
Warrants issued to warrant holders with respect to convertible notes and
warrants issued in 1996, 1997 and 1998 were initially valued and recorded as
debt issuance costs which were subsequently amortized to interest expense over
the initial term of the convertible notes. When the warrants expired, the
Company recorded the initial 120-day extension of the warrants at the fair value
of the warrants using the Black-Scholes option-pricing model. As the warrants
were extended for additional 30-day periods, the Company treated the warrants as
stock appreciation rights and adjusted the value of the warrants quarterly based
on the increase or decrease in the market price of the Company's stock. Upon
conversion of these convertible notes into shares of the Company's common stock,
the Company valued any additional shares of its common stock issued and recorded
any decrease in the warrant exercise price, compared to the original terms of
the conversion option, as debt conversion costs.
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 revenues from operations during the
nine months ended September 30, 2002 totaling $1,158 as compared to $11,727 for
the nine months ended September 30, 2001. Additionally, the Company has incurred
losses of $22,225,158 since inception through September 30, 2002.
13
At September 30, 2002, the Company had a stockholders' deficit of $1,409,753,
which reflects $21,656,063 of paid in capital (net of amount attributable to
treasury stock) less accumulated deficit of $23,065,816. 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 through 2001, research and
development, general and administrative expenses and the valuation of stock
options and warrants incurred since inception. At September 30, 2002, the
Company had a working capital deficit of $1,909,812.
In January 2002, the Company raised $150,000 of equity from ISC enabling the
Company to continue the marketing of its electronic coupon distribution program.
In February 2002, the board of directors authorized the offering of up to
$700,000 of 2002 Units to accredited investors to continue the marketing of the
electronic coupon distribution program. In June 2002, the board of directors
authorized an increase in this offering of an additional $122,850 Units. Through
September 30, 2002, the Company had sold 2,146,221of its 2002 Units generating
total net proceeds of $782,186. During the quarter, the Company sold 1,875,146
shares of common stock generating total net proceeds of $269,105. The Company
received a subscription for the sale of 2,000,000 shares for $100,000 from an
officer of the Company. The Company is unable to provide any assurance that it
will be able to raise the additional funds necessary to finance anticipated
costs associated with the commencement of the electronic coupon distribution
program and otherwise to implement its business plan and strategy, as presently
contemplated.
The Company is seeking to eliminate all remaining debt obligations through the
conversion or buyout of notes payable. In March 2002, the Company provided these
noteholders with the option of extending their notes through October 31, 2002 or
electing to convert their notes and accrued interest into shares of the
Company's common stock. As of September 30, 2002, notes totaling $75,000 were
extended and notes totaling $310,676, including accrued interest of $110,676,
have been converted into 837,712 shares of the Company's common stock. As of
September 30, 2002, notes totaling $337,584 (including accrued interest of
$125,084) remain outstanding and in default. Through September 30, 2002 the
Company remained burdened with debt obligations and a continuing lack of working
capital. The raising of additional equity in the first three quarters of 2002
relieved some of the burden relating to the debt obligations and provided the
necessary funding to continue the marketing of the Company's electronic coupon
distribution program. If the Company is unsuccessful in eliminating all
remaining debt obligations either through conversion or buyout, the Company may
require the securing of additional working capital to continue its program and
operations as planned. Otherwise, the Company may be forced to curtail or
discontinue its operations. Additionally, the Company must resolve its
contractual differences with LGS in conjunction with and as part of its filing a
plan of reorganization with the Bankruptcy Court.
FINANCIAL CONDITION
- -------------------
The Company had $525,255 in total assets and $1,935,008 in total liabilities at
September 30, 2002, as compared to $709,696 and $1,688,056 at December 31, 2001,
respectively. Accounts payable and accrued expenses at December 31, 2001 were
$922,567 as compared to $1,294,467 at September 30, 2002. The Company had a
working capital deficit of $1,909,812 at September 30, 2002, as compared to a
working capital deficit of $1,597,567 at December 31, 2001. This difference
primarily is attributed to an increase in accounts payable and accrued expenses
of $371,900 offset by a decrease in notes payable and accrued interest of
$124,948.
14
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
$15,010,560 from inception through September 30, 2002. These expenses include
$3,318,423 in research and development expenses and $11,322,028 in general and
administrative expenses. The Company introduced its coupon booklet program in 38
Piggly Wiggly Carolina Co., Inc. supermarkets on September 26, 2002. The costs
of installation and promotion increased operating expenses during the period.
The remaining 77 Piggly Wiggly supermarkets were scheduled to activate the
coupon booklet program on or about November 1, 2002. However, on or about August
6, 2002 the Company was notified by legal counsel for Let's Go Shopping, Inc.
("LGS") that in the opinion of LGS, the Patent and License Agreement between the
two companies signed November 29, 2001 (the "Agreement") required a minimum
license fee payment of $435,000 be paid by October 6, 2002 or the Agreement
would be terminated. In Store Media Systems responded to and disputed this
demand. On October 10, 2002 a representative of LGS advised the Company that
notwithstanding the Company's objections, LGS considered the Agreement
terminated. In Store Media Systems disputes this interpretation and has taken
vigorous action to enforce the Agreement. Until this dispute is resolved, the
Company will cease its support of the coupon booklet program just introduced at
Piggly Wiggly Carolina Co., Inc. supermarkets. In the interim, Let's Go
Shopping, Inc. will take over responsibility for the expenses of continuing the
Piggly Wiggly operation. See Part II, Item I, LEGAL PROCEEDINGS.
QUARTER ENDED SEPTEMBER 30, 2002, COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001
For the quarter ended September 30, 2002, the Company sustained net operating
losses of $ 641,479, as compared to net losses of $507,474 for the quarter ended
September 30, 2001. The increase in operating losses primarily was due to
continuing general and administrative expenses and an increase in interest
expense associated with the expiration of the A, B, and C warrants in December
2001 and the valuation of stock warrants and options at September 30, 2002 as
compared to the valuation at September 30, 2001.
The Company's operating expenses for the quarter ended September 30, 2002
decreased by approximately 39% to $578,125, as compared to operating expenses of
$947,117, for the same period last year. The decrease in operating expenses in
2002 was due to decreases in general and administrative expenses. General and
administrative expenses decreased by $383,545 or 40% to $566,973 for the 2002
fiscal quarter as compared to general and administrative expenses of $950,518
for the same period last year. The decrease in general and administrative
expenses primarily was due to decreases of $222,654 in management consulting
fees related to the Company's project management requirements, $313,667 in
advertising/promotion, $22,115 in legal and professional fees and offset by
increases in wages and benefits of $83,728.
The Company's net non-operating expenses (including non-operating interest
income and interest expense) increased to $63,354 for the quarter ended
September 30, 2002 as compared to net non-operating income of $433,911 for the
quarter ended September 30, 2001. The increase was primarily due to increases in
interest expense. Interest expense for the quarter ended September 30, 2002
increased by $518,437 as compared to the same period last year. This was due
primarily to a decrease in the valuation of the warrants issued in connection
with the Company's debt offerings as a result of the expiration of the A, B, and
C warrants in June 2002.
15
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 September 30, 2002, the Company had $1,935,008 in current liabilities, of
which $459,030 (including $171,530 of interest accrued thereon) was in the form
of convertible, short-term debentures issued by the Company and its predecessor
in private transactions during the 1998, 1997 and 1996 fiscal years. At
September 30, 2002, the Company was in default of its obligations under the
notes issued to investors by the Company and its predecessor in the amount of
$212,500 (plus accrued interest of $125,084). 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 March 2002, the Company offered its noteholders the
option of extending their notes through October 31, 2002 or electing to convert
their notes and accrued interest into shares of the Company's restricted common
stock. Under the extension feature, each noteholder has the option of extending
their note and accrued interest to October 31, 2002. In consideration for
extending their note, each noteholder would receive options to purchase shares
of the Company's restricted common stock exercisable at $1.00 per share for each
dollar owed the noteholder as of March 1, 2002 including all accrued interest.
Under the conversion feature, each noteholder has the option of converting their
note and accrued interest into shares of the Company's restricted common stock
at $.45 per share. In consideration for converting their note, each noteholder
would receive options to purchase shares of the Company's restricted common
stock (one option for each share of common stock) at prices ranging from $.50 to
$.75 per share. All options expire on December 31, 2002. As of September 30,
2002, notes totaling $75,000 have been extended and notes totaling $310,676,
including accrued interest of $110,676 have been converted into 837,712 shares
of the Company's common stock. At September 30, 2002, notes in the aggregate
principal amount of $287,500 remained outstanding, as compared to notes in the
aggregate principal amount of $487,500 that were outstanding on December 31,
2001. The remaining portion of the Company's current liabilities is primarily
comprised of short-term note obligations totaling $160,097 and continuing
payment obligations of $490,688 (at September 30, 2002 and December 31, 2001) 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 at all, or if 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 2001 through September 30, 2002, the Company's cash
position has decreased. At September 30, 2002, the Company had available cash of
$17,936, as compared to available cash of $21,457 at December 31, 2001. The
decrease in cash is a result of the Company obtaining short term equity
financing through the offering of the 2002 Units and the issuance of short term
notes payable less operating expenses paid.
16
In January 2002, the Company raised an additional $150,000 of equity from ISC,
enabling the Company to continue the marketing of its electronic coupon
distribution program. In February 2002, the board of directors authorized the
offering of up to $700,000 of 2002 Units to accredited investors. In June 2002,
the board of directors authorized an increase in this offering of an additional
$122,850 of these Units. As of September 30, 2002, the Company had sold
2,146,221 of its 2002 Units generating total net proceeds of $782,186. In June
2002, the Company finalized an agreement with Piggly Wiggly Carolina to
implement the Let's Go Shopping coupon booklet program in 115 of their retail
locations. The rollout began with 38 stores on September 26, 2002 and the other
77 stores were scheduled to implement the program in November. Whether or not
the Company prevails in its dispute with Let's Go Shopping, Inc., it will
require additional capital to finance its operating and/or legal costs through
the sale of equity and/or debt securities. Prior to the dispute with Let's Go
Shopping, Inc., the Company had entered into one funding arrangement, was
considering another funding proposal and had established contact with two
venture capital companies that had an interest in providing funding to the
Company after an analysis of revenues from Piggly Wiggly operations. These
funding opportunities were withdrawn following the Company's announcement of the
LGS action. There is no assurance that these capital financing sources can be
accessed even if the Company prevails in its dispute with Let's Go Shopping,
Inc. Additionally, if the Company continues to be successful in securing
long-term contracts with a minimum number of additional customers, then the
Company would be in a much stronger position to secure additional capital.
Failure to secure additional contracts would require the Company to acquire
additional capital in the form of either debt or equity. If the Company were
unable to secure needed additional capital it would most likely impair the
ability of the Company to meet its obligations in the near or medium term and to
continue operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------------------------------------------------------------------
The Company does not own financial instruments that are subject to market risk.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On October 23, 2002 Let's Go Shopping, Inc. ("LGS") filed a lawsuit against the
Company for breach of contract in the United States District Court, Southern
District of Georgia, Savannah Division. The lawsuit alleges the Company breached
the contract between LGS and the Company by not paying minimum license fees. The
Plaintiff has asked the Court for $435,000 of such fees, interest and legal
costs. The LGS lawsuit followed the LGS claim that it cancelled the Patent and
License agreement by LGS, which was subsequently announced by In Store Media
Systems on October 10, 2002. The Company views the license as in full force and
effect and denies that LGS has the right to terminate the contract and contends
that the LGS lawsuit is without merit. The Company has engaged counsel to assert
claims against all parties who may have misappropriated the Company's trade
secrets or interferred in its business. The LGS actions resulted in the loss by
the Company of previously arranged financing resulting in substantial damages.
The Company, which was expecting income to be generated by the Piggly Wiggly
contract, was not able to pay its creditors on a timely basis. It has deferred
executive salaries totaling $250,841 as of September 30, 2002. Consequently, two
officers of the Company resigned and a third was terminated. Two of the former
officers, James Babo and Michael Eckerman have filed lawsuits to collect back
17
pay. In addition, a consultant firm, Computer Task Group, Inc., has also filed
suit to collect $19,800 plus interest and collection costs, for consulting
services rendered to the Company.
The Board of Directors has decided to obtain a legal decision in its dispute
with LGS. In order to expedite the decision, the Company filed a Chapter 11
proceeding under the Bankruptcy Code in United States Bankruptcy Court for the
District of Colorado on November 12, 2002. A key agenda issue includes
preservation of shareholder value. Company management believes the
reorganization filing is the best method for In Store Media Systems to resolve
legal issues, pay legitimate Company creditors to the maximum extent possible
and preserve shareholder value for its shareholders.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
In January 2002, the Company raised an additional $150,000 of equity from ISC in
exchange for the issuance of 347,222 shares of the Company's restricted common
stock, enabling the Company to continue the marketing of its electronic coupon
distribution program. This sale was made pursuant to an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
In February 2002, the board of directors authorized the offering of up to
$700,000 of 2002 Units to accredited investors. In June 2002, the board of
directors authorized an increase in this offering of an additional $122,850
Units. As of September 30, 2002, the Company had generated total gross proceeds
of $822,851 in exchange for the issuance of 2,146,221 shares of the Company's
restricted common stock. This sale was made pursuant to an exemption under
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
During the quarter ended September 30, 2002, the Company sold 1,451,146 shares
of common stock to three individuals generating total proceeds of $235,000 (of
which $120,000 was received in June, 2002). The Company also sold 424,000 shares
of common stock to other individuals for proceeds of $34,105 (net of offering
costs of $3,789). These sales were made pursuant to an exemption under Section
4(2) of the Securities Act and Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
As of August 15, 2002, the Company was in default on its notes payable issued to
investors in 1996, 1997, and 1998 in the form of convertible short-term
debentures totaling $337,584 (including accrued interest of $125,084). These
debentures, which originally matured between 1997 and 1999, are in default
because of the Company's inability to repay these obligations as a result of the
Company's insufficient working capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
18
ITEM 5. OTHER INFORMATION
- --------------------------
In February 2002, the Company completed a Registration Statement on Form S-8
with the Securities and Exchange Commission registering options to purchase
8,866,875 shares of the Company's common stock, par value $.001 per share, that
were authorized to be issued by the Company under the Company's 2000 Omnibus
Equity Incentive Plan. As of September 30, 2002, options to purchase 3,066,875
shares of the Company's common stock had been granted to various employees and
directors of the Company. Additionally, as of September 30, 2002, options to
purchase 926,875 shares of the Company's common stock expired and no such
options were exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K.
None.
19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 19, 2002 IN STORE MEDIA SYSTEMS, INC.
(Registrant)
By: /s/ Michael T. Mozer
------------------------------
Michael T. Mozer, President
and Chief Executive Officer
20
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, AND 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael T. Mozer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of In Store Media Systems,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of September 30, 2002, and for the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 19, 2002 By: /s/ Michael T. Mozer
---------------------------
Chief Executive Officer and
Chief Financial Officer
21
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of In Store Media Systems, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael T. Mozer, President, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Dated: November 19, 2002 By: /s/ Michael T. Mozer
---------------------------
Chief Executive Officer and
Chief Financial Officer
22